Santander Holdings USA, Inc. - Quarter Report: 2010 June (Form 10-Q)

Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2010


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

For the transition period from to .

Commission File Number: 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)


Virginia		23-2453088
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

75 State Street, Boston, Massachusetts		02109
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 ST (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o. No o.*


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

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


Large accelerated 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.

APPLICABLE ONLY TO CORPORATE ISSUERS:

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


Class		Outstanding at July 31, 2010

Common Stock (no par value)		514,107,043 shares

FORWARD LOOKING STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Santander Holdings USA, Inc. (“SHUSA” or the “Company”). SHUSA may from time to time make forward-looking statements in SHUSA’s filings with the Securities and Exchange Commission (the “SEC” or the “Commission”) (including this Quarterly Report on Form 10-Q and the Exhibits hereto), in its reports to shareholders (including its Annual Report on Form 10-K for the fiscal year ended December 31, 2009) 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 true impact of this legislation to SHUSA and the industry will be unknown until the rulemaking process mandated by the legislation is complete, although the impact will involve higher compliance costs and certain elements, such as the debit interchange legislation, are likely to negatively affect our revenue and earnings.

FORWARD LOOKING STATEMENTS
(continued)

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

	•		technological changes;

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

	•		changes in consumer spending and savings habits;

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

	•		regulatory or judicial proceedings;

	•		changes in asset quality;

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

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

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

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

INDEX


	Page
PART I. CONDENSED FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets at June 30, 2010 and December 31, 2009		4

Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2010 and 2009		5-6

Consolidated Statement of Stockholders’ Equity for the six-month period ended June 30, 2010		7

Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2010 and 2009		8-9

Notes to Consolidated Financial Statements		10–32

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33–58

Item 3. Quantitative and Qualitative Disclosures About Market Risk		59

Item 4. Controls and Procedures		59

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		60

Item 1A. Risk Factors		60

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		60

Item 6. Exhibits		61

SIGNATURES		62

EXHIBITS INDEX		63

Ex-31.1 Certification
Ex-31.2 Certification
Ex-32.1 Certification
Ex-32.2 Certification

PART 1 — FINANCIAL INFORMATION

Item 1. Condensed Financial Information

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited at June 30, 2010, audited at December 31, 2009)


	June 30,			December 31,
	2010			2009
	(in thousands)
ASSETS
Cash and amounts due from depository institutions	$	1,767,922		$	2,323,290
Investment securities:
Available-for-sale		13,954,732			13,609,398
Other investments		664,688			692,240
Loans held for investment		58,295,047			57,552,177
Allowance for loan losses		(2,043,010	)		(1,818,224	)


Net loans held for investment		56,252,037			55,733,953


Loans held for sale		124,931			118,994
Premises and equipment, net		494,142			477,812
Accrued interest receivable		359,749			345,122
Goodwill		4,124,351			4,135,540
Core deposit intangibles and other intangibles, net of accumulated amortization of $967,716 and $934,270 at June 30, 2010 and December 31, 2009, respectively		218,895			245,641
Bank owned life insurance		1,493,776			1,810,511
Other assets		3,628,719			3,460,714


TOTAL ASSETS	$	83,083,942		$	82,953,215


LIABILITIES
Deposits and other customer accounts	$	41,437,988		$	44,428,065
Borrowings and other debt obligations		28,867,412			27,235,151
Advance payments by borrowers for taxes and insurance		108,360			87,445
Other liabilities		2,141,148			1,815,019


TOTAL LIABILITIES		72,554,908			73,565,680


STOCKHOLDERS’ EQUITY
Preferred stock; no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at June 30, 2010 and at December 31, 2009		195,445			195,445
Common stock; no par value; 800,000,000 shares authorized; 514,107,043 shares issued at June 30, 2010 and 511,107,043 shares issued at December 31, 2009		11,147,355			10,397,214
Warrants and employee stock options issued		285,435			285,435
Accumulated other comprehensive loss		(184,668	)		(349,869	)
Retained deficit		(914,533	)		(1,140,690	)


TOTAL STOCKHOLDERS’ EQUITY		10,529,034			9,387,535


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	83,083,942		$	82,953,215

See accompanying notes to unaudited consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three-Month Period						Six-Month Period
	Ended June 30,						Ended June 30,
	2010			2009			2010			2009
	(in thousands)
INTEREST INCOME:
Interest on loans	$	1,033,179		$	1,043,686		$	2,044,404		$	2,104,917
Interest-earning deposits		404			3,796			760			5,943
Investment securities:
Available-for-sale		123,047			80,743			237,274			168,291
Other investments		219			587			672			821


TOTAL INTEREST INCOME		1,156,849			1,128,812			2,283,110			2,279,972


INTEREST EXPENSE:
Deposits and customer accounts		54,923			180,412			123,215			396,810
Borrowings and other debt obligations		291,826			279,724			592,037			572,357


TOTAL INTEREST EXPENSE		346,749			460,136			715,252			969,167


NET INTEREST INCOME		810,100			668,676			1,567,858			1,310,805
Provision for credit losses		437,304			455,796			850,011			1,165,743


NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		372,796			212,880			717,847			145,062


NON-INTEREST INCOME:
Consumer banking fees		141,146			89,931			232,781			170,802
Commercial banking fees		46,253			47,829			91,876			93,974
Mortgage banking income/(loss)		5,409			19,075			25,082			(25,768	)
Capital markets revenue		3,852			4,742			8,227			1,452
Bank owned life insurance		13,547			15,991			27,092			30,918
Miscellaneous income		1,060			4,643			2,469			8,606


TOTAL FEES AND OTHER INCOME		211,267			182,211			387,527			279,984

Total other-than-temporary impairment losses		(43,917	)		(65,489	)		(46,393	)		(246,513	)
Portion of loss recognized in other comprehensive income (before taxes)		40,783			41,482			43,259			142,841
Gains on the sale of investment securities		46,028			534			72,355			2,502

Net gain/(loss) on investment securities recognized in earnings		42,894			(23,473	)		69,221			(101,170	)

TOTAL NON-INTEREST INCOME		254,161			158,738			456,748			178,814


GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits		158,605			176,705			324,776			380,968
Occupancy and equipment expenses		77,158			79,092			156,636			160,776
Technology expense		27,588			25,579			53,564			51,707
Outside services		30,317			29,686			57,491			55,301
Marketing expense		8,893			10,986			15,695			24,110
Other administrative expenses		65,936			48,158			123,250			102,308


TOTAL GENERAL AND ADMINISTRATIVE EXPENSES		368,497			370,206			731,412			775,170

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


	Three-Month Period					Six-Month Period
	Ended June 30,					Ended June 30,
	2010		2009			2010		2009
	(in thousands)
OTHER EXPENSES:
Amortization of intangibles	$	16,673	$	19,438		$	33,446	$	39,815
Deposit insurance premiums		23,460		54,468			47,302		76,110
Equity method investments		5,903		7,274			14,053		17,135
Transaction related and integration charges and other restructuring costs		—		70,513			—		235,088
Loss on debt extinguishment		2,251		—			3,368		68,733


TOTAL OTHER EXPENSES		48,287		151,693			98,169		436,881


INCOME/(LOSS) BEFORE INCOME TAXES		210,173		(150,281	)		345,014		(888,175	)
Income tax (benefit)/provision		66,130		(8,957	)		107,810		20,282


NET INCOME/(LOSS)	$	144,043	$	(141,324	)	$	237,204	$	(908,457	)

See accompanying notes to unaudited consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2010

(Unaudited)

(in thousands)


									Accumulated						Total
	Common						Warrants		Other			Retained			Stock-
	Shares		Preferred		Common		& Stock		Comprehensive			Earnings			Holders’
	Outstanding		Stock		Stock		Options		Loss			(Deficit)			Equity
Balance, December 31, 2009		511,107	$	195,445	$	10,397,214	$	285,435	$	(349,869	)	$	(1,140,690	)	$	9,387,535
Cumulative effect from change in accounting principle		—		—		—		—		—			(3,747	)		(3,747	)

Balance, January 1, 2010		511,107	$	195,445	$	10,397,214	$	285,435	$	(349,869	)	$	(1,144,437	)	$	9,383,788
Comprehensive income:
Net income		—		—		—		—		—			237,204			237,204
Change in unrealized gain/loss, net of tax:
Investment securities available-for-sale		—		—		—		—		165,726			—			165,726
Pension liabilities		—		—		—		—		603			—			603
Cash flow hedges		—		—		—		—		(1,128	)		—			(1,128	)

Total comprehensive income																402,405

Issuance of common stock to Parent		3,000		—		750,000		—		—			—			750,000
Stock issued in connection with employee benefit and incentive compensation plans		—		—		141		—		—			—			141
Dividends paid on preferred stock		—		—		—		—		—			(7,300	)		(7,300	)

Balance, June 30, 2010		514,107	$	195,445	$	11,147,355	$	285,435	$	(184,668	)	$	(914,533	)	$	10,529,034

See accompanying notes to unaudited consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six-Month Period
	Ended June 30,
	2010			2009
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)	$	237,204		$	(908,457	)
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Provision for credit losses		850,011			1,165,743
Depreciation and amortization		117,037			125,571
Net amortization/accretion of investment securities and loan premiums and discounts		(102,161	)		(243,770	)
Net gain on sale of loans		(13,683	)		(40,661	)
Net (gain)/loss on investment securities		(69,221	)		101,170
Loss on debt extinguishments		3,368			68,733
Net loss on real estate owned and premises and equipment		7,529			4,387
Stock-based compensation		1,395			47,323
Remittance to Parent for stock-based compensation		(877	)		—
Origination and purchases of loans held for sale, net of repayments		(484,382	)		(4,428,678	)
Proceeds from sales of loans held for sale		488,276			3,677,147
Net change in:
Accrued interest receivable		(5,736	)		8,678
Other assets and bank owned life insurance		192,380			409,755
Other liabilities		197,553			(61,667	)

Net cash provided by / (used in) operating activities		1,418,693			(74,726	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Adjustments to reconcile net cash (used in)/provided by investing activities:
Proceeds from sales of investment securities:
Available-for-sale		1,996,969			2,573,312
Proceeds from repayments and maturities of investment securities:
Available-for-sale		2,569,262			3,594,232
Net change in other investments		27,552			23,488
Purchases of available-for-sale investment securities		(3,648,265	)		(6,766,122	)
Proceeds from sales of loans held for investment		4,583			38,498
Purchase of loans		(3,232,447	)		(1,234,828	)
Net change in loans other than purchases and sales		1,107,226			4,641,771
Proceeds from sales of premises and equipment		1,794			2,328
Purchases of premises and equipment		(60,988	)		(15,668	)
Proceeds from sales of real estate owned		27,158			25,026
Cash received from contribution of subsidiary		—			23,300

Net cash (used in)/provided by investing activities		(1,207,156	)		2,905,337

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


	Six-Month Period
	Ended June 30,
	2010			2009
	(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Adjustments to reconcile net cash provided by financing activities:
Net (decrease)/increase in deposits and other customer accounts	$	(2,990,077	)	$	827,229
Net increase/(decrease) in borrowings		1,163,920			(3,661,262	)
Net proceeds from senior notes, subordinated notes and credit facility		3,370,700			1,187,852
Repayments of borrowings and other debt obligations		(3,075,063	)		(1,933,642	)
Net increase in advance payments by borrowers for taxes and insurance		20,915			13,446
Cash dividends paid to preferred stockholders		(7,300	)		(7,300	)
Proceeds from the issuance of common stock, net of transaction costs		750,000			—
Proceeds from issuance of preferred stock		—			1,800,000

Net cash (used in)/ provided by financing activities		(766,905	)		(1,773,677


Net change in cash and cash equivalents		(555,368	)		1,056,934
Cash and cash equivalents at beginning of period		2,323,290			3,754,523

Cash and cash equivalents at end of period	$	1,767,922		$	4,811,457


	Six-Month Period
	Ended June 30,
	2010		2009
	(in thousands)
Supplemental Disclosures:
Net income taxes (refunded)/paid	$	138,375	$	67,368
Interest paid	$	711,612	$	911,450

Non-cash transactions: In the first quarter of 2009, SHUSA consolidated its dealer floor plan securitization due to an early amortization event from low payment rates. This resulted in a non-cash transaction which increased loan and borrowing obligation balances by $731.7 million on the reconsolidation date.

In the second quarter of 2010, SCUSA assumed $139.3 million of securitized debt in connection with the purchase of $162.0 million of loan contracts from a third party.

During the six months ended June 30, 2010 and June 30, 2009 SHUSA received $719.5 million and $604.0 million of foreclosed and repossessed assets for the settlement of loans.

During the six months ended June 30, 2010 SHUSA received $974.7 million of available for sale mortgage backed securities in exchange for mortgage loans held for investment.

In the first quarter of 2010, SHUSA consolidated a commercial mortgage backed securitization related to a change in accounting principle which became effective on January 1, 2010. This non-cash transaction increased net loans by $866.3 million and borrowing obligation balances by $870.1 million on the reconsolidation date. During the second quarter of 2010, SHUSA sold this portfolio, and as a result, the related non-cash transactions of the first quarter have been reversed. See Note 3 for further details.

See accompanying notes to unaudited consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements of Santander Holdings USA, Inc. and Subsidiaries (“SHUSA” or the “Company”) include the accounts of Santander Holdings USA, Inc. and its subsidiaries, including the following subsidiaries: Sovereign Bank (the “Bank”), Santander Consumer USA, Inc (“SCUSA”), Independence Community Bank Corp. (“Independence”), and Sovereign Delaware Investment Corporation. All intercompany balances and transactions have been eliminated in consolidation. SHUSA is a wholly owned subsidiary of Banco Santander SA (“Santander”). Santander is a retail and commercial bank, based in Spain, with a presence in ten main markets throughout the world. At the end of 2009, Santander was the largest bank in the euro zone by market capitalization. In December 2009, Santander had 90 million customers, 13,660 branches, more than any other international bank, and around 170,000 employees. It is the largest financial group in Spain and Latin America, with leading positions in the United Kingdom and Portugal and a broad presence in Europe through its Santander Consumer Finance arm.

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

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

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

See Note 14 for a discussion of the impact of accounting pronouncements adopted during the six-month period ended June 30, 2010.

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

(2) INVESTMENT SECURITIES

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


	June 30, 2010
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
Investment Securities:
U.S. Treasury and government agency securities	$	12,997	$	—	$	—	$	12,997
Debentures of FHLB, FNMA, and FHLMC		24,209		803		—		25,012
Corporate debt and asset-backed securities		6,882,153		190,094		17,293		7,054,954
Equity securities		2,579		181		1		2,759
State and municipal securities		2,584,454		43,903		37,895		2,590,462
Mortgage-backed securities:
U.S. government agencies		7,186		114		—		7,300
FHLMC and FNMA debt securities		2,445,072		51,756		3,928		2,492,900
Non-agency securities		2,007,542		3		239,197		1,768,348


Total investment securities available-for-sale	$	13,966,192	$	286,854	$	298,314	$	13,954,732


	December 31, 2009
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
Investment Securities:
U.S. Treasury and government agency securities	$	364,596	$	116	$	102	$	364,610
Debentures of FHLB, FNMA, and FHLMC		1,848,401		992		1,170		1,848,223
Corporate debt and asset-backed securities		6,652,059		117,232		12,119		6,757,172
Equity securities		2,579		181		1		2,759
State and municipal securities		1,836,589		14,434		48,597		1,802,426
Mortgage-backed securities:
U.S. government agencies		1,098		21		2		1,117
FHLMC and FNMA debt securities		962,465		4,876		6,184		961,157
Non-agency securities		2,230,114		1		358,181		1,871,934


Total investment securities available-for-sale	$	13,897,901	$	137,853	$	426,356	$	13,609,398

Investment securities available-for-sale with an estimated fair value of $4.9 billion and $4.2 billion were pledged as collateral for borrowings, standby letters of credit, interest rate agreements and certain public deposits at June 30, 2010 and December 31, 2009, respectively.

