Santander Holdings USA, Inc. - Annual Report: 2011 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

for the fiscal year ended December 31, 2011, or

for the transition period from N/A             to             .

Commission File Number 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of Registrant as specified in its charter)

(617) 346-7200

Registrant’s Telephone Number

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

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

None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    

Yes  ¨     No  x

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

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  ¨

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

No Common Stock of the Registrant was held by nonaffiliates of the Registrant at June 30, 2011. As of February 28, 2012, the Registrant had 520,307,043 shares of Common Stock outstanding.

Form 10-K Cross Reference Index

Forward-Looking Statements

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

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

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If one or more of the factors affecting SHUSA’s forward-looking information and statements proves incorrect, the 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 the 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 management cannot assess the impact of any such factor on SHUSA’s 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.

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Part I

Item 1 Business

General

Santander Holdings USA, Inc (“SHUSA” or the “Company), formerly known as Sovereign Bancorp Inc. is the parent company of Sovereign Bank, National Association (“Sovereign or the “Bank”), a federally chartered savings bank as of December 31, 2011 which converted to a national banking association on January 26, 2012. In connection with the charter conversion, the Bank changed its name to Sovereign Bank, National Association. Also effective on January 26, 2012, SHUSA became a bank holding company. Sovereign had over 720 retail branches, over 2,300 ATMs and 8,557 team members as of December 31, 2011 with principal markets in the Northeastern United States. The Bank’s primary business consists of attracting deposits from its network of retail branches, and originating small business and middle market commercial loans, multi-family loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans in the communities served by those offices. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loan and investment portfolios. In addition, the Bank generates 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. The principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The volumes, and accordingly the financial results, of the Bank are affected by the economic environment, including interest rates, consumer and business confidence and spending, as well as the competitive conditions within its geographic footprint.

SHUSA is headquartered in Boston, Massachusetts, and its principal executive offices are at 75 State Street, Boston, Massachusetts. The Bank’s home office is in Wilmington, Delaware.

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

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

SCUSA’s results of operations were consolidated from January 2009 until December 31, 2011. On December 31, 2011, the Company deconsolidated SCUSA as a result of certain agreements with investors entered into during the fourth quarter 2011 (“SCUSA Transaction”). The SCUSA Transaction reduced the Company’s ownership interest and its power to direct the activities that most significantly impact SCUSA’s economic performance so that SHUSA no longer has a controlling interest in SCUSA. Accordingly, as of December 31, 2011, SCUSA is accounted for as an equity method investment. Refer to the SCUSA Transaction section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Note 3 to the Consolidated Financial Statements for additional information.

Segments

The Company has five business segments including Retail banking, Corporate banking, Specialized Business, Global Banking and Markets, and SCUSA.

The Company’s segments are focused principally around the customers the Bank serves. The Retail banking segment is primarily comprised of the branch locations and the residential mortgage business. The 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 interest bearing demand deposit accounts, money market and savings accounts, certificates of deposits and retirement savings products. The branches also offer consumer loans such as home equity loans and line of credits. The Retail banking segment also includes business banking loans and small business loans to individuals.

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The Specialized Business segment is primarily comprised of non-strategic lending groups which include indirect automobile, aviation and continuing care retirement communities financing.

The Corporate banking segment provides the majority of the Company’s commercial lending platforms, such as commercial real estate loans, multi-family loans, commercial and industrial loans and the Company’s related commercial deposits.

The Global Banking and Markets segment includes businesses with large corporate domestic and foreign clients.

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

The financial results for each of these business segments are included in Note 26 of the Notes to Consolidated Financial Statements and are discussed in Item 7, MD&A. Results of the Company’s business segments are presented based on its management structure and management accounting practices.

Subsidiaries

SHUSA had three principal consolidated majority-owned subsidiaries at December 31, 2011: the Bank, Independence Community Bank Corp. and Sovereign Delaware Investment Corporation.