The following tables disclose the aggregate amount of unrealized losses as of June 30, 2010 and December 31, 2009 on securities in SHUSA’s investment portfolio classified according to the amount of time that those securities have been in a continuous loss position:


	At June 30, 2010
	Less than 12 months					12 months or longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Investment Securities
Corporate debt and asset-backed securities	$	1,259,183		(10,108	)	$	56,315	$	(7,185	)	$	1,315,498	$	(17,293	)
Equity securities		253		(1	)		—		—			253		(1	)
State and municipal securities		231,767		(1,927	)		479,137		(35,968	)		710,904		(37,895	)
Mortgage-backed Securities:
FHLMC and FNMA debt securities		493,087		(3,927	)		494		(1	)		493,581		(3,928	)
Non-agency securities		9		—			1,767,807		(239,197	)		1,767,816		(239,197	)


Total investment securities available-for-sale	$	1,984,299	$	(15,963	)	$	2,303,753	$	(282,351	)	$	4,288,052	$	(298,314	)

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

(2) INVESTMENT SECURITIES (continued)


	At December 31, 2009
	Less than 12 months					12 months or longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Investment Securities
U.S. Treasury and government agency securities	$	199,714	$	(102	)	$	—	$	—		$	199,714	$	(102	)
Debentures of FHLB, FNMA and FHLMC		1,250,970		(1,170	)		—		—			1,250,970		(1,170	)
Corporate debt and asset-backed securities		1,118,889		(4,641	)		53,929		(7,478	)		1,172,818		(12,119	)
Equity securities		—		—			253		(1	)		253		(1	)
State and municipal securities		316,746		(3,243	)		508,333		(45,354	)		825,079		(48,597	)
Mortgage-backed Securities:
U.S. government agencies		130		(2	)		—		—			130		(2	)
FHLMC and FNMA debt securities		729,843		(6,179	)		1,468		(5	)		731,311		(6,184	)
Non-agency securities		11		(1	)		1,874,562		(358,180	)		1,874,573		(358,181	)


Total investment securities available-for-sale	$	3,616,303	$	(15,338	)	$	2,438,545	$	(411,018	)	$	6,054,848	$	(426,356	)

As of June 30, 2010, management has concluded that the unrealized losses above on its investment securities (which totaled 192 individual securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, the principal and interest on these securities are from investment grade issuers, the Company does not intend to sell these investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

The unrealized losses on the Company’s state and municipal bond portfolio were $37.9 million at June 30, 2010 compared to $48.6 million at December 31, 2009. This portfolio consists of 100% general obligation bonds of states, cities, counties and school districts. The portfolio has a weighted average underlying credit risk rating of AA-. These bonds are insured with various companies and as such, carry additional credit protection. The Company has determined that the unrealized losses on the portfolio are due to an increase in credit spreads since acquisition, principally for obligors in certain geographic locations.

The unrealized losses on the non-agency securities portfolio were $239.2 million at June 30, 2010 compared with $358.2 million at December 31, 2009. Other than what is described in the following paragraph, this portfolio consists primarily of highly rated non-agency mortgage-backed securities from a diverse group of issuers in the private-label market. The Company has determined that the unrealized losses on the portfolio are due to an increase in credit spreads since acquisition and liquidity issues in the marketplace. The Company has concluded these unrealized losses are temporary in nature on the majority of this portfolio since we believe based on modeled projections, that there is sufficient credit subordination associated with these securities.

During the second quarter of 2010, SHUSA updated its assessment of the unrealized losses in its non-agency mortgage backed security portfolio and whether the losses were temporary in nature. SHUSA concluded that the present value of the expected cash flows on two additional non-agency mortgage backed securities was less than their amortized cost which resulted in an impairment of $3.1 million.

SHUSA has fourteen investments in certain non-agency mortgage backed securities with an ending book value of $965.8 million at June 30, 2010 and $817.9 million at December 31, 2009 which the Company does not expect to collect all of its scheduled principal. Cumulative credit losses for these securities recognized in earnings were $158.0 million and $206.2 million at June 30, 2010 and December 31, 2009.

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

(2) INVESTMENT SECURITIES (continued)

Below is a rollforward of the anticipated credit losses on securities which SHUSA has recorded other-than-temporary impairment charges on through earnings (excludes other-than-temporary-impairment charges incurred in the first quarter of 2009 on our Fannie Mae and Freddie Mac preferred stock since these are equity securities).


	Six Months			Six Months
	Ending			Ending
	June 30, 2010			June 30, 2009
Beginning balance at December 31, 2009 and December 31, 2008	$	206,155		$	62,834
Additions for amount related to credit loss for which an other-than-temporary-impairment was not previously recognized		3,134			28,206
Reductions for securities sold during the period		—			—
Reductions for increases in cash flows expected to be collected and recognized over the remaining life of security (1)		(51,293	)		—
Additional increases to credit losses for previously recognized other-than-temporary-impairment charges when there is no intent to sell the security		—			38,591

Ending balance at June 30, 2010 and June 30, 2009	$	157,996		$	129,631


(1)		For the six-month period ended June 30, 2010, SHUSA accreted into interest income $3.0 million of the expected increase in cash flow on certain non-agencies securities. The reason for the $51.3 million improvement in anticipated credit losses was due to increased prepayment speed assumptions from reduced mortgage interest rates during the first half of 2010 as well as an improvement in expected losses.

The fourteen bonds that SHUSA has recorded other-than-temporarily impairments on have a weighted average S&P credit rating of CCC at June 30, 2010 and December 31, 2009. Each of these securities contains various levels of credit subordination. The underlying mortgage loans that comprise these investment securities were primarily originated in the years 2006 and 2007. Approximately 66% of these loans were jumbo loans, and approximately 70% of the collateral backing these securities were limited documentation loans. A summary of the key assumptions utilized to forecast future expected cash flows on the securities determined to have other-than-temporary-impairment were as follows at June 30, 2010 and December 31, 2009.


	June 30, 2010			December 31, 2009
Loss severity		49.18	%		49.45	%
Expected cumulative loss percentage		46.77	%		32.15	%
Cumulative loss percentage to date		3.61	%		3.01	%
Weighted average FICO		711			711
Weighted average LTV		68.5	%		70.1	%

Contractual maturities of SHUSA’s investment securities available for sale at June 30, 2010 are as follows (in thousands):


	Amortized		Fair
	Cost		Value
Due within one year	$	432,884	$	432,892
Due after 1 within 5 years		4,055,863		4,151,227
Due after 5 within 10 years		2,542,412		2,628,133
Due after 10 years/ no maturity		6,935,033		6,742,480


Total	$	13,966,192	$	13,954,732

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

During the three-month period ended June 30, 2010, SHUSA sold its Visa Inc. Class B common shares for proceeds of $19.5 million, resulting in a pre-tax gain of $14.0 million. As part of this transaction, SHUSA entered into a total return swap in which SHUSA will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. The swap terminates on the later of the third anniversary of Visa’s IPO or the date on which certain pre-specified litigation is finally settled. As a result of the sale of Class B shares and entering into the swap contract, SHUSA recognized a free standing derivative liability with an initial fair value of $5.5 million. See Note 13 for further discussion on this total return swap. The sale of the Class B shares, recognition of the derivative liability and reversal of the net litigation reserve liability resulted in a pre-tax benefit of $14.0 million ($9.6 million after-tax) recognized by SHUSA in the three-month period ended June 30, 2010.

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

(3) LOANS

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


	June 30, 2010					December 31, 2009
	Amount		Percent			Amount		Percent
Commercial real estate loans	$	11,871,228		20.4	%	$	12,453,575		21.6	%
Commercial and industrial loans		11,047,111		19.0			10,754,692		18.7
Multi-family loans		5,355,679		9.2			4,588,403		8.0
Other		1,273,700		2.2			1,317,204		2.3


Total commercial loans held for investment		29,547,718		50.8			29,113,874		50.6


Residential mortgages		10,726,754		18.4			10,607,626		18.4
Home equity loans and lines of credit		7,019,725		12.0			7,069,491		12.3


Total consumer loans secured by real estate		17,746,479		30.4			17,677,117		30.7

Auto loans		10,741,640		18.4			10,496,510		18.2
Other		259,210		0.4			264,676		0.5


Total consumer loans held for investment		28,747,329		49.2			28,438,303		49.4


Total loans held for investment (1)	$	58,295,047		100.0	%	$	57,552,177		100.0	%


Total loans held for investment with:
Fixed rate	$	34,537,817		59.2	%	$	33,667,940		58.5	%
Variable rate		23,757,230		40.8			23,884,237		41.5


Total loans held for investment (1)	$	58,295,047		100.0	%	$	57,552,177		100.0	%


(1)		Total loans held for investment includes deferred loan origination costs, net of deferred loan fees and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net decrease in loans of $477.6 million and $382.6 million at June 30, 2010 and December 31, 2009, respectively. The reason for the variance was primarily due discounts related to loans acquired by SCUSA during the first quarter of 2010. Loans pledged as collateral for borrowings totaled $40.7 billion and $35.9 billion at June 30, 2010 and December 31, 2009, respectively.

The entire loans held for sale portfolio at June 30, 2010 and December 31, 2009 consists of fixed rate residential mortgages. The balance at June 30, 2010 was $124.9 million compared to $119.0 million at December 31, 2009.

In the first quarter of 2010, SHUSA consolidated a commercial mortgage backed securitization (“CMBS”) related to a change in accounting principle which became effective on January 1, 2010. The Company owns the subordinated certificates issued by the securitization (“controlling class certificate holders”) which had an outstanding balance of $19.9 million. The holder of these certificates received the residual cash flows of the trust each month, if any, and incurred the initial credit losses for the underlying loans collateralizing the debt certificates. Additionally, the controlling class certificate holders had the right to determine which party should be assigned the role of special servicer for the trust. The special servicer decided how delinquent loans should be serviced in order to maximize cash flows for the benefit of the certificate holders. Since SHUSA held the controlling class certificates the Company determined it was the primary beneficiary of the Trust and as a result consolidated its assets and liabilities. This non-cash transaction increased net loans by $866.3 million and borrowings by $870.1 million on the reconsolidation date.

In the second quarter of 2010, the Company sold the controlling class certificates in the CMBS securitization that was consolidated and as such no longer has the risks and rewards of owning the subordinated certificates. Additionally, the Company no longer has the ability to decide which party should service problem loans in order to maximize cash flows of the underlying trust. Therefore, SHUSA is no longer considered the primary beneficiary of the CMBS securitization trust and as a result deconsolidated the net assets and liabilities of this vehicle in the second quarter which totaled $860.5 million.

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

(3) LOANS (continued)

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


	Three-Month Period					Six-Month Period
	Ended June 30,					Ended June 30,
	2010			2009		2010		2009

Allowance for loan losses, beginning of period	$	1,932,360		$	1,687,432	$	1,818,224	$	1,102,753
Acquired allowance for loan losses due to SCUSA contribution from Parent		—			—		—		347,302
Allowance established in connection with reconsolidation of previously unconsolidated securitized assets		(19,653	)		—		5,991		—
Charge-offs:
Commercial		176,864			67,852		351,468		151,707
Consumer secured by real estate		36,784			23,196		65,717		49,010
Consumer not secured by real estate		151,189			227,390		380,629		578,318


Total Charge-offs		364,837			318,438		797,814		779,035


Recoveries:
Commercial		17,452			2,145		27,332		5,121
Consumer secured by real estate		293			3,216		773		5,617
Consumer not secured by real estate		60,525			73,898		139,438		164,165


Total Recoveries		78,270			79,259		167,543		174,903


Charge-offs, net of recoveries		286,567			239,179		630,271		604,132
Provision for loan losses (1)		416,870			424,914		849,066		1,027,244


Allowance for loan losses, end of period		2,043,010			1,873,167		2,043,010		1,873,167

Reserve for unfunded lending commitments, beginning of period		239,651			172,780		259,140		65,162
Provision for unfunded lending commitments (1)		20,434			30,882		945		138,500
Reserve for unfunded lending commitments, end of period		260,085			203,662		260,085		203,662

Total allowance for credit losses, end of period	$	2,303,095		$	2,076,829	$	2,303,095	$	2,076,829


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


	June 30,		December 31,
	2010		2009
Non-accrual loans:
Consumer:
Residential mortgages	$	626,849	$	617,918
Home equity loans and lines of credit		120,967		117,390
Auto loans and other consumer loans		351,556		535,902

Total consumer loans		1,099,372		1,271,210
Commercial		580,075		654,322
Commercial real estate		795,387		823,766
Multi-family		333,085		381,999


Total commercial loans		1,708,547		1,860,087

Total non-performing loans		2,807,919		3,131,297


Other real estate owned		105,498		73,734
Other repossessed assets		55,516		44,346


Total other real estate owned and other repossessed assets		161,014		118,080


Total non-performing assets	$	2,968,933	$	3,249,377

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

(3) LOANS (continued)

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


	June 30,		December 31,
	2010		2009
Impaired loans with a related allowance	$	1,817,892	$	1,193,095
Impaired loans without a related allowance		354,490		283,652


Total impaired loans	$	2,172,382	$	1,476,747


Allowance for impaired loans	$	454,933	$	363,059


Total loans past due 90 days as to interest or principal and accruing interest	$	22,747	$	27,321

SHUSA, through its SCUSA subsidiary, acquires certain auto loans at a substantial discount from par from manufacturer-franchised dealers or other companies engaged in non-prime lending activities. Part of this discount is attributable to the expectation that not all contractual cash flows will be received from the borrowers. These loans are accounted for under the Receivable topic of the FASB Accounting Standards Codification (Section 310-30) “Loans and Debt Securities Acquired with Deteriorated Credit Quality”. The excess of the estimated undiscounted principal, interest and other cash flows expected to be collected over the initial investment in the acquired loans is amortized to interest income over the expected life of the loans via the effective interest rate method. A rollforward of the nonaccretable and accretable yield on loans accounted for under Section 310-30 is shown below (in thousands):


	Contractual			Nonaccretable			Accretable			Carrying
	Receivable Amount			Yield			Yield			Amount
Balance at January 1, 2010	$	2,042,594		$	(225,949	)	$	(35,207	)	$	1,781,438
Additions (Loans acquired during the period)		1,451,771			(147,201	)		34,370			1,338,940
Customer repayments		(560,765	)		—			—			(560,765	)
Charge-offs		(72,020	)		72,020			—			—
Accretion of loan discount		—			—			1,938			1,938


Balance at June 30, 2010	$	2,861,580		$	(301,130	)	$	1,101		$	2,561,551

In June 2010, SCUSA entered into an agreement with Citigroup to purchase approximately $3.2 billion in non-prime auto loans and service approximately $7.2 billion of Citigroup auto loans. SCUSA will pay approximately $3.2 billion in connection with this transaction which is expected to close in the fall of 2010.

(4) DEPOSIT PORTFOLIO COMPOSITION

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


	June 30, 2010								December 31, 2009
						Weighted								Weighted
						Average								Average
	Amount		Percent			Rate			Amount		Percent			Rate
Demand deposit accounts	$	7,152,161		17.3	%		—	%	$	7,237,730		16.3	%		—	%
NOW accounts		5,559,451		13.4			0.15			5,703,789		12.8			0.16
Money market accounts		13,554,087		32.7			0.59			13,158,001		29.6			0.82
Savings accounts		3,616,185		8.7			0.10			3,537,983		8.0			0.14
Certificates of deposit		6,918,990		16.7			1.44			8,515,350		19.2			1.64

Total retail and commercial deposits		36,800,874		88.8			0.52			38,152,853		85.9			0.69
Wholesale NOW accounts		118,270		0.3			0.34			27,570		0.1			0.50
Wholesale money market accounts		—		—			—			486,944		1.1			0.19
Wholesale certificates of deposit		648,184		1.5			2.27			1,724,841		3.8			2.20

Total wholesale deposits		766,454		1.8			1.97			2,239,355		5.0			1.74
Government deposits		2,218,721		5.4			0.34			2,231,752		5.0			0.14
Customer repurchase agreements		1,651,939		4.0			0.22			1,804,105		4.1			0.22

Total deposits	$	41,437,988		100.0	%		0.53	%	$	44,428,065		100.0	%		0.69	%

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

(5) BORROWINGS AND OTHER DEBT OBLIGATIONS

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


	June 30, 2010					December 31, 2009
			Effective					Effective
	Balance		Rate			Balance		Rate
Sovereign Bank borrowings and other debt obligations:
Securities sold under repurchase agreements	$	1,127,468		0.29	%	$	—		—	%
Fed funds purchased		1,042,000		0.10			1,000,000		0.25
FHLB advances		12,047,624		4.02			12,056,294		2.64
Reit preferred		146,833		14.21			146,115		14.34
Senior notes		1,347,234		3.92			1,346,373		3.92
Subordinated notes		1,463,539		6.12			1,663,399		5.84
Holding company borrowings and other debt obligations:
SCUSA unsecured note, due December 2010		153,000		2.23			28,000		4.48
SCUSA subordinated revolving credit facility, due December 2010		100,000		2.10			100,000		3.23
SCUSA subordinated revolving credit facility, due December 2010		—		—			117,000		4.24
SCUSA warehouse line with Wells Fargo & Co., due May 2011		684,700		1.36			1,000,000		2.01
SCUSA warehouse lines with Santander and related subsidiaries		3,445,904		1.86			4,031,267		1.94
SCUSA warehouse line with Credit Suisse, due March 2011		249,903		1.28			—		—
SCUSA warehouse line with JP Morgan Chase, due May 2011		486,100		1.31			—		—
4.80% senior notes, due September 2010		299,947		4.80			299,788		4.80
4.90% senior notes, due September 2010		249,497		4.91			248,393		4.93
2.50% senior notes, due June 2012		249,111		3.73			248,895		3.73
Floating rate senior notes, due July 2010		375,000		0.70			—		—
Floating rate senior notes, due March 2010		—		—			299,956		0.48
Santander Puerto Rico fixed rate senior notes, due February 2010		—		—			250,000		0.61
Subordinated notes		750,534		5.96			—		—
TALF loan		256,469		2.22			320,133		2.13
Asset-backed notes		3,211,554		3.30			1,929,706		4.49
Credit facilities		—		—			890,000		0.30
Junior subordinated debentures due to Capital Trust Entities		1,180,995		6.53			1,259,832		6.46


Total borrowings and other debt obligations	$	28,867,412		3.51	%	$	27,235,151		2.99	%

During the three months ended June 30, 2010, the Company, through its SCUSA subsidiary, executed two securitization transactions with net proceeds of approximately $1.7 billion and entered into three new warehouse line of credit agreements with net proceeds of approximately $2.0 billion. The proceeds from these new financing arrangements were used to pay down other warehouse facilities and to fund loan growth of approximately $400 million during the quarter.

The three SCUSA subsidiary warehouse line of credit agreements above included a $500 million line with JP Morgan Chase, which will mature on May 4, 2011, and a $1.8 billion line with Banco Santander N.A., acting through its New York branch, which will mature on December 31, 2011. Additionally, on May 7, 2010, SCUSA’s warehouse line of credit agreement with Wells Fargo Securities, LLC was amended to provide for borrowings up to $900 million and to extend the maturity date to May 6, 2011.

In June 2010, SHUSA issued a $375 million fixed rate note to Santander, which matures in July 2010. This note bears interest at 0.70%.

In March 2010, the Company issued $750 million of subordinated notes to Santander, which matures in March 2020. This subordinated note bears interest at 5.75% until March 2015 and then bears interest at 6.25% until maturity. Interest is being recognized at the effective interest rate of 5.96%.

Additionally, in March 2010, the Company issued 3 million shares of common stock to Santander which raised proceeds of $750 million. SHUSA utilized the proceeds of this offering and the subordinated debt to pay down the $890 million line of credit agreement with Banco Santander and a $250 million term borrowing with an affiliate of Santander.

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

(5) BORROWINGS AND OTHER DEBT OBLIGATIONS (continued)

In March 2010, the Company, through its SCUSA subsidiary, entered into a $250 million warehouse line of credit agreement with Credit Suisse. This line of credit bears interest at the commercial paper rate plus 90 basis points and will mature on March 17, 2011.

In November 2009, the Company entered into a line of credit agreement with Banco Santander. This agreement provides borrowing capacity of up to $1 billion and matures on September 30, 2011.

As previously mentioned, the Company sold the controlling class certificates in the CMBS securitization during the second quarter of 2010. See Note 3 for further discussion.

During the six-month period ended June 30, 2009, the Company retired $1.4 billion of advances from the FHLB incurring prepayment penalties 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 low rate environment at the time.

(6) DERIVATIVES

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

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

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

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

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

Fair Value Hedges. SHUSA has historically entered into pay-variable, receive-fixed interest rate swaps to hedge changes in fair values of certain brokered certificates of deposits and certain debt obligations. Additionally, SHUSA through its SCUSA subsidiary, enters into pay-fixed, receive variable interest rate swaps to hedge changes in fair value of certain longer term assets. SHUSA had no fair value hedges outstanding at June 30, 2010. For the three-month and six-month periods ended June 30, 2009, income of $2.0 million, respectively, were recorded in earnings associated with hedge ineffectiveness.

Cash Flow Hedges. SHUSA hedges exposures to changes in cash flows associated with forecasted interest payments on variable-rate liabilities, through the use of pay-fixed, receive variable interest rate swaps. The last of the hedges is scheduled to expire in January 2016. For the six months ended June 30, 2010 and June 30, 2009, no hedge ineffectiveness was recognized as income in earnings associated with cash flow hedges. During the six months ended June 30, 2010 and 2009, $7.4 million and $17.3 million of losses deferred in accumulated other comprehensive income were recorded as interest expense as a result of discontinuance of cash flow hedges for which the forecasted transaction was probable of occurring. As of June 30, 2010, SHUSA expects approximately $9.7 million of the deferred net after-tax loss on derivative instruments included in accumulated other comprehensive income to be reclassified to earnings during the next twelve months. The effective portion of gains and losses on derivative instruments designated as cash flow hedges recorded in other comprehensive income and reclassified into earnings resulted in increases of $61.3 million and $139.3 million to interest expense for the three-month and six-month periods ended June 30, 2010. The effective portion of the unrealized gain recognized in other comprehensive income on cash flow hedges was $31.6 million and $124.3 million for the three-month and six-month periods ended June 30, 2010.

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

(6) DERIVATIVES (continued)

Other Derivative Activities. SHUSA’s derivative portfolio also includes mortgage banking interest rate lock commitments and forward sale commitments used for risk management purposes and derivatives executed with commercial banking customers, primarily interest rate swaps and foreign currency contracts. The Company also enters into precious metals customer forward purchase arrangements and forward sale agreements.

During the three-month period ended June 30, 2010, SHUSA sold its Visa Inc. Class B common shares resulting in a gain of $14.0 million. In conjunction with the sale of its Visa, Inc. Class B shares, SHUSA entered into a total return swap in which SHUSA will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. This total return swap is accounted for as a free standing derivative. The fair value of the total return swap was calculated using a discounted cash flow model based on unobservable inputs consisting of management’s estimate of the probability of certain litigation scenarios, timing of litigation settlements and payments related to the swap.

SCUSA has entered into interest rate swap agreements to hedge variable rate liabilities associated with securitization trust agreements. SCUSA has over time repurchased $93 million of borrowings from the securitization trust; however, the trust documents have prevented SCUSA from terminating the associated interest rate swap agreements. Therefore, SCUSA has designated the hedges, whose notional value was $81.5 million as of June 30, 2010, as trading hedges and records changes in the market value of these hedges through earnings.

Additionally, SCUSA has derivative positions with notionals totaling $2.9 billion and $3.5 billion which were not designated to obtain hedge accounting treatment at June 30, 2010 and December 31, 2009. SHUSA recorded a charge of $7.2 million and $11.7 million for the three-month and six-month periods ended June 30, 2010 associated with these positions.

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

Shown below is a summary of the derivatives designated as accounting hedges at June 30, 2010 and December 31, 2009:


	Notional						Receive			Pay			Life
	Amount		Asset		Liability		Rate			Rate			(Years)
June 30, 2010
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	$	7,267,103	$	—	$	230,745		2.43	%		1.31	%		2.6

December 31, 2009
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	$	6,565,898	$	—	$	204,034		0.56	%		3.86	%		2.0

Summary information regarding other derivative activities at June 30, 2010 and December 31, 2009 follows:


	June 30,			December 31,
	2010			2009
	Asset			Asset
	(Liability)			(Liability)
Mortgage banking derivatives:
Forward commitments to sell loans	$	(4,722	)	$	2,013
Interest rate lock commitments		5,009			325

Total mortgage banking risk management		287			2,338
Swaps receive fixed		365,953			266,770
Swaps pay fixed		(361,783	)		(266,355	)

Net customer related interest rate hedges		4,170			415
VISA total return swap		(5,240	)		—
Precious metals forward sale agreements		67			1,421
Precious metals forward purchase arrangements		(67	)		(1,421	)
Foreign exchange contracts		5,144			5,852

Total	$	4,361		$	8,605

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

(6) DERIVATIVES (continued)

The following financial statement line items were impacted by SHUSA’s derivative activity as of and for the six months ended June 30, 2010:


	Balance Sheet Effect at	Income Statement Effect For The Six Months Ended
Derivative Activity	June 30, 2010	June 30, 2010
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Increases to other liabilities and deferred taxes of $230.7 million and $85.2 million, respectively, and a decrease to stockholders’ equity of $137.7 million.	Decrease in net interest income of $160.6 million.

Other hedges:
Forward commitments to sell loans	Decrease to other liabilities of $4.7 million.	Decrease in mortgage banking revenues of $6.7 million.

Interest rate lock commitments	Increase to mortgage loans of $5.0 million.	Increase in mortgage banking revenues of $4.7 million.

Net customer related hedges	Increase to other assets of $4.2 million.	Increase in capital markets revenue of $3.8 million.

Total return swap associated with sale of Visa, Inc. Class B. shares	Increase to other liabilities of $5.2 million	Decrease in other non-interest income of $5.2 million

Forward commitments to sell and purchase precious metals inventory	Insignificant balance sheet effect at June 30, 2010.	No income statement effect.

Foreign exchange	Increase to other assets of $5.1 million.	Decrease in commercial banking fees of $0.7 million.

The following financial statement line items were impacted by SHUSA’s derivative activity as of December 31, 2009 and for the six months ended June 30, 2009:


	Balance Sheet Effect at	Income Statement Effect For The Six Months Ended
Derivative Activity	December 31, 2009	June 30, 2009
Fair value hedges:
Receive fixed-pay variable interest rate swaps	No derivative positions designated in fair value hedging relationships as of December 31, 2009.	Increase in net interest income of $1.2 million.

Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Increases to other liabilities and deferred taxes of $204.0 million and $74.2 million, respectively and a net decrease to stockholders’ equity of $129.8 million.	Decrease in net interest income of $138.2 million.

Other hedges:
Forward commitments to sell loans	Increase to other assets of $2.0 million.	Increase in mortgage banking revenues of $21.6 million.

Interest rate lock commitments	Increase to mortgage loans of $0.3 million.	Decrease in mortgage banking revenues of $4.8 million.

Net customer related hedges	Increase to other assets of $0.4 million.	Decrease in capital markets revenue of $5.3 million.

Forward commitments to sell and purchase precious metals inventory	Insignificant balance sheet effect at December 31, 2009.	Decrease in commercial banking fees of $0.9 million.

Foreign exchange	Increase to other assets of $5.9 million.	Decrease in commercial banking fees of $0.9 million.

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

(7) COMPREHENSIVE (LOSS)/INCOME

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


	Three-Month Period						Six-Month Period
	Ended June 30,						Ended June 30,
	2010			2009			2010			2009
Net income	$	144,043		$	(141,324	)	$	237,204		$	(908,457	)
Change in accumulated (losses)/gains on cash flow hedge derivative financial instruments, net of tax		(18,191	)		(41,637	)		(5,806	)		(4,589	)
Change in unrealized gains/(losses) on investment securities available-for-sale, net of tax		156,997			194,613			209,751			184,679
Less reclassification adjustment, net of tax:
Derivative instruments		(2,353	)		(5,499	)		(4,678	)		(11,015	)
Pensions		(301	)		(389	)		(603	)		(1,185	)
Investments available-for-sale		27,281			(14,929	)		44,025			(64,344	)

Comprehensive income/(loss)	$	258,222		$	32,469		$	402,405		$	(651,823	)

Accumulated other comprehensive losses, net of related tax, consisted of net unrealized losses on securities of $10.7 million (which includes $119.5 million of unrealized other-than-temporary-impairment losses recognized in accumulated other comprehensive income), net accumulated losses on unfunded pension liabilities of $15.3 million and net accumulated losses on derivatives of $158.7 million at June 30, 2010 and net unrealized losses on securities of $176.4 million (which includes $123.4 million of unrealized other-than-temporary-impairment losses recognized in accumulated other comprehensive income), net accumulated losses on unfunded pension liabilities of $15.9 million and net accumulated losses on derivatives of $157.6 million at December 31, 2009.

(8) MORTGAGE SERVICING RIGHTS


Gross balance as of December 31, 2009	$	179,643
Mortgage servicing assets recognized		16,646
Amortization		(23,895	)

Gross balance at June 30, 2010		172,394
Valuation allowance		(41,228	)

Balance as June 30, 2010	$	131,166

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

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


	June 30, 2010			March 31, 2010			December 31, 2009			June 30, 2009
CPR		22.88	%		21.56	%		24.44	%		24.44	%
Escrow credit spread		2.88	%		3.06	%		3.17	%		3.70	%

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

(8) MORTGAGE SERVICING RIGHTS (continued)

A valuation allowance is established for the excess of the cost of each residential mortgage servicing asset stratum over its estimated fair value. Activity in the valuation allowance for mortgage servicing rights for the six months ended June 30, 2010 consisted of the following:


Balance as of December 31, 2009	$	52,089
Net decrease in valuation allowance for mortgage servicing rights		(10,861	)

Balance as June 30, 2010	$	41,228

SHUSA also originates and periodically sells multi-family loans in the secondary market to Fannie Mae while retaining servicing. At June 30, 2010 and December 31, 2009, SHUSA serviced $11.9 billion and $12.3 billion of loans for Fannie Mae, respectively, and as a result has recorded servicing assets of $5.7 million and $9.3 million, respectively. SHUSA recorded servicing asset amortization of $4.7 million and $2.2 million related to the multi-family loans sold to Fannie Mae for the six-months ended June 30, 2010 and 2009, respectively. SHUSA recorded a multi-family servicing recovery of $0.7 million and $1.1 million for the three-month and six-month periods ended June 30, 2010, compared to a net recovery of $1.3 million and a net impairment $2.3 million for the corresponding periods in the prior year.

SHUSA had gains on the sale of mortgage loans, multi-family loans and home equity loans of $5.0 million and $12.7 million for the three-month and six-month periods ended June 30, 2010, compared with gains of $9.1 million and losses of $29.4 million for the corresponding periods ended June 30, 2009. The three-month and six-month periods ended June 30, 2009 included charges of $21.9 million and $70.0 million to increase our recourse reserves associated with the sales of multi-family loans to Fannie Mae. No such charges were recorded in 2010. SHUSA now has recourse reserves of $171.8 million associated with multi-family loans sold to Fannie Mae, on which SHUSA’s maximum credit exposure is $243.5 million.

(9) BUSINESS SEGMENT INFORMATION

For segment reporting purposes, SCUSA has been reflected as a stand-alone business segment. 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 segment. Other income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct expenses as well as certain allocated corporate expenses are accounted for within each segment’s financial results. Where practical, the results are adjusted to present consistent methodologies for the segments. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business.

The Company’s segments are focused principally around the customers SHUSA serves. The Retail Banking Division 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 plans. 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 Middle Market segment provides the majority of SHUSA’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. The Other segment includes earnings from the investment portfolio (excluding any investments purchased by SCUSA), interest expense on SHUSA’s borrowings and other debt obligations (excluding any borrowings held by SCUSA), amortization of intangible assets and certain unallocated corporate income and expenses.