Employees

At December 31, 2011, SHUSA had 7,531 full-time and 1,026 part-time employees. This compares to 10,515 full-time and 1,199 part-time employees as of December 31, 2010. The decline is primarily due to the effects of the SCUSA Transaction. Refer to the SCUSA Transaction section of Item 7, MD&A and Note 3 of the Notes to Consolidated Financial Statements for additional information. None of these employees are represented by a collective bargaining agreement.

Competition

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

Supervision and Regulation

The Bank continued to be chartered as a federal savings bank as of December 31, 2011. As of January 26, 2012, the Bank was converted to a national banking association and is highly regulated by various regulatory agencies as to all its activities, and subject to extensive examination, supervision, and reporting.

On July 21, 2011, as required by the Dodd-Frank Act, the Office of the Comptroller of the Currency (“OCC”) assumed responsibility from the Office of Thrift Supervision (“OTS”) for the ongoing examination, supervision, and regulation of federal savings associations and rulemaking for all savings associations, state and federal. As a national bank, and since July 21, 2010 while it was a federal savings bank, the Bank is and has been subject to supervision, enforcement, and rulemaking authority by the OCC.

The Bank is required to file reports with the OCC describing its activities and financial condition and is periodically examined to test compliance with various regulatory requirements. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is also subject to examination by the FDIC. Such examinations are conducted for the purpose of protecting depositors and the insurance fund and not for the purpose of protecting holders of equity or debt securities of SHUSA or the Bank. The Bank is a member of the Federal Reserve Branch of Boston and is subject to regulation by the Board of Governors of the Federal Reserve System with respect to reserves maintained against deposits and certain other matters.

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh, which is part of the twelve regional banks comprising the FHLB system.

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As of December 31, 2011, SHUSA was a non-bank subsidiary of a bank holding company for purposes of the Bank Holding Company Act of 1956, as amended (the “BHCA”); as of January 26, 2012, SHUSA has become a bank holding company for purposes of the BHCA. As such, SHUSA is prohibited from engaging in any activity, directly or through a subsidiary, which is not permissible for subsidiaries of bank holding companies. Generally, financial activities are permissible, while commercial and industrial activities are not.

On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (“Dodd-Frank 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.

Holding Company Regulation

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

Control of the Bank

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

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

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

Banco Santander (SAN.MC, STD.N, BNC.LN) is a retail and commercial bank, based in Spain, with a presence in 10 main markets. At the end of 2011, Santander was the largest bank in the euro zone and 13th in the world by market capitalization. Founded in 1857, Santander had at year-end €1,383 billion in managed funds, more than 102 million customers, 14,756 branches – more than any other international bank – and 193,000 employees. It is the largest financial group in Spain and Latin America. Furthermore, it has relevant positions in the United Kingdom, Portugal, Poland, Northeastern U.S. and, through its Santander Consumer Finance arm, in Germany. Santander had €5.4 billion in net attributable profit in 2011.

Regulatory Capital Requirements

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

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If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver or conservator. Critically undercapitalized institutions generally may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt. All but well-capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Pursuant to the FDIA and OCC regulations, savings associations which are not categorized as well capitalized or adequately-capitalized are restricted from making capital distributions which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of a savings association. At December 31, 2011, the Bank met the criteria to be classified as “well-capitalized.”

Standards for Safety and Soundness

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

Foreclosures

In October 2010, the Bank began a comprehensive review of its foreclosure processes. Based on the results of the review, the Bank took corrective action to address deficiencies in the mortgage foreclosure practices and is implementing additional measures to address the issues raised in the consent order discussed below. As of December 31, 2011, the Bank services approximately 151,000 residential mortgage loans including approximately 3,600 which are in the process of foreclosure. These loans are comprised of loans owned by the Bank and loans serviced for third parties.

The Bank also owns loans serviced by third parties including approximately 300 that are in the process of foreclosure. The average number of residential mortgage and home equity foreclosures initiated monthly for loans serviced by the Bank and Bank owned-loans serviced by third parties is approximately 225 and 340, as of December 31, 2011 and 2010, respectively.