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

(9) BUSINESS SEGMENT INFORMATION (continued)

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


For the three-month period ended				Specialized			Middle
June 30, 2010	Retail			Business(1)			Market			SCUSA		Other (3)			Total

Net interest income/(expense)	$	181,287		$	65,577		$	87,144		$	401,317	$	74,775		$	810,100
Fees and other income		111,981			9,473			16,750			53,538		19,525			211,267
Provision for credit losses		72,446			94,754			42,540			241,404		(13,840	)		437,304
General and administrative expenses		241,017			23,654			32,641			81,501		(10,316	)		368,497
Income/(loss) before income taxes⁽¹⁾		(25,343	)		(43,423	)		25,849			130,192		122,898			210,173
Intersegment revenue/(expense) ⁽²⁾		(29,672	)		(135,132	)		(18,739	)		—		183,543			—
Total average assets	$	22,354,524		$	15,526,101		$	11,506,907		$	9,985,339	$	22,971,481		$	82,344,352


For the six-month period ended				Specialized			Middle
June 30, 2010	Retail			Business(1)			Market			SCUSA		Other (3)			Total

Net interest income/(expense)	$	356,795		$	133,502		$	173,164		$	760,542	$	143,855		$	1,567,858
Fees and other income		230,404			19,109			34,850			67,821		35,343			387,527
Provision for credit losses		138,018			198,295			73,964			447,111		(7,377	)		850,011
General and administrative expenses		484,039			48,206			64,219			154,586		(19,638	)		731,412
Income/(loss) before income taxes⁽¹⁾		(59,387	)		(94,151	)		64,589			223,987		209,976			345,014
Intersegment revenue/(expense) ⁽²⁾		(55,046	)		(276,244	)		(37,815	)		—		369,105			—
Total average assets	$	21,993,955		$	15,491,339		$	11,470,338		$	9,385,569	$	24,358,996		$	82,700,197


For the three-month period ended				Specialized			Middle
June 30, 2009	Retail			Business(1)			Market			SCUSA		Other (3)			Total

Net interest income/(expense)	$	155,828		$	85,260		$	77,846		$	343,068	$	6,674		$	668,676
Fees and other income		135,620			(2,103	)		13,849			6,476		28,369			182,211
Provision for credit losses		38,957			142,397			44,498			218,796		11,148			455,796
General and administrative expenses		265,830			25,251			33,515			51,698		(6,088	)		370,206
Income/(loss) before income taxes⁽¹⁾		(62,462	)		(85,789	)		7,012			78,691		(87,733	)		(150,281	)
Intersegment revenue/(expense) ⁽²⁾		29,022			(170,743	)		(32,689	)		—		174,410			—
Total average assets	$	22,375,812		$	20,045,966		$	12,600,695		$	6,621,336	$	22,438,095		$	84,081,904


For the six-month period ended				Specialized			Middle
June 30, 2009	Retail			Business(1)			Market			SCUSA		Other (3)			Total

Net interest income/(expense)	$	282,308		$	169,703		$	153,165		$	676,128	$	29,501		$	1,310,805
Fees and other income		235,170			(43,471	)		26,389			13,647		48,249			279,984
Provision for credit losses		77,014			280,109			182,444			423,743		202,433			1,165,743
General and administrative expenses		557,353			55,411			70,910			106,483		(14,987	)		775,170
Income/(loss) before income taxes⁽¹⁾		(187,411	)		(210,776	)		(81,739	)		158,829		(567,078	)		(888,175	)
Intersegment revenue/(expense) ⁽²⁾		43,994			(350,432	)		(68,417	)		—		374,855			—
Total average assets	$	22,661,320		$	20,837,612		$	12,886,725		$	6,440,361	$	20,745,017		$	83,571,035


(1)		The Retail Segment fees and other income includes residential servicing right (impairments)/ recoveries of $(3.8) million and $10.9 million for the three months and six months ended June 30, 2010, compared to a recovery of $16.3 million and an impairment charge of $1.3 million in the corresponding periods in the prior year. The Retail Segment income/(loss) before income taxes also includes an additional deposit premium assessment of $35.3 million in the second quarter of 2009. The Specialized Business Segment fees and other income includes charges of $21.9 million and $70.0 million associated with increasing multi-family recourse reserves for loans sold to Fannie Mae for the three and six months ended June 30, 2009. See Note 8 for further discussion on these items.

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

(3)		Included in Other for the three months and six months ended June 30, 2009 were other-than-temporary-impairment charges of $24.0 million and $103.7 million on FNMA and FHLMC preferred stock and non-agency mortgage backed securities. Prior year results also included net transaction related and integration charges and other restructuring costs, severance and debt extinguishment charges of $70.5 million and $303.8 million for the three months and six months ended June 30, 2009, respectively.

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

(10) INCOME TAXES

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

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

The income taxes topic of the FASB Accounting Standards Codification suggests that additional scrutiny should be given to deferred tax assets of an entity with cumulative pre-tax losses during the three most recent years and is widely considered significant negative evidence that is objective and verifiable and therefore, difficult to overcome. During the three years ended December 31, 2008, we had cumulative pre-tax losses and considered this factor in our analysis of deferred tax assets at year-end. Additionally, based on the continued economic uncertainty that existed at that time, it was determined that it was probable that the Company would not generate significant pre-tax income in the near term on a stand-alone basis. As a result of these facts, SHUSA recorded a $1.43 billion valuation allowance against its deferred tax assets for the year-ended December 31, 2008.

During 2009, Santander contributed SCUSA into the Company. SCUSA generated pretax income of $332.2 million in 2009 compared to $261.6 million and $260.8 million in 2008 and 2007. As a result of this contribution, SHUSA updated its deferred tax realizability analysis by incorporating future projections of taxable income that will be generated by SCUSA. As a result of incorporating future taxable income projections of SCUSA, the Company was able to reduce its deferred tax valuation allowance by $1.3 billion for the year ended December 31, 2009. SHUSA continues to maintain a valuation allowance of $428 million and $408 million at June 30, 2010 and December 31, 2009, respectively, related to deferred tax assets that will not be realized based on the current earning projections discussed above. The future realizability of our deferred tax assets 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 impact the realizability (either negatively or positively) of our deferred tax assets in future periods.

At June 30, 2010, the Company had net unrecognized tax benefits related to uncertain tax positions of $81.2 million, which represents the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


Gross unrecognized tax benefits at December 31, 2009	$	97,048
Additions based on tax positions related to the current year		520
Additions based on tax positions related to prior years		932
Settlements		(586	)
Reductions based on tax positions related to prior years		(696	)

Gross unrecognized tax benefits at June 30, 2010		97,218
Less: Federal, state and local income tax benefits		(16,001	)

Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of June 30, 2010	$	81,217

SHUSA recognizes penalties and interest accrued related to unrecognized tax benefits within income tax expense on the Consolidated Statement of Operations. During the three-month and six-month periods ended June 30, 2010, SHUSA recognized increases of approximately $0.4 million and $1.1 million in interest and penalties compared to an increase of $0.8 million and a decrease of $0.1 million for the corresponding periods in the prior year. Included in gross unrecognized tax benefits at June 30, 2010 was approximately $15.4 million for the potential payment of interest and penalties.

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

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

(10) INCOME TAXES (continued)

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. SHUSA reviews its tax balances quarterly and as new information becomes available, the balances are adjusted, as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions. In late 2008, the Internal Revenue Service (the “IRS”) completed its examination of the Company’s federal income tax returns for the years 2002 through 2005. Included in this examination cycle are two separate financing transactions with an international bank totaling $1.2 billion. As a result of these transactions, SHUSA was subject to foreign taxes of $154.0 million during the years 2003 through 2005 and claimed a corresponding foreign tax credit for foreign taxes paid during those years. In 2006 and 2007, SHUSA was subject to an additional $87.6 million and $22.5 million, respectively, of foreign taxes related to these financing transactions and claimed a corresponding foreign tax credit. The IRS issued a notification of adjustment disallowing the foreign tax credits taken in 2003-2005 in the amount of $154.0 million related to these transactions; disallowing deductions for issuance costs and interest expense related to the transaction which would result in an additional tax liability of $24.9 million and assessed interest and potential penalties, the combined amount of which totaled approximately $70.8 million. SHUSA has paid the additional tax due resulting from the IRS’ adjustments, as well as the assessed interest and penalties and has filed a lawsuit seeking the refund of those amounts in Federal District Court. In addition, the IRS has commenced its audit for the years 2006 and 2007. We expect that in the future the IRS will propose to disallow the foreign tax credits and deductions taken in 2006 and 2007 of $87.6 million and $22.5 million, respectively; disallow deductions for issuance costs and interest expense which would result in an additional tax liability of $37.1 million; and to assess interest and penalties. SHUSA continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe it is entitled to tax deductions for the related issuance costs and interest deductions based on tax law. SHUSA also believes that its recorded tax reserves for its position of $57.9 million adequately provides for any potential exposure to the IRS related to these items. However, as the Company continues to go through the litigation process, we will continue to evaluate the appropriate tax reserve levels for this position and any changes made to the tax reserves may materially affect SHUSA’s income tax provision, net income and regulatory capital in future periods.

(11) RELATED PARTY TRANSACTIONS

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

In March 2010, SHUSA issued to Santander, 3,000,000 shares of SHUSA’s Common Stock, raising proceeds of $750 million.

SHUSA has $1.7 billion of public securities that consists of various senior note obligations, trust preferred security obligations and preferred stock issuances. Santander owns approximately 35% of these securities as of June 30, 2010.

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

SHUSA has entered into interest rate swap agreements with Santander to hedge interest rate risk on floating rate tranches of its securitizations and FHLB advances which have a notional value of $6.7 billion.

In 2006, Santander extended a total of $425 million in unsecured lines of credit to Sovereign Bank for federal funds and Eurodollar borrowings and for the confirmation of standby letters of credit issued by Sovereign Bank. This line is at a market rate and in the ordinary course of business and can be cancelled by either Sovereign Bank or Santander at any time and can be replaced by Sovereign Bank at any time. In the first quarter of 2009, this line was increased to $2.5 billion. During the six months ended June 30, 2010 and 2009, respectively, the average balance outstanding under these commitments was $826.4 million and $225.4 million. As of June 30, 2010, there was no outstanding balance on the unsecured lines of credit for federal funds and Eurodollar borrowings. Sovereign Bank paid approximately $6.3 million in fees to Santander in the six month period ended June 30, 2010 in connection with these commitments compared to $2.2 million in fees in the corresponding period in the prior year.

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

(11) RELATED PARTY TRANSACTIONS (continued)

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

•

Nw Services Co., a Santander affiliate doing business as Aquanima, is under contract with Sovereign Bank to provide procurement services, with fees paid in the second quarter of 2010 in the amount of $0.4 million.

•

Geoban, S.A., a Santander affiliate, is under contract with Sovereign Bank to provide services in the form of debit card disputes and claims support, and consumer and mortgage loan set-up and review. There were no fees paid in the second quarter of 2010 with respect to this agreement.

•

Ingenieria De Software Bancario S.L., a Santander affiliate, is under contract with Sovereign Bank to provide information technology development, support and administration, with fees paid in the second quarter of 2010 in the amount of $32.9 million.

•

Produban Servicios Informaticos Generales S.L., a Santander affiliate, is under contract with Sovereign Bank to provide professional services, and administration and support of information technology production systems, telecommunications and internal/external applications, with fees paid in the second quarter of 2010 in the amount of $10.4 million.

•

Santander Back-Offices Globales Mayoristas S.A., a Santander affiliate, is under contract with Sovereign Bank to provide logistical support for Sovereign Bank’s derivative and hedging transactions and programs. There were no fees paid in the second quarter of 2010 with respect to this agreement.

•

Santander Global Facilities (“SGF”), a Santander affiliate, is under contract with Sovereign Bank to provide administration and management of employee benefits and payroll functions for Sovereign Bank and other affiliates. There were no fees paid in the second quarter of 2010 with respect to this agreement.

•

SGF is under contract with Sovereign Bank and other Santander affiliates pursuant to which Sovereign Bank shall share in certain employee benefits and payroll processing services provided by third party vendors through sponsorship by SGF. In the second quarter of 2010, fees in the amount of $1.3 million were paid to SGF with respect to this agreement.

•

SGF is under contract with Sovereign Bank to provide property management services. There were no fees paid in the second quarter of 2010 with respect to this agreement.

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

(12) FAIR VALUE

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

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

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

The Company’s residential loan held for sale portfolio had an aggregate fair value of $124.9 million at June 30, 2010. The contractual principal amount of these loans totaled $119.4 million. The difference in fair value compared to the principal balance was $5.5 million which was recorded in mortgage banking revenues during the six-month period ended June 30, 2010. Substantially all of these loans are current and none are in non-accrual status. The fair value of these loans is estimated based upon the anticipated exit prices for these loans in the secondary market to agency buyers such as Fannie Mae and Freddie Mac. Practically all of our residential loans held for sale portfolio is sold to these two agencies.

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

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

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that the majority of its derivative valuations are classified in Level 2 of the fair value hierarchy.

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

(12) FAIR VALUE (continued)

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

The following table presents the assets that are measured at fair value on a recurring basis by level within the fair value hierarchy as reported on the consolidated balance sheet at June 30, 2010. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands).


	Fair Value Measurements at Reporting Date Using:
	Quoted Prices in
	Active Markets for		Significant Other			Significant
	Identical Assets		Observable Inputs			Unobservable Inputs			Balance at
	(Level 1)		(Level 2)			(Level 3)			June 30, 2010
Assets:
US Treasury and government agency securities	$	—	$	12,997		$	—		$	12,997
Debentures of FHLB, FNMA and FHLMC		—		25,012			—			25,012
Corporate debt and asset-backed securities		—		7,003,473			51,481			7,054,954
Equity securities		—		2,759			—			2,759
State and municipal securities		—		2,590,462			—			2,590,462
Mortgage backed securities		—		2,504,028			1,764,520			4,268,548

Total investment securities available-for-sale		—		12,138,731			1,816,001			13,954,732
Loans held for sale		—		124,931			—			124,931
Derivatives		—		(244,354	)		(14,422	)		(258,776	)

Total	$	—	$	12,019,308		$	1,801,579		$	13,820,887

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

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


	Quoted Prices in Active		Significant Other		Significant
	Markets for		Observable Inputs		Unobservable
	Identical Assets (Level 1)		(Level 2)		Inputs (Level 3)		Total
June 30, 2010
Loans (1)	$	—	$	2,172,382	$	—	$	2,172,382
Foreclosed assets (2)		—		49,804		—		49,804
Mortgage servicing rights (3)		—		—		136,855		136,855

December 31, 2009
Loans (1)	$	—	$	1,476,747	$	—	$	1,476,747
Foreclosed assets (2)		—		118,080		—		118,080
Mortgage servicing rights (3)		—		—		136,874		136,874


(1)		These balances are measured at fair value on a non-recurring basis using the fair value of the underlying collateral.

(2)		Represents the fair value of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets, based on periodic updates of appraisals and estimated selling costs.

(3)		These balances are measured at fair value on a non-recurring basis. Mortgage servicing rights are stratified for purposes of the impairment testing.

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

(12) FAIR VALUE (continued)

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


	Six Months ended June 30,
	2010			2009
Loans	$	(91,874	)	$	(228,996	)
Foreclosed assets		(3,032	)		(1,565	)
Mortgage servicing rights		11,938			(1,327	)

	$	(82,968	)	$	(231,888	)

The table below presents the changes in our Level 3 balances for the six-month period ended June 30, 2010.


	Investments			Mortgage
	Available-for-Sale			Servicing Rights			Derivatives			Total
Balance at December 31, 2009	$	1,938,576		$	136,874		$	(24,585	)	$	2,050,865
Gains/(losses) in other comprehensive income		113,618			—			(1,182	)		112,436
Gains/(losses) in earnings		(4,994	)		11,938			2,970			9,914
Additions		—			16,646			(5,240	)		11,406
Repayments		(231,199	)		—			13,615			(217,584	)
Sales/Amortization		—			(28,603	)		—			(28,603	)

Balance at June 30, 2010	$	1,816,001		$	136,855		$	(14,422	)	$	1,938,434

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

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


	June 30, 2010						December 31, 2009
	Carrying						Carrying
	Value			Fair Value			Value			Fair Value
Financial Assets:
Cash and amounts due from depository institutions	$	1,767,922		$	1,767,922		$	2,323,290		$	2,323,290
Investment securities:
Available-for-sale		13,954,732			13,954,732			13,609,398			13,609,398
Loans held for investment, net		56,252,038			55,438,340			55,733,953			53,483,141
Loans held for sale		124,931			124,931			118,994			118,994
Mortgage servicing rights		136,855			140,499			136,874			139,992
Mortgage banking forward commitments		(4,722	)		(4,722	)		2,013			2,013
Mortgage interest rate lock commitments		5,009			5,009			325			325
Financial Liabilities:
Deposits		41,437,988			40,985,256			44,428,065			43,699,060
Borrowings and other debt obligations		28,867,412			29,936,854			27,235,151			27,961,841
Interest rate derivative instruments		253,823			253,823			220,387			220,387
Total return swap		5,240			5,240			—			—
Precious metal forward sale agreements		67			67			1,421			1,421
Precious metal forward settlement arrangements		(67	)		(67	)		(1,421	)		(1,421	)
Unrecognized financial instruments:⁽¹⁾
Commitments to extend credit		103,467			103,384			95,354			95,278


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

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

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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

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

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

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

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

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

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

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

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

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

Precious metals customer forward settlement arrangements and precious metals forward sale agreements. The fair value of these contracts is based on the price of the metals based on published sources, taking into account when appropriate, the current credit worthiness of the counterparties.

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

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

(14) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued an amendment to the transfers and servicing topic of the FASB Accounting Standards Codification. This will eliminate the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and require additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. It also amends the consolidation guidance applicable to variable interest entities. It is effective on January 1, 2010 for the Company and it resulted in the reconsolidation of certain assets and liabilities in qualified special purpose entities in the Company’s statement of financial position. As a result of this standard, SHUSA consolidated approximately $866.3 million of loans, net of allowance for loan losses, and $870.1 million of borrowings on its balance sheet at January 1, 2010 that no longer qualified for sale accounting. See Note 5 for a description of why SHUSA determined it was the primary beneficiary of this securitization vehicle which was consolidated. The consolidation of these assets and liabilities did not have a significant impact on the Consolidated Statement of Operations.

In January 2010, the FASB issued authoritative guidance aimed at improving disclosures about fair value measurements. This guidance adds new disclosure requirements for transfers into and out of fair value hierarchy Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing disclosure requirements regarding the level of disaggregation for classes of assets and liabilities, and about inputs and valuation techniques used to measure fair value. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009 (except for certain Level 3 disclosures), and the Company adopted this guidance effective January 1, 2010. During the first half of 2010, SHUSA had no transfers between items classified as Level 1 and 2. The disclosures required by this pronouncement are included in Note 12 and 13.

In July 2010, the FASB issued authoritative guidance to improve the disclosures that companies provide about the credit quality of receivables and the related allowance for credit losses. As a result of these amendments, companies will be required to disaggregate certain existing disclosures and provide certain new disclosures about receivables and the related allowance for credit losses. SHUSA’s implementation of this guidance for the year ended December 31, 2010 is not expected to have a significant impact on SHUSA’s financial position or results of operations.

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

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

SHUSA recorded charges against its earnings for the three-month and six-month periods ending June 30, 2009 for transaction related and integration charges and other restructuring costs of $70.5 million and $235.1 million pre-tax, which were comprised of the following:


	Three-Month		Six-Month
	Period Ended		Period Ended
	June 30, 2009		June 30, 2009
Severance	$	64,666	$	137,360
Restricted stock acceleration charges		—		45,037
Miscellaneous deal costs and other		5,847		52,691

Transaction related and integration charges	$	70,513	$	235,088

The status of the reserves related to merger, restructuring and other expenses is summarized as follows:


	Contract
	Termination		Severance		Total
Reserve balance at December 31, 2009	$	27,805	$	46,900	$	74,705
Charge recorded in earnings		—		—		—
Payments		7,161		19,746		26,907

Reserve balance at June 30, 2010	$	20,644	$	27,154	$	47,798

(16) INQUIRY FROM TRUSTEE FOR THE TRUST PIERS

SHUSA has received an inquiry from the Trustee for the Trust Preferred Income Equity Redeemable Securities (“Trust PIERS”) concerning whether Santander’s acquisition of SHUSA on January 31, 2009, constituted a “change of control” under the Indenture for the Trust PIERS. SHUSA is cooperating in providing information to the Trustee. We understand the Trustee intends to communicate with Trust PIERS holders about this issue.

If the Trustee or a holder prevails in a claim that a “change of control” has occurred, the impact on SHUSA (as of June 30, 2010) would be a reduction of pre-tax income up to approximately $309 million, of which approximately $274 million relates to the difference in the current carry amount of the subordinated debentures and the principal amount due at maturity.

SHUSA believes the acquisition by Santander was not a “change of control” and intends to vigorously defend its position against any potential claims by the Trustee or any holder of Trust PIERS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

EXECUTIVE SUMMARY

SHUSA is comprised of two major subsidiaries, Sovereign Bank and Santander Consumer USA (“SCUSA”). Sovereign Bank is a $73.9 billion financial institution as of June 30, 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 Banco Santander, S.A. (“Santander”). Additionally, 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 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.

In order to enhance the Company’s capital position, on March 25, 2009, SHUSA issued 72,000 shares of preferred stock to Santander to raise proceeds of $1.8 billion. The Series D preferred stock pays non-cumulative dividends of 10% per year. Each share of Series D preferred stock is convertible into 100 shares of the Company’s common stock. SHUSA contributed the proceeds from this issuance to Sovereign Bank in order to strengthen the Bank’s regulatory capital ratios. On July 29, 2009, the outstanding Series D preferred stock was converted into common shares of SHUSA by Santander. This action further illustrates the commitment our Parent Company has made to the Company and eliminates the cash obligation of SHUSA with respect to the 10% Series D preferred stock dividend. Additionally, on March 1, 2010, SHUSA issued 3 million shares of common stock for $750 million to our Parent Company. These funds remained at our Holding Company at June 30, 2010.

Our Tier 1 leverage ratio for SHUSA was 8.27% at June 30, 2010 compared to 7.13% at December 31, 2009. The Bank’s total risk based capital ratio was 12.85% compared to 12.46% at December 31, 2009 and 12.40% a year ago. Our capital levels and ratios are in excess of the levels required to be considered well-capitalized. We continue to strengthen our balance sheet and position the Company for any further weakening in economic conditions by increasing the amount of loan loss reserves on our balance sheet. Reserves for credit losses as a percentage of total loans held for investment have increased to 3.95% at June 30, 2010 from 3.61% at December 31, 2009.

In order to further improve our operating returns, we continue to focus on acquiring and retaining customers by demonstrating convenience through our locations, technology and business approach while offering innovative and easy-to-use products and services. In the first quarter of 2009, Sovereign Bank formed a new management team which is comprised of several executives from Santander and certain legacy Sovereign Bank executives. The new management team completed its review of Sovereign Bank’s operating procedures and cost structure. During 2009, management implemented certain pricing and fee assessment changes to our deposit portfolio and also initiated a reduction in workforce and instituted a hiring freeze with respect to certain open positions. This resulted in a reduction in our workforce of approximately 2,700 employees in 2009. Many of the reductions came from consolidating certain back office functions or eliminating certain middle to senior management positions. As a result of these actions, severance charges of $137.4 million were recorded during the six-month period ended June 30, 2009.

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.

In order 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. 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

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.

Moving forward, our aim is to transform the franchise by:

1) Strengthening the core retail business;

2) Revitalizing the corporate banking business;

3) Refocusing specialized business priorities; and

4) Integrating information technology and operations systems.

RECENT INDUSTRY CONSOLIDATION

We believe the acquisition with Santander has strengthened our financial position and will continue to enable us to execute our strategy of focusing on our core retail and commercial customers. 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 are complete, although they will involve higher compliance costs and certain elements, such as the debit interchange legislation, are likely to negatively affect our revenue and earnings. These impacts are likely to 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 significantly 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 are 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. We believe that the combination of these changes will 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

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. During the first six months of 2010, our net interest margin increased to 4.49% from 3.69% in the six months ended June 30, 2009. Sovereign Bank has been able to reduce its reliance on high cost time deposit and promotional money market balances that were originated primarily in the fourth quarter of 2008. Additionally, the Bank had acquired substantial amounts of liquidity in the first quarter of 2009 due to the economic uncertainty at that time. As economic conditions have improved over recent quarters, the Bank has begun to deploy this liquidity into its investment portfolio and pay down borrowings, which has improved margins. These actions have improved SHUSA’s net interest margin (excluding SCUSA) from 2.01% in the second quarter of 2009 to 2.73% in the second quarter of 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 low cost 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 signs of stabilization in 2010 and the pace of deterioration has slowed from what was experienced in 2009. We had charge-offs of $286.6 million and $630.3 million during the three months and six months ended June 30, 2010 compared to $239.2 million and $604.1 million during the corresponding periods in the prior year. Charge-offs related to SCUSA for three-month and six-month periods ended June 30, 2010 were $76.8 million and $202.3 million compared to $129.7 million and $339.0 million for the three-month and six-month periods ended June 30, 2009. Our provision for credit losses was $437.3 million and $850.0 million during the three months and six months ended June 30, 2010 compared to $455.8 million and $1.2 billion during the corresponding periods in the prior year.

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, including reducing a 26-year high for unemployment which has been between 9% and 10% since the early part of 2009. We expect to continue to see high levels of credit losses in 2010 given the current economic environment and the uncertainty of the economic recovery which has been largely dependent on government stimulus efforts.

Conditions in the housing market have significantly impacted areas of our business. Certain segments of our consumer and commercial loan portfolios have exposure to the housing market. Sovereign Bank had residential real estate loans totaling $10.9 billion at June 30, 2010 of which $2.0 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 loans have been modest and totaled $14.6 million and $23.5 million during the three-month and six-month periods ended June 30, 2010 compared to $5.1 million and $10.9 million for the corresponding periods in the prior year. Future performance of our residential loan portfolio will continue to be significantly influenced by home prices in the residential real estate market, unemployment and general economic conditions. SHUSA holds allowances of $230.8 million on its residential loan portfolio at June 30, 2010 compared to $198.2 million at December 31, 2009.

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 $335.5 million at June 30, 2010 compared to $639.2 million a year ago. Approximately ninety percent of these loans at June 30, 2010 are to builders in our geographic footprint which generally have had more stable economic conditions on a relative basis compared to the national economy. We 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

We have seen early signs of stabilization in non-performing assets in our residential loan portfolio. Non-performing assets for this portfolio decreased to $626.8 million at June 30, 2010 from $633.3 million at March 31, 2010, but remain higher than 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 which may result in elevated levels of provisions for credit losses in future periods.

Sovereign Bank also has $7.0 billion of home equity loans and lines of credit at June 30, 2010 compared to $7.1 billion at December 31, 2009. Net charge-offs on these loans for the six-month period ended June 30, 2010 were $24.0 million compared to $26.7 million for the corresponding period in the prior year. The majority of these loans and lines had an average FICO at origination of 780 and an average loan to value of 58.0%. We have total allowances of $107.3 million for this loan portfolio at June 30, 2010 compared to allowances of $137.1 million at December 31, 2009.

SHUSA has $11.0 billion of auto and other consumer loans at June 30, 2010. Our non-performing auto and other consumer loans declined significantly since year end, dropping to $351.6 million from $535.9 million, but have increased since the end of the first quarter by $40.8 million. Improvements in the SCUSA loan portfolio delinquency and loss tend to occur in the early part of the year, when its customer base utilizes tax refunds to get current on their bills. We anticipate non accrual levels will continue to rise in subsequent quarters and have factored this anticipated deterioration into our allowance for loan loss reserves for this portfolio.

As previously stated, SCUSA’s target customer base is focused on individuals with past credit problems. The current FICO distribution for its $9.3 billion loan portfolio is as follows.


FICO Band	% of Portfolio
> 650		13	%
650-601		16	%
600-551		34	%
550-501		23	%
<=500		14	%

Although credit loss rates on this portfolio are elevated (8.7% during 2009 and 5.0% for the six-month period ended June 30, 2010), the pricing on the portfolios contemplates this as gross loan yields for SCUSA’s portfolio was 20.91% for the six-month period ended June 30, 2010.

In the six-month period ended June 30, 2010 non-performing asset loans in our commercial real estate decreased to $795.4 million, from $823.8 million at December 31, 2009. Delinquencies in this portfolio, however, rose from $151.6 million at December 31, 2009 to $182.7 million at June 30, 2010.

Non-performing commercial loans decreased from $654.3 million at December 31, 2009 to $580.1 million at June 30, 2009, and delinquencies on non-performing commercial loans decreased from $159.8 million at December 31, 2009 to $68.2 million at June 30, 2010.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

General

SHUSA reported net income of $144.0 million and $237.2 million for the three-month and six-month periods ended June 30, 2010 as compared to net losses of $141.3 million and $908.5 million for the three-month and six-month periods ended June 30, 2009. Second quarter 2010 results compared against the corresponding period in the prior year were favorably impacted by a net gain on the sale of shares of Visa of $14.0 million and $32.0 million of net investment security gains.

In connection with the acquisition by Santander, SHUSA incurred transaction related and integration charges and other restructuring costs of $303.8 million during the six months ended June 30, 2009. The majority of these costs related to change in control payments to certain executives and severance charges of $137.4 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 in the first half of 2009. 2009 results also included investment security impairment charges of $103.7 million on our FNMA/FHLMC preferred stock portfolio and certain non-agency mortgage backed securities. Additionally, non-interest income in 2009 was impacted by mortgage banking losses of $25.8 million as a result of a $69.9 million charge to increase our recourse reserves associated with sales of multi-family loans to Fannie Mae.

In 2009, the FDIC charged all insured depository institutions a special deposit premium assessment to help replenish its deposit insurance reserve fund, resulting in additional deposit premium assessments of $35.3 million in the second quarter of 2009.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
SIX-MONTH PERIOD ENDED JUNE 30, 2010 AND 2009
(in thousands)


	2010								2009
				Tax								Tax
	Average			Equivalent		Yield/			Average			Equivalent		Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
EARNING ASSETS INVESTMENTS	$	15,365,870		$	260,703		3.40	%	$	13,706,912		$	196,986		2.87	%
LOANS:
Commercial loans		24,243,217			578,450		4.80	%		26,938,217			598,607		4.47	%
Multi-Family		5,156,879			139,226		5.41	%		4,559,602			128,897		5.67	%
Consumer loans
Residential mortgages		11,020,327			274,646		4.98	%		11,466,274			304,330		5.31	%
Home equity loans and lines of credit		7,034,414			144,202		4.13	%		6,889,958			154,216		4.51	%

Total consumer loans secured by real estate		18,054,741			418,848		4.65	%		18,356,232			458,546		5.01	%

Auto loans		10,336,892			905,663		17.67	%		10,829,840			916,026		17.06	%
Other		259,824			8,884		6.89	%		283,056			9,915		7.06	%

Total consumer		28,651,457			1,333,395		9.37	%		29,469,128			1,384,487		9.46	%

Total loans		58,051,553			2,051,071		7.11	%		60,966,947			2,111,991		6.97	%
Allowance for loan losses		(1,912,674	)		—		—			(1,625,996	)		—		—

NET LOANS		56,138,879			2,051,071		7.35	%		59,340,951			2,111,991		7.16	%

TOTAL EARNING ASSETS		71,504,749			2,311,774		6.50	%		73,047,863			2,308,977		6.36	%
Other assets		11,195,448			—		—			10,523,172			—		—

TOTAL ASSETS	$	82,700,197		$	2,311,774		5.62	%	$	83,571,035		$	2,308,977		5.56	%


FUNDING LIABILITIES
Deposits and other customer related accounts:
Retail and commercial deposits	$	30,139,319		$	107,166		0.72	%	$	33,852,339		$	334,632		1.99	%
Wholesale deposits		1,365,985			10,673		1.58	%		5,003,611			49,815		2.01	%
Government deposits		2,176,136			3,467		0.32	%		2,329,340			9,466		0.82	%
Customer repurchase agreements		1,692,331			1,909		0.23	%		1,590,574			2,897		0.37	%

TOTAL DEPOSITS		35,373,771			123,215		0.70	%		42,775,864			396,810		1.87	%


BORROWED FUNDS:
FHLB advances		11,595,404			274,009		4.75	%		11,513,463			312,219		5.44	%
Fed funds and repurchase agreements		1,830,411			2,000		0.22	%		1,619,420			2,546		0.32	%
Other borrowings		14,727,830			316,028		4.31	%		11,310,298			257,592		4.57	%

TOTAL BORROWED FUNDS		28,153,645			592,037		4.23	%		24,443,181			572,357		4.70	%

TOTAL FUNDING LIABILITIES		63,527,416			715,252		2.26	%		67,219,045			969,167		2.90	%
Demand deposit accounts		7,024,382			—		—			6,600,771			—		—
Other liabilities		2,024,704			—		—			2,299,285			—		—

TOTAL LIABILITIES		72,576,502			715,252		1.98	%		76,119,101			969,167		2.56	%
STOCKHOLDERS’ EQUITY		10,123,695			—		—			7,451,934			—		—

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	82,700,197			715,252		1.75	%	$	83,571,035			969,167		2.33	%

NET INTEREST INCOME				$	1,596,522							$	1,339,810

NET INTEREST SPREAD (1)							4.24	%							3.46	%


NET INTEREST MARGIN (2)							4.49	%							3.69	%


(1)		Represents the difference between the yield on total earning assets and the cost of total funding liabilities.