On April 13, 2011, the Bank consented to the issuance of a consent order by the Bank’s previous primary federal banking regulator, the Office of Thrift Supervision (“OTS”), as part of an interagency horizontal review of foreclosure practices at 14 mortgage servicers. The Bank, upon its conversion to a national bank on January 26, 2012, entered into a stipulation consenting to the issuance of a Consent Order (the “Order”) issued by the Office of the Comptroller of the Currency, which contains the same terms as the OTS consent order. The Order requires the Bank to take a number of actions, including designating a Board committee to monitor and coordinate the Bank’s compliance with the provisions of the Order, developing and implementing plans to improve the Bank’s mortgage servicing and foreclosure practices, designating a single point of contact for borrowers throughout the loss and mitigation foreclosure processes and taking certain other remedial actions. Under the Consent Order, the Bank has retained an independent consultant to conduct a review of certain foreclosure actions or proceedings for loans serviced by the Bank.

The Company incurred $24.7 million of costs in 2011 relating to compliance with the Order. The estimated costs for 2012 include $12 million of costs related to file reviews that were previously expected to be incurred in 2011. Recurring legal and operational expenses to comply with the Order are estimated to be approximately $7.0 million annually. The Company and the Bank may incur further expenses related to compliance with the Order. The Order and any other proceedings and investigations could adversely affect the Company’s reputation.

In addition, the Company incurred $196 thousand of costs in 2011 related to compensatory fees as a result of foreclosure delays. The Company expects to incur additional compensatory fees in 2012.

The Order will remain in effect until modified or terminated by the OCC. Any material failure to comply with the provisions of the Order could result in enforcement actions by the OCC. While the Bank intends to take such actions as may be necessary to enable the Bank to comply fully with the provisions of the Order, and management is not aware of any impediments that may prevent the Bank from achieving full compliance with the Order, there can be no assurance that the Bank will be able to comply fully with the provisions of the Order, or to do so within the timeframes required, or that compliance with the Order will not be more time consuming, more expensive, or require more managerial time than anticipated. The Bank may also be subject to remediation costs and civil money penalties under the Order or it could be subject to other proceedings or investigations with respect to its foreclosure activities, however, management is unable to determine at this time the likelihood or amount of such costs or penalties under the Order or with respect to any other such events and accordingly, no accrual has been recorded.

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Insurance of Accounts and Regulation by the FDIC

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

The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC insured limits, which in early October 2008, the U.S. government increased to $250,000 per depositor per ownership category. In October 2008, the FDIC announced a program that provided unlimited insurance on non-interest bearing accounts for covered institutions through December 31, 2009, which has been subsequently extended through December 31, 2012. The Bank participated in the unlimited coverage program through December 31, 2009 but determined not to participate in the extension.

Due to bank failures over the past few years, the reserve ratio is below its target balance of 1.15%. In the second quarter of 2009, the FDIC assessed additional fees to institutions who have secured borrowings in excess of 15% of their deposits. Additionally, the FDIC approved a special assessment charge of 5 cents per $100 of an institution’s assets minus its Tier 1 capital on June 30, 2009 to help bolster the reserve fund, which was payable on September 30, 2009.

During the fourth quarter of 2009, the FDIC announced that all depository institutions would be required to prepay three years of assessments in order to quickly raise funds and replenish the reserve ratio while not immediately impacting banks’ earnings. The Bank paid $347.9 million on December 31, 2009 to the FDIC based on an estimate of what the deposit assessments would be over the next three years. This amount was accounted for as a prepaid asset and will be expensed based on the actual deposit assessments in future years until it is depleted. The remaining prepaid asset at December 31, 2011 is $188.3 million. No additional prepay was ordered by the FDIC during 2011.