(2)		Represents annualized, taxable equivalent net interest income divided by average interest-earning assets.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Net Interest Income

Net interest income for the three-month and six-month periods ended June 30, 2010 was $810.1 million and $1.6 billion compared to $668.7 million and $1.3 billion for the same periods in 2009. SCUSA generated net interest income of $760.5 million for the six-month period ended June 30, 2010 compared to $676.1 million for the same period in the corresponding year due to growth in average earning assets at SCUSA. Excluding this impact, net interest income increased to $807.3 million for the six-month period ended June 30, 2010, compared to $634.7 million for the same period in the corresponding period in the prior year due to a significant reduction in high cost time deposits. Additionally, prior to the acquisition of Sovereign Bank by Santander, the Company originated a large amount of high cost deposits to stabilize liquidity levels. The Company’s liquidity and financial position improved significantly following the acquisition and as these high cost deposits matured in the fourth quarter of 2009 the runoff of these funds has lowered the Bank’s overall funding costs. Average earning retail time deposits totaled $7.6 billion at a weighed average cost of 1.45% for the quarter ended June 30, 2010 compared to $13.6 billion at a weighed average cost of 3.27% for the corresponding period in the prior year.

Interest on investment securities and interest earning deposits was $123.7 million and $238.7 million for the three-month and six-month periods ended June 30, 2010, compared to $85.1 million and $175.1 million for the same periods in 2009. The average balance of investment securities was $15.4 billion with an average tax equivalent yield of 3.40% for the six-month period ended June 30, 2010 compared to an average balance of $13.7 billion with an average yield of 2.87% for the same period in 2009. As mentioned previously, the Company has deployed some of its excess liquidity throughout the second half of 2009 as economic conditions have stabilized from the height of the financial crisis at the end of the third quarter of 2008.

Interest on loans was $1.0 billion and $2.0 billion for the three-month and six-month periods ended June 30, 2010, compared to $1.0 billion and $2.1 billion for the three-month and six-month periods in 2009. Average loan balances for the six-month period ended June 30, 2010 declined $2.9 billion from the same period in the corresponding year while yields increased to 7.11% for the six-month period ended June 30, 2010 compared to 6.97% for the corresponding period in the prior year.

Interest on deposits and related customer accounts was $54.9 million and $123.2 million for the three-month and six-month periods ended June 30, 2010, compared to $180.4 million and $396.8 million for the same periods in 2009. The average balance of deposits was $35.4 billion with an average cost of 0.70% for the six-month period ended June 30, 2010 compared to an average balance of $42.8 billion with an average cost of 1.87% for the same period in 2009. The reduction in yields has been due to repricing efforts on promotional money market accounts during 2009 and the runoff of the previously mentioned high cost time deposits issued in the latter half of 2008. The average balance of non-interest bearing demand deposits increased to $7.0 billion for the six-month period ended June 30, 2010 from $6.6 billion for the corresponding period in 2009.

Interest on borrowed funds was $291.8 million and $592.0 million for the three-month and six-month periods ended June 30, 2010, compared to $279.7 million and $572.4 millions for the same periods in 2009. The average balance of borrowings was $28.2 billion with an average cost of 4.23% for the six-month period ended June 30, 2010 compared to an average balance of $24.4 billion with an average cost of 4.70% for the same period in 2009. The increase in borrowing levels is due to SCUSA asset earning growth which has been funded with increased borrowings as well as an increase in Sovereign Bank borrowing levels of $1.3 billion which have been utilized to partially offset the runoff of the high cost time deposits mentioned above.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Provision for Credit Losses

The provision for credit losses is based upon credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the current loan portfolio. The provision for credit losses for the three-month and six-month periods ended June 30, 2010 was $437.4 million and $850.0 million, compared to $455.8 million and $1.2 billion for the same periods in 2009. Credit losses, while showing signs of stabilizing, remain elevated given recent economic weakness and high unemployment levels which has negatively impacted the credit quality of our loan portfolios.

Non-performing assets were $3.0 billion or 3.57% of total assets at June 30, 2010, compared to $3.2 billion or 3.92% of total assets at December 31, 2009 and $2.5 billion or 3.00% of total assets at June 30, 2009. The increase from the year ago period was primarily driven by our residential, commercial real estate and commercial and industrial loan portfolios. Although non-performing assets levels have remained higher than the comparable period a year ago, non-performing asset levels have decreased in each of the past two quarters. Future changes to delinquency and non performing assets levels will have a significant impact on our financial results. Management regularly evaluates SHUSA’s loan portfolios, and its allowance for loan losses, and adjusts the loan loss allowance as deemed necessary.

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


	Three-Month Period					Six-Month Period
	Ended June 30,					Ended June 30,
	2010			2009		2010		2009

Allowance for loan losses, beginning of period	$	1,932,360		$	1,687,432	$	1,818,224	$	1,102,753
Acquired allowance for loan losses due to SCUSA contribution from Parent		—			—		—		347,302
Allowance established in connection with reconsolidation of previously unconsolidated securitized assets		(19,653	)		—		5,991		—
Charge-offs:
Commercial		176,864			67,852		351,468		151,707
Consumer secured by real estate		36,784			23,196		65,717		49,010
Consumer not secured by real estate		151,189			227,390		380,629		578,318


Total Charge-offs		364,837			318,438		797,814		779,035


Recoveries:
Commercial		17,452			2,145		27,332		5,121
Consumer secured by real estate		293			3,216		773		5,617
Consumer not secured by real estate		60,525			73,898		139,438		164,165


Total Recoveries		78,270			79,259		167,543		174,903


Charge-offs, net of recoveries		286,567			239,179		630,271		604,132
Provision for loan losses (1)		416,870			424,914		849,066		1,027,244


Allowance for loan losses, end of period		2,043,010			1,873,167		2,043,010		1,873,167

Reserve for unfunded lending commitments, beginning of period		239,651			172,780		259,140		65,162
Provision for unfunded lending commitments (1)		20,434			30,882		945		138,500
Reserve for unfunded lending commitments, end of period		260,085			203,662		260,085		203,662

Total allowance for credit losses, end of period	$	2,303,095		$	2,076,829	$	2,303,095	$	2,076,829


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Non-Interest Income

Total non-interest income was $254.2 million and $456.7 million for the three-month and six-month periods ended June 30, 2010, compared to $158.7 million and $178.8 million for the same periods in 2009. The six-month period ended June 30, 2010 includes $14.0 million of gains on the sale of Visa ownership interests, $69.2 million of gains on the sale of investment securities, $11.9 million benefit from changes in MSR impairment reserves, and $3.1 million of other-than-temporary impairment charges. The six-month period ended June 30, 2009 includes an other-than-temporary impairment charge of $36.9 million on FNMA and FHLMC preferred stock, a $66.8 million other-than-temporary impairment charge on our non-agency mortgage backed securities and an increase to recourse reserves on multifamily loans sales of $70.0 million.

Consumer banking fees were $141.1 million and $232.8 million for the three-month and six-month periods ended June 30, 2010, compared to $89.9 million and $170.8 million for the same periods in 2009, representing increases of 57.0% and 36.3%, respectively. The increase for the six-month period ended June 30, 2010 is due to growth in consumer loan fees which increased $54.0 million during the six-month period ended June 30, 2010 due to growth in the SCUSA loan portfolio. Additionally, deposit fees increased $9.3 million from the corresponding period in the prior year due to certain pricing changes on deposit products.

Commercial banking fees were $46.3 million and $91.9 million for the three-month and six-month periods ended June 30, 2010, compared to $47.8 million and $94.0 million for the same periods in 2009, representing decreases of 3.1% and 2.2%, respectively. The Company has been able to maintain its commercial levels in spite of declining commercial loan balances due to pricing changes on its commercial deposit and loan portfolios.

Net mortgage banking income was composed of the following components:


	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Sales of mortgage loans and related securities	$	5,432		$	27,080		$	13,757		$	38,717
Net (losses)/gains on hedging activities		3,243			(343	)		1,810			14,575
Mortgage servicing fees		13,656			12,676			27,196			25,884
Amortization of mortgage servicing rights		(13,296	)		(18,716	)		(28,603	)		(35,533	)
Residential mortgage servicing rights (impairments)/recoveries		(3,829	)		15,041			10,861			927
Sales and changes to recourse reserves of multi-family loans		(474	)		(17,941	)		(1,016	)		(68,084	)
Recoveries from/(Impairments to) multi-family mortgage servicing rights		676			1,278			1,077			(2,254	)

Total mortgage banking (losses)/income	$	5,408		$	19,075		$	25,082		$	(25,768	)

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

Sales of mortgage loans have declined for the three-month and six-month periods ended June 30, 2010 compared to 2009 as the Company has decided to keep more loan production on its balance sheet in the first half of 2010 and the end of 2009. For the three-month and six-month periods ended June 30, 2010, SHUSA sold $231.7 million and $482.8 million of loans at a gain of $5.4 million and $13.8 million compared to $2.1 billion and $3.2 billion of loans at a gain of $27.1 million and $38.7 million in the corresponding periods in the prior year.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

At June 30, 2010 and December 31, 2009, SHUSA serviced residential real estate loans for the benefit of others totaling $14.9 billion and $14.8 billion, respectively. The fair value of the servicing portfolio at June 30, 2010 and December 31, 2009 was $131.4 million and $127.9 million, respectively. For the three months and six months ended June 30, 2010, SHUSA recorded $3.8 million of impairments and $10.9 million of recoveries on our mortgage servicing rights resulting from slower than expected prepayments on our residential mortgage portfolio. The most important assumptions in the valuation of mortgage servicing rights are anticipated loan prepayment rates (CPR) and the positive spread received for holding escrow related balances. Increases in prepayment speeds (which are generally driven by lower long term interest rates) result in lower valuations of mortgage servicing rights, while lower prepayment speeds result in higher valuations. The escrow related credit spread is the estimated reinvestment yield earned on the serviced loan escrow deposits. Increases in escrow related credit spreads result in higher valuations of mortgage servicing rights while lower spreads result in lower valuations. For each of these items, SHUSA must make market assumptions based on future expectations. All of the assumptions are based on standards that we believe would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources. Additionally, an independent appraisal of the fair value of our mortgage servicing rights is obtained annually and is used by management to evaluate the reasonableness of our discounted cash flow model. Future changes to prepayment speeds may cause significant future charges or recoveries of previous impairments in future periods.

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


	June 30, 2010			March 31, 2010			December 31, 2009			June 30, 2009
CPR		22.88	%		21.56	%		24.44	%		24.44	%
Escrow credit spread		2.88	%		3.06	%		3.17	%		3.70	%

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

SHUSA originates and periodically sells multi-family loans in the secondary market to Fannie Mae while retaining servicing. Under the terms of the sales program with Fannie Mae, we retain a portion of the credit risk associated with such loans. As a result of this agreement with Fannie Mae, SHUSA retains a 100% first loss position on each multi-family loan sold to Fannie Mae under such program until the earlier to occur of (i) the aggregate losses on the multi-family loans sold to Fannie Mae reaching the maximum loss exposure for the portfolio as a whole ($243.5 million as of June 30, 2010) or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off. The maximum loss exposure is available to satisfy any losses on loans sold in the program subject to the foregoing limitations.

The Company has established a liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae. This liability represents the amount that the Company estimates that it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses that the portfolio is projected to incur based upon an industry-based default curve with a range of estimated losses. At June 30, 2010 and December 31, 2009, SHUSA had a $171.8 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.

At June 30, 2010 and December 31, 2009, SHUSA serviced $11.9 billion and $12.3 billion, respectively, of loans for Fannie Mae sold to it pursuant to this program with a maximum potential loss exposure of $243.5 million and $245.7 million, respectively. As a result of this retained servicing on multi-family loans sold to Fannie Mae, the Company had loan servicing assets of $5.7 million and $9.3 million at June 30, 2010 and December 31, 2009, respectively. During the six-month period ended June 30, 2010 and the corresponding period in the prior year, SHUSA recorded servicing asset amortization of $4.7 million and $4.4 million, respectively. Additionally, during the first six months of 2010, SHUSA recorded a net servicing right asset recovery of $1.1 million.

Capital markets revenues were $3.9 million and $8.2 million for the three-month and six-month periods ended June 30, 2010, compared to $4.7 million and $1.5 million for the same periods in 2009. The six-month period ended June 30, 2009 includes a charge of $8.0 million to increase reserves for uncollectible swap receivables from customers due to deterioration in the credit worthiness of these companies.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Bank owned life insurance (BOLI) income represents the increase in the cash surrender value of life insurance policies for certain employees where the Bank is the beneficiary of the policies, as well as the receipt of insurance proceeds. The decrease in BOLI income to $27.1 million for the six-month period ended June 30, 2010, compared to $30.9 million for the comparable period in the prior year is primarily due to decreased death benefits as well as lower returns on certain polices.

Net gains on investment securities were $42.9 million and $69.2 million for the three-month and six-month periods ended June 30, 2010, compared to net losses of $23.5 million and $101.2 million for the same periods in 2009. Second quarter 2010 results included an other-than-temporary impairment charge of $3.1 million on certain non-agency mortgage backed securities. Additionally, second quarter 2010 results included a net gain of $14.0 million on the sale of Visa Inc. Class B common shares. Second quarter 2009 results included an other-than-temporary impairment charge of $24.0 million on certain non-agency mortgage backed securities. First quarter 2009 results included other-than-temporary impairment charges of $36.9 million on FNMA and FHLMC preferred stock and $42.8 million on certain non-agency mortgage backed securities due to increased credit loss assumptions in 2009 due to continued deteriorating economic conditions, including higher levels of impairment. See Note 2 for further discussion.

General and Administrative Expenses

General and administrative expenses for the three-month and six-month periods ended June 30, 2010 were $368.5 million and $731.4 million, compared to $370.2 million and $775.2 million for the same periods in 2009. This reduction has been primarily due to cost management efforts implemented in 2009. Sovereign Bank has reduced its employee base 24% from December 2008 to December 2009 as the Company has exited certain business lines, combined certain back office functions and transferred certain servicing operations to subsidiaries of Santander. Additionally, the Company has reduced certain discretionary expenses during this same period.

Other Expenses

Other expenses consist primarily of amortization of intangibles, deposit insurance expense, merger related and integration charges, equity method investment expense and other restructuring and proxy and related professional fees. Other expenses were $48.3 million and $98.2 million for the three-month and six-month periods ended June 30, 2010, compared to $151.7 million and $436.9 million for the same periods in 2009. The reasons for the variances are discussed below.

SHUSA recorded charges of $70.5 million and $303.8 million for the three-month and six-month periods ended June 30, 2009 associated with transaction related and integration charges and other restructuring costs. The majority of these costs in the six-month period ended June 30, 2009 related to change in control payments to certain executives and severance charges of $72.7 million as well as restricted stock acceleration charges of $45.0 million. SHUSA also incurred fees of approximately $26.4 million to third parties to successfully close the transaction. 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.

SHUSA recorded charges of $35.3 million for the three-month period ended June 30, 2009 associated with the FDIC one time special assessment. This fee was charged by the FDIC to help replenish their deposit insurance reserve fund.

SHUSA recorded intangible amortization expense of $33.4 million for the six-month period ended June 30, 2010, compared to $39.8 million for the corresponding period in the prior year. The decrease in the current year period is due primarily to decreased core deposit intangible amortization expense on previous acquisitions.

Income Tax Provision/(Benefit)

An income tax provision of $66.1 million and $107.8 million was recorded for the three-month and six-month periods ended June 30, 2010, compared to a benefit of $9.0 million and a provision of $20.3 million for the same periods in 2009 resulting in an effective tax rate/(benefit) of 31.46% and 31.25% in 2010 compared to (5.96)% and 2.28% in 2009. The 2009 tax rates are not meaningful due to the significant loss recorded by Sovereign Bank at that time.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Line of Business Results

The Company has five reportable segments. The Company’s segments are focused principally around the customers SHUSA serves. The Retail Banking Division 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 plans. 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 Middle Market segment provides the majority of SHUSA’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. A significant portion of SCUSA’s loan portfolio is generated from the state of Texas. The Other segment includes earnings from the investment portfolio (excluding any investments purchased by SCUSA), interest expense on the Company’s borrowings and other debt obligations (excluding any borrowings held by SCUSA), amortization of Sovereign Bank intangible assets and certain unallocated corporate income and expenses.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

The Retail Banking segment net interest income increased $25.5 million and $74.5 million to $181.3 million and $356.8 million for the three-month and six-month periods ended June 30, 2010 compared to the corresponding period in the preceding year. The increase in net interest income was due to margin expansion on a matched funded basis due to the runoff of the previously mentioned high cost deposits. The average balance of loans was $21.5 billion for the six months ended June 30, 2010 compared to an average balance of $22.5 billion for the corresponding period in the preceding year and the net spread on the loan portfolio for the six month period ended June 30, 2010 was 1.75% compared to 1.69% for the corresponding period in the prior year. The average balance of deposits was $34.9 billion for the six months ended June 30, 2010, compared to $39.0 billion for the same period a year ago. The net spreads on our retail deposit portfolio were 1.00% for the six-month period ended June 30, 2010 compared to 0.52% for the corresponding period in the prior year. The provision for credit losses increased $33.5 million and $61.0 million for the three months and six months ended June 30, 2010 and is driven by increased allowance allocations for the division’s loan portfolio. Provision levels have been at elevated levels since the third quarter of 2008 due to increasing high levels of unemployment. General and administrative expenses totaled $241.0 million and $484.0 million for the three months and six months ended June 30, 2010, compared to $265.8 million and $557.4 million for the three months and six months ended June 30, 2009. The decrease in general and administrative expenses is due to tighter cost controls and a lower headcount within our retail banking division.

The Specialized Business segment net interest income decreased $19.7 million and $36.2 million to $65.6 million and $133.5 million for the three-month and six-month periods ended June 30, 2010 compared to the corresponding period in the preceding year. The net spread on a match funded basis for this segment was 1.77% for the first six months of 2010 compared to 1.85% for the same period in the prior year. The average balance of loans for the six-month period ended June 30, 2010 was $14.9 billion compared with $18.3 billion for the corresponding period in the prior year. Fees and other income were $9.5 million and $19.1 million for the three-month and six-month periods ended June 30, 2010 compared to $(2.1) million and $(43.5) million for the corresponding periods in the prior year. The prior year results included a charge of $70.0 million to increase our recourse reserves associated with the sales of multi-family loans to Fannie Mae. The provision for credit losses decreased $47.6 million and $81.8 million to $94.8 million and $198.3 million for the three months and six months ended June 30, 2010 due to a lower level of specific reserves. General and administrative expenses totaled $23.7 million and $48.2 million for the three months and six months ended June 30, 2010, compared to $25.3 million and $55.4 million for the three months and six months ended June 30, 2009. The reason for the decline is due to lower headcount levels due to staff reductions.

The Middle Market segment net interest income increased $9.3 million and $20.0 million to $87.1 million and $173.2 million for the three-month and six-month periods ended June 30, 2010 compared to the corresponding period in the preceding year. The net spread on a match funded basis for this segment was 1.99% for the first six months of 2010 compared to 1.70% for the same period in the prior year. The average balance of loans for the six months ended June 30, 2010 was $12.1 billion compared with $13.5 billion for the corresponding period in the prior year. The provision for credit losses decreased $2.0 million and $108.5 million to $42.5 million and $74.0 million for the three months and six months ended June 30, 2010 due to a decrease in specific reserve allocations on certain segments within our commercial loan portfolio. The 2009 provision results included an increase in specific reserve levels due to conforming to our Parent’s reserve allocation methodology. General and administrative expenses (including allocated corporate and direct support costs) were $32.6 million and $64.2 million for the three months and six months ended June 30, 2010 compared with $33.5 million and $70.9 million for the corresponding periods in the prior year. The reason for the decline is due to tighter expense management controls and lower headcount levels due to staff reductions.

The SCUSA segment net interest income increased $58.2 million and $84.4 million to $401.3 million and $760.5 million for the three-month and six-month period ended June 30 2010, compared to the corresponding period in the preceding year. The average balance of loans for the six months ended June 30, 2010 was $8.6 billion compared with $6.3 billion for the corresponding period in the prior year and the yield on the loan portfolio for the six month period ended June 30, 2010 was 20.91% compared to 24.78% for the corresponding period in the prior year. Average borrowings for the six-month period ended June 30, 2010 were $8.2 billion with an average cost of 3.50%, compared to $5.7 billion with an average cost of 3.65% in the preceding year. The provision for credit losses was $241.4 million and $447.1 million for the three months and six months ended June 30, 2010 compared to $218.8 million and $423.7 million for the three month and six month periods ended June 30, 2009. General and administrative expenses totaled $81.5 million and $154.6 million for the three months and six months ended June 30, 2010, compared to $51.7 million and $106.5 million for the three months and six months ended June 30, 2009. SCUSA continues to remain profitable due to aggressive pricing on its loan portfolio, favorable financing costs and adequate sources of liquidity which in a large part is attributable to its relationship with Santander. Additionally, SCUSA’s successful servicing and collection practices have enabled them to maximize cash collections on their portfolio. Future profitability levels will depend on controlling credit losses and continuing to be able to effectively price its portfolio. SCUSA’s business has also been favorably impacted by the fact that certain competitors have exited the subprime auto market.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

The net income before income taxes for Other increased $210.6 million and $777.1 million to $122.9 million and $210.0 million for the three months and six months ended June 30, 2010 compared to the corresponding periods in the preceding year. Results for the six months ended June 30, 2009 included charges of $36.9 million and $66.8 million related to the other-than-temporary impairment charge on FNMA and FHLMC preferred stock and the non-agency mortgage backed securities portfolio, respectively. Results for the three months and six months ended June 30, 2009 included charges of $70.5 million and $303.8 million related to transaction related and integration charges and other restructuring costs, respectively. Net interest income increased $68.1 million and $114.4 million to $74.8 million and $143.9 million for the three months and six months ended June 30, 2010 compared to the corresponding periods in the preceding year due primarily to borrowing yields decreasing 47 basis points for the six-month period ended June 30, 2010. Average borrowings for the six-month period ended June 30, 2010 and 2009 were $28.2 billion and $24.4 billion, respectively, with an average cost of 4.23% and 4.70%. Average investments for the six-month period ended June 30, 2010 and 2009 was $15.4 billion and $13.7 billion, respectively, at an average yield of 3.40% and 2.87%.

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the December 31, 2009 consolidated financial statements filed on 2009 Form 10-K. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. We have identified accounting for the allowance for loan losses, derivatives, income taxes and goodwill as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis and the December 31, 2009 Management’s Discussion and Analysis filed in our 2009 Form 10-K.

A discussion of the impact of new accounting standards issued by the FASB and other standard setters are included in Note 14 to the consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

FINANCIAL CONDITION

Loan Portfolio

At June 30, 2010, commercial loans totaled $24.2 billion representing 41.4% of SHUSA’s loan portfolio, compared to $24.5 billion, or 42.5% of the loan portfolio, at December 31, 2009 and $26.3 billion, or 44.3% of the loan portfolio, at June 30, 2009. At June 30, 2010 and December 31, 2009, only 11% and 6%, respectively, of our total commercial portfolio was unsecured. The ability for SHUSA to originate commercial loans to credit worthy customers in recent quarters has been limited due to challenging economic conditions which has resulted in reduced loan demand as corporate borrowers are being more cautious about increasing their Company’s debt obligations.

At June 30, 2010, multi-family loans totaled $5.4 billion representing 9.2% of SHUSA’s loan portfolio, compared to $4.6 billion, or 8.0% of the loan portfolio, at December 31, 2009 and $4.5 billion or 7.6% of the loan portfolio at June 30, 2009. The increase in multi-family loans since December 31, 2009 is due to the Company’s decision not to sell any multifamily loan production during the first half of the year in order to increase the percentage of our assets in this lower risk asset class.

The consumer loan portfolio secured by real estate (consisting of home equity loans and lines of credit of $7.0 billion and residential loans of $10.9 billion) totaled $17.9 billion at June 30, 2010, representing 30.6% of SHUSA’s loan portfolio, compared to $17.8 billion, or 30.9%, of the loan portfolio at December 31, 2009 and $18.0 billion or 30.3% of the loan portfolio at June 30, 2009. SHUSA entered into a credit default swap in 2006 on a portion of its residential real estate loan portfolio through a synthetic securitization structure. Under the terms of the credit default swap, SHUSA is responsible for the next $0.2 million of losses on the remaining loans in the structure which totaled $2.1 billion at June 30, 2010. SHUSA is reimbursed for the next $50.8 million of losses under the terms of the credit default swap. Losses above $51.0 million are borne by SHUSA. This credit default swap term is equal to the term of the loan portfolio.

The consumer loan portfolio not secured by real estate (consisting of automobile loans of $10.7 billion and other consumer loans of $259.2 million) totaled $11.0 billion at June 30, 2010, representing 18.9% of SHUSA’s loan portfolio, compared to $10.8 billion, or 18.7%, of the loan portfolio at December 31, 2009 and $10.6 billion or 17.8% of the loan portfolio at June 30, 2009. Auto loans as a percentage of our total loan portfolio have decreased due to Sovereign Bank’s decision to discontinue the origination of indirect auto loans in 2008. Sovereign Bank auto loans have declined to $2.6 billion at June 30, 2010 compared to $3.4 billion at December 31, 2009 and $4.4 billion at June 30, 2009.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Non-Performing Assets

At June 30, 2010, SHUSA’s non-performing assets decreased by $280.4 million to $3.0 billion compared to $3.2 billion at December 31, 2009. Non-performing assets as a percentage of total loans held for investment, real estate owned and repossessed assets decreased to 5.07% at June 30, 2010 from 5.62% at December 31, 2009.

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

SHUSA reserve levels due to nonperforming asset levels and our allowance for credit losses as a percentage of total loans has increased to 3.94% at June 30, 2010 compared to 3.60% at December 31, 2009 and 3.44% at June 30, 2009. Although non-performing assets remain at elevated levels, we have seen improvements from December 31, 2009 levels in the six month period ended June 30, 2010. Excluding loans that are classified as non-accrual, our loans past due have declined from $1.0 billion at year end to $852.8 million at June 30, 2010.

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


	June 30,			December 31,
	2010			2009
Non-accrual loans:
Consumer:
Residential mortgages	$	626,849		$	617,918
Home equity loans and lines of credit		120,967			117,390
Auto loans and other consumer loans		351,556			535,902

Total consumer loans		1,099,372			1,271,210
Commercial		580,075			654,322
Commercial real estate		795,387			823,766
Multi-family		333,085			381,999


Total commercial loans		1,708,547			1,860,087

Total non-performing loans		2,807,919			3,131,297


Other real estate owned		105,498			99,364
Other repossessed assets		55,516			18,716


Total other real estate owned and other repossessed assets		161,014			118,080


Total non-performing assets	$	2,968,933		$	3,249,377


Past due 90 days or more as to interest or principal and accruing interest	$	22,747		$	27,321
Annualized net loan charge-offs to average loans		2.17	%		2.40	%
Non-performing assets as a percentage of total assets		3.57	%		3.92	%
Non-performing loans as a percentage of total loans		4.81	%		5.43	%
Non-performing assets as a percentage of total loans, real estate owned and repossessed assets		5.07	%		5.62	%
Allowance for credit losses as a percentage of total non-performing assets (1)		77.6	%		63.9	%
Allowance for credit losses as a percentage of total non-performing loans (1)		82.0	%		66.3	%


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

Loans ninety (90) days or more past due and still accruing interest decreased by $4.6 million from December 31, 2009 to June 30, 2010. Potential problem loans (commercial loans delinquent more than 30 days but less than 90 days, although not currently classified as non-performing loans) amounted to approximately $295.9 million and $364.5 million at June 30, 2010 and December 31, 2009, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Troubled Debt Restructurings

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

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


	June 30,		December 31,
	2010		2009
Accruing:
Commercial	$	29,735	$	—
Residential		60,416		23,125
Consumer		12,115		4,181

Subtotal accruing	$	102,266	$	27,306

Non-accruing:
Commercial	$	65,962	$	24,708
Residential		66,850		31,498
Consumer		18,573		13,323

Subtotal non-accruing	$	151,385	$	69,529

Total	$	253,651	$	96,835

Allowance for Credit Losses

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


	June 30, 2010					December 31, 2009
			% of					% of
			Loans to					Loans to
			Total					Total
	Amount		Loans			Amount		Loans
Allocated allowance:
Commercial loans	$	973,673		51	%	$	958,856		50	%
Consumer loans secured by real estate		338,063		30			335,228		31
Consumer loans not secured by real estate		714,351		19			519,637		19
Unallocated allowance		16,923		n/a			4,503		n/a


Total allowance for loan losses	$	2,043,010		100	%	$	1,818,224		100	%
Reserve for unfunded lending commitments		260,085					259,140


Total allowance for credit losses	$	2,303,095				$	2,077,364

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

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

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

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

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

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

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

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

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

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

As of June 30, 2010, approximately 22% and 17% of our residential mortgage loan portfolio and home equity loan portfolio had loan-to-value ratios above 100% compared with approximately 19% and 14% at December 31, 2009. No loans were originated with LTVs in excess of 100%.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

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

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

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

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

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

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

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

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

As mentioned previously, SHUSA, through its SCUSA subsidiary, acquires loans at a substantial discount from certain companies. Part of this discount is attributable in part to future expected credit losses. Upon acquisition of a portfolio of loans, SCUSA will project future credit losses on the pool and will not amortize this discount to interest income in accordance with Accounting Standard Codification 310-30. The amount of nonaccretable loan discount at June 30, 2010 totaled $301.1 million compared to $225.9 million at December 31, 2009. The reason for the increase is due to a large portfolio acquired during the first quarter of 2010.

Commercial Portfolio. The portion of the allowance for loan losses related to the commercial portfolio has remained relatively consistent, increasing from $958.9 million at December 31, 2009 (3.29% of commercial loans) to $973.7 million at June 30, 2010 (3.30% of commercial loans).

Consumer Secured by Real Estate Portfolio. The allowance for the consumer loans secured by real estate portfolio was $338.1 million at June 30, 2010 and $335.2 million at December 31, 2009. Non-performing assets and past due loans for our residential portfolios, particularly in our $2.0 billion Alt-A portfolio, continue to increase. Additionally, our in market home equity portfolio losses have been steadily increasing. However, early stage delinquency levels have improved in these portfolios. We expect that the difficult housing environment as well as general economic conditions will continue to impact our residential and home equity portfolios which may result in higher loss levels.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Consumer Not Secured by Real Estate Portfolio. The allowance for the consumer not secured by real estate portfolio increased from $519.6 million at December 31, 2009 to $714.4 million at June 30, 2010 primarily due to increased reserve allocations at our SCUSA subsidiary. The allowance as a percentage of consumer loans not secured by real estate was 6.49% at June 30, 2010 and 4.83% at December 31, 2009.

Unallocated Allowance. The unallocated allowance for loan losses was $16.9 million at June 30, 2010 and $4.5 million at December 31, 2009. Management continuously evaluates its allowance methodology; however the unallocated allowance is subject to changes each reporting period due to certain inherent but undetected losses; which are probable of being realized within the loan portfolio.

Reserve for unfunded lending commitments. The reserve for unfunded lending commitments has increased nominally from $259.1 million at December 31, 2009 to $260.1 million at June 30, 2010.

Investment Securities

Investment securities consist primarily of mortgage-backed securities, tax-free municipal securities, U.S. Treasury and government agency securities, corporate debt securities, asset backed securities and stock in the Federal Home Loan Bank of Pittsburgh (“FHLB”). Mortgage-backed securities consist of pass-throughs and collateralized mortgage obligations issued by federal agencies or private label issuers. SHUSA’s mortgage-backed securities are generally either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by Standard and Poor’s and Moody’s at the date of issuance. The Company purchases classes which are senior positions backed by subordinate classes. The subordinate classes absorb the losses and must be completely eliminated before any losses flow through the senior positions. The average life of the available-for-sale investment portfolio at June 30, 2010 was 5.47 years compared to 3.86 years at December 31, 2009.

Total investment securities available-for-sale was $14.0 billion at June 30, 2010 and $13.6 billion at December 31, 2009. For additional information with respect to SHUSA’s investment securities, see Note 2 in the Notes to Consolidated Financial Statements.

SHUSA recorded an other-than-temporary-impairment charge of $36.9 million on FNMA and FHLMC preferred stock and a $66.8 million charge on certain non-agency mortgage backed securities in the first half of 2009.

Other investments, which consists of FHLB stock and repurchase agreements, remained constant at $0.7 billion at June 30, 2010 and December 31, 2009.

Goodwill and Other Intangible Assets

Goodwill was $4.1 billion at June 30, 2010 and December 31, 2009. Other intangibles decreased by $26.7 million at June 30, 2010 compared to December 31, 2009 due to year-to-date amortization expense of $33.4 million, partially offset by the addition of intangible assets of $6.0 million related to SCUSA.

Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. This testing is required annually, or more frequently if events or circumstances indicate there may be impairment. Impairment testing is performed at the reporting unit level, and not on an individual acquisition basis and is a two-step process. The first step is to compare the fair value of the reporting unit to its carrying value (including its allocated goodwill). If the fair value of the reporting unit is in excess of its carrying value then no impairment charge is recorded. If the carrying value of a reporting unit is in excess of its fair value then a second step needs to be performed. The second step entails calculating the implied fair value of goodwill as if a reporting unit is purchased at its step 1 fair value. This is determined in the same manner as goodwill in a business combination. If the implied fair value of goodwill is in excess of the reporting units allocated goodwill amount then no impairment charge is required. We evaluated our goodwill at December 31, 2009 and determined that it was not impaired. No impairment indicators have been noted since December 31, 2009 and as such, no impairment test has been performed since then. The Company will perform its annual goodwill impairment test at December 31, 2010.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

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


	Calendar				Remaining
	Year		Recorded		Amount
Year	Amount		To Date		To Record
2010	$	64,174	$	33,446	$	30,728
2011		50,973		—		50,973
2012		38,101		—		38,101
2013		26,293		—		26,293
2014		17,350		—		17,350

Deposits and Other Customer Accounts

SHUSA attracts deposits within its primary market area with an offering of deposit instruments including demand accounts, NOW accounts, money market accounts, savings accounts, certificates of deposit and retirement savings plans. Total deposits and other customer accounts at June 30, 2010 were $41.4 billion compared to $44.4 billion at December 31, 2009.

Borrowings and Other Debt Obligations

SHUSA utilizes borrowings and other debt obligations as a source of funds for its asset growth and its asset/liability management. Collateralized advances are available from the FHLB provided certain standards related to creditworthiness have been met. Funding is also available from the Federal Reserve discount window through the pledging of certain assets. SHUSA also utilizes reverse repurchase agreements, which are short-term obligations collateralized by securities fully guaranteed as to principal and interest by the U.S. Government or an agency thereof, and federal funds lines with other financial institutions. The Company, through its SCUSA subsidiary, has warehouse lines of credit agreements with Santander, our Parent, as well as other financial institutions. SCUSA also securitizes some of its retail automotive installment contracts which are structured as secured financings. These transactions are paid using the cash flows from the underlying retail automotive installment contracts which serve as collateral. Total borrowings at June 30, 2010 and December 31, 2009 were $28.9 billion and $27.2 billion, respectively. The reason for this increase is due to loan growth at SCUSA (via a portfolio acquisition) which was funded with borrowings. See Note 5 for further discussion and details on our borrowings and other debt obligations.

Off Balance Sheet Arrangements

Securitization transactions contribute to SHUSA’s overall funding and regulatory capital management. These transactions involve periodic transfers of loans or other financial assets to special purpose entities (“SPEs”). The vast majority of SHUSA’s SPE’s are consolidated on the Company’s balance sheet at June 30, 2010. The balance of loans in unconsolidated SPE’s totaled only $68.8 million at June 30, 2010.

SHUSA enters into partnerships, which are variable interest entities, with real estate developers for the construction and development of low-income housing. The partnerships are structured with the real estate developer as the general partner and SHUSA as the limited partner. SHUSA is not the primary beneficiary of these variable interest entities. The Company’s risk of loss is limited to its investment in the partnerships, which totaled $131.4 million at June 30, 2010 and any future cash obligations that SHUSA has committed to the partnerships. Future cash obligations related to these partnerships totaled $1.0 million at June 30, 2010. SHUSA investments in these partnerships are accounted for under the equity method.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Bank Regulatory Capital

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

The FDICIA established five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution’s capital tier depends upon its capital levels in relation to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized or adequately-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities. At June 30, 2010 and December 31, 2009, Sovereign Bank had met all quantitative thresholds necessary to be classified as well-capitalized under regulatory guidelines.

Federal banking laws, regulations and policies also limit Sovereign Bank’s ability to pay dividends and make other distributions to SHUSA. Sovereign Bank is required to give prior notice to the OTS before paying any dividend. In addition, Sovereign Bank must obtain prior OTS approval to declare a dividend or make any other capital distribution if, after such dividend or distribution, Sovereign Bank’s total distributions to SHUSA within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years, or if Sovereign Bank is not adequately capitalized at the time. In addition, OTS prior approval would be required if Sovereign Bank’s examination or CRA ratings fall below certain levels or Sovereign Bank is notified by the OTS that it is a problem association or an association in troubled condition. The following schedule summarizes the actual capital balances of Sovereign Bank at June 30, 2010 and December 31, 2009:


	TIER 1			TIER 1			TOTAL
	LEVERAGE			RISK-BASED			RISK-BASED
	CAPITAL			CAPITAL			CAPITAL
REGULATORY CAPITAL	RATIO			RATIO			RATIO
Sovereign Bank at June 30, 2010:
Regulatory capital	$	5,571,092		$	5,496,876		$	7,192,199
Minimum capital requirement (1)		2,729,376			2,238,465			4,476,929

Excess	$	2,841,716		$	3,258,411		$	2,715,270

Sovereign Bank capital ratio		8.16	%		9.82	%		12.85	%

Sovereign Bank at December 31, 2009:
Regulatory capital	$	5,292,202		$	5,252,657		$	7,239,965
Minimum capital requirement (1)		2,779,235			2,323,303			4,646,605

Excess	$	2,512,967		$	2,929,354		$	2,593,360

Sovereign Bank capital ratio		7.62	%		9.04	%		12.46	%


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

Listed below are Tier 1 leverage ratios for SHUSA.


	TIER 1
	LEVERAGE
	CAPITAL
REGULATORY CAPITAL	RATIO
Capital ratio at June 30, 2010 (1)		8.27	%
Capital ratio at December 31, 2009 (1)		7.13	%


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

SHUSA’s Tier 1 leverage ratio was positively impacted by the issuance of $750 million of common stock to Santander.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

Liquidity represents the ability of SHUSA to obtain cost effective funding to meet the needs of customers, as well as SHUSA’s financial obligations. Factors that impact the liquidity position of SHUSA include loan origination volumes, loan prepayment rates, maturity structure of existing loans, core deposit growth levels, certificate of deposit maturity structure and retention, SHUSA’s credit ratings, investment portfolio cash flows, maturity structure of wholesale funding, etc. These risks are monitored and centrally managed. This process includes reviewing all available wholesale liquidity sources. As of June 30, 2010, SHUSA had $18.0 billion in unused available overnight liquidity in the form of unused federal funds purchased lines, unused FHLB borrowing capacity, unused borrowing lines with the Federal Reserve Bank and unencumbered investment portfolio securities. SHUSA also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times.

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

SHUSA has the following major sources of funding to meet its liquidity requirements: dividends and returns of investment from its subsidiaries, short-term investments held by nonbank affiliates and access to the capital markets. Additionally, our Parent Company and certain subsidiaries of our Parent Company have provided liquidity to SHUSA in 2010 and 2009.

As of June 30, 2010, SHUSA had over $22.2 billion in committed liquidity from the FHLB and the Federal Reserve Bank. Of this amount, $18.0 billion is unused and therefore provides additional borrowing capacity and liquidity for the Company. The Company also has cash deposits at June 30, 2010 of $1.8 billion compared with $2.3 billion at year end. The Company also has the ability to raise funds via its Parent. During the first quarter of 2010, SHUSA issued 3 million shares of common stock to raise $750 million and also issued subordinated notes of $750 million to Santander. We believe that we have ample liquidity to fund our operations.

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

Net cash provided by operating activities was $1.4 billion for 2010. Net cash used by investing activities for 2010 was $1.2 billion and primarily due to the purchases of $3.6 billion of investments and $3.2 billion of loans, offset by $4.6 billion of investment sales, maturities and repayments, and net loan repayments of $1.1 billion. Net cash used by financing activities for 2010 was $766.9 million, which consisted primarily of a $3.0 billion reduction in deposits, repayments of debt of $3.1 billion, offset by proceeds from debt and an increase in borrowings of $4.5 billion as well as $750 million of proceeds from the issuance of common stock. See the Consolidated Statement of Cash Flows for further details on our sources and uses of cash.

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

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Contractual Obligations and Commitments

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


	Payments Due by Period
			Less than		Over 1 yr		Over 3 yrs		Over
	Total		1 year		to 3 yrs		to 5 yrs		5 yrs
FHLB advances (1)	$	13,897,802	$	6,509,074	$	2,236,459	$	1,536,035	$	3,616,234
Securities sold under repurchase agreements (1)		1,128,022		1,128,022		—		—		—
Fed Funds (1)		1,042,007		1,042,007		—		—		—
Other debt obligations (1) (2)		14,569,135		5,475,840		5,079,861		2,924,883		1,088,551
Junior subordinated debentures due to Capital Trust entities (1) (2)		2,480,460		258,509		275,717		119,819		1,826,415
Certificates of deposit (1)		7,691,953		6,364,311		1,009,115		301,264		17,263
Investment partnership commitments (3)		981		862		26		26		67
Operating leases		815,561		109,799		206,717		151,813		347,232


Total contractual cash obligations	$	41,625,921	$	20,888,424	$	8,807,895	$	5,033,840	$	6,895,762


(1)		Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based upon interest rates in effect at June 30, 2010. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.

(2)		Includes all carrying value adjustments, such as unamortized premiums or discounts and hedge basis adjustments.

(3)		The commitments to fund investment partnerships represent future cash outlays for the construction and development of properties for low-income housing, and historic tax credit projects. The timing and amounts of these commitments are projected based upon the financing arrangements provided in each project’s partnership or operating agreement, and could change due to variances in the construction schedule, project revisions, or the cancellation of the project.

Excluded from the above table are deposits of $33.9 billion that are due on demand by customers and $3.2 billion for the agreement with Citigroup to purchase and service auto loans which is expected to close in the fall of 2010 (see Note 3). Additionally, $81.2 million of tax liabilities associated with unrecognized tax benefits under FIN 48 have been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations.

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

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

Amount of Commitment Expiration per Period:


	Total
	Amounts		Less than		Over 1 yr		Over 3 yrs
Other Commitments	Committed		1 year		to 3 yrs		to 5 yrs		Over 5 yrs
Commitments to extend credit	$	15,522,767	$	6,442,661	$	3,233,965	$	956,382	$	4,889,759
Standby letters of credit		3,983,435		1,471,226		1,916,324		375,073		220,812
Loans sold with recourse		291,715		15,287		67,180		55,538		153,710
Forward buy commitments		1,017,474		1,001,428		16,046		—		—

Total commitments	$	20,815,391	$	8,930,602	$	5,233,515	$	1,386,993	$	5,264,281

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

SHUSA’s standby letters of credit meet the definition of a guarantee under the guarantees topic of the FASB Accounting Standards Codification. These transactions are conditional commitments issued by SHUSA to guarantee the performance of a customer to a third party. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments is 2.0 years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. SHUSA has various forms of collateral, such as real estate assets and customer business assets. The maximum undiscounted exposure related to these commitments at June 30, 2010 was $3.9 billion, and the approximate value of the underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $3.1 billion. The fees related to standby letters of credit are deferred and amortized over the life of the commitment. These fees are immaterial to SHUSA’s financial statements at June 30, 2010. We believe that the utilization rate of these standby letters of credit will continue to be substantially less than the amount of these commitments, as has been our experience to date.

Asset and Liability Management

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

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

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

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


	The following estimated percentage
If interest rates changed in parallel by the	increase/(decrease) to
amounts below at June 30, 2010	net interest income would result
Up 100 basis points		1.75	%
Up 200 basis points		3.02	%

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

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Management then looks at the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk and also highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to SHUSA’s MVE at June 30, 2010 and December 31, 2009:


	The following estimated percentage
	increase/(decrease) to MVE would result
If interest rates changed in parallel by	June 30, 2010			December 31, 2009
Base (in thousands)	$	7,190,985		$	6,150,298
Up 200 basis points		(5.79	)%		(9.55	)%
Up 100 basis points		(2.31	)%		(4.53	)%

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2010. Based on this evaluation, our principal executive officer and our principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2010 to ensure that information required to be disclosed by the Company in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

Reference should be made to Footnote 18 in our 2009 Form 10-K and Note 10 in this Form 10-Q for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service. Besides this item, SHUSA is not involved in any pending material legal proceeding other than routine litigation occurring in the ordinary course of business, other than as discussed in Note 16.

Item 1A — Risk Factors

The risk factors in the Company’s Annual Report on Form 10-K has not changed materially.

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

No shares of the Company’s common stock were repurchased during the three-month period ended June 30, 2010.

Item 6 — Exhibits

(a) Exhibits



(2.1	)	Transaction Agreement, dated as of October 13, 2008, between Santander Holdings USA, Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 2.1 to Santander Holdings USA’s Current Report on Form 8-K filed October 16, 2008).

(3.1	)	Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA’s Current Report on Form 8-K filed January 30, 2009).

(3.2	)	Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.2 to Santander Holdings USA’s Current Report on Form 8-K filed January 30, 2009).

(3.3	)	Certificate of Designations for the Series D Preferred Stock (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA’s Current Report on Form 8-K filed on March 27, 2009).

(3.4	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA’s Current Report on Form 8-K filed February 5, 2010).

(31.1	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32.1	)	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(32.2	)	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


	SANTANDER HOLDINGS USA, INC. (Registrant)
Date: August 11, 2010	/s/ Gabriel Jaramillo
	Gabriel Jaramillo
	Chairman of the Board, Chief Executive Officer (Authorized Officer)

Date: August 11, 2010	/s/ Guillermo Sabater
	Guillermo Sabater
	Chief Financial Officer (Principal Financial Officer)

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

EXHIBITS INDEX



(2.1	)	Transaction Agreement, dated as of October 13, 2008, between Santander Holdings USA, Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 2.1 to Santander Holdings USA’s Current Report on Form 8-K filed October 16, 2008).

(3.1	)	Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA’s Current Report on Form 8-K filed January 30, 2009).

(3.2	)	Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.2 to Santander Holdings USA’s Current Report on Form 8-K filed January 30, 2009).

(3.3	)	Certificate of Designations for the Series D Preferred Stock (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA’s Current Report on Form 8-K filed on March 27, 2009).

(3.4	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA’s Current Report on Form 8-K filed February 5, 2010).

(31.1	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32.1	)	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(32.2	)	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.