In February 2011, the FDIC amended 12 CFR 327 to implement revisions to the Federal Deposit Insurance Act (“FDIA”) made by the Dodd-Frank Act by modifying the definition of an institution’s deposit insurance assessment base; to change the assessment rate adjustments; to revise the deposit insurance assessment rate schedules in light of the new assessment base and altered adjustments; to implement Dodd-Frank’s dividend provisions; to revise the large insured depository institution assessment system to better differentiate for risk and better take into account losses from large institution failures that the FDIC may incur; and to make technical and other changes to the FDIC’s assessment rules. The revision also established a minimum ratio of deposit insurance reserves to estimated insured deposits of 1.15% prior to September 2020 and 1.35% thereafter. This amendment had an effective date of April 1, 2011. Please refer to the section Supervision and Regulation for further discussion on Dodd-Frank.

In addition to deposit insurance premiums, all insured institutions are required to pay a Financing Corporation assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. In 2011, the Bank paid Finance Corporation Assessments of $4.4 million compared to $4.3 million that was paid in 2010. The annual rate for all insured institutions reduced over the year from $0.102 in the first quarter of 2011 to $0.068 in the fourth quarter for every $1,000 in domestic deposits. The rate reduction beginning with the fourth quarter of 2011 reflects the change from an assessment base computed on deposits to an assessment base computed on assets as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The assessments are revised quarterly and will continue until the bonds mature in the year 2017.

Federal Restrictions on Transactions with Affiliates and Insiders

All savings institutions and national banks are subject to affiliate and insider transaction rules applicable to member banks of the Federal Reserve System set forth in the Federal Reserve Act and the Home Owners Loan Act (HOLA), as well as such additional limitations as the institutions’ primary federal regulator may adopt. These provisions prohibit or limit a savings institution from extending credit to, or entering into certain transactions with, affiliates, principal shareholders, directors and executive officers of the savings institution and its affiliates. For these purposes, the term “affiliate” generally includes a holding company such as SHUSA and any company under common control with the savings institution or bank.

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Restrictions on Subsidiary Savings Institution Capital Distributions

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

Qualified Thrift Lender

When the Bank was chartered as a federal savings bank, it was subject to the Qualified Thrift Lender Test, under HOLA (“QTL Test”), which specifies that a savings bank have at least 65% of its portfolio assets, as defined by regulation, in qualified thrift investments. As an alternative, the savings institution under HOLA may maintain 60% of its assets in those assets specified in Section 7701(a) (19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans, certain consumer and small business loans, as defined by the regulations, and mortgage related investments. At December 31, 2011, the Bank satisfied the QTL Test. As a national bank, the Bank no longer is subject to the QTL Test.

Other Loan Limitations

When the Bank was chartered as a federal savings bank, it was subject to federal laws which limit the amount of non-residential mortgage loans a savings bank, may make. Separate from the QTL test, the law limits a savings institution to a maximum of 20% of its total assets in commercial loans not secured by real estate, however, only 10% can be large commercial loans not secured by real estate (defined as loans in excess of $2 million to one obligor), with another 10% of assets permissible in “small business loans.” Commercial loans secured by real estate can be made in an amount up to four times an institution’s total risk-based capital. An institution can also have commercial leases, in addition to the above items, up to 10% of its assets. Commercial paper, corporate bonds, and consumer loans taken together cannot exceed 35% of an institution’s assets. For this purpose, however, residential mortgage loans and credit card loans are not considered consumer loans, and are both unlimited in amount. The foregoing limitations are established by statute, and cannot be waived by the OCC. At December 31, 2011, the Bank was in compliance with all these limits. As a national bank, the Bank is no longer subject to these limits.

Federal Reserve Regulation

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

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

Federal Home Loan Bank System

The Federal Home Loan Bank System (“FHLB”) was created in 1932 and consists of twelve regional FHLBs. The FHLBs are federally chartered but privately owned institutions created by U.S. Congress. The Federal Housing Finance Board is an agency of the federal government and is generally responsible for regulating the FHLB System. Each FHLB is owned by its member institutions. The primary purpose of the FHLBs is to provide funding to their members for making housing loans as well as for affordable housing and community development lending. FHLBs are generally able to make advances to their member institutions at interest rates that are lower than could otherwise be obtained by such institutions. As a member, the Bank is required to make minimum investments in FHLB stock based on the level of borrowings from the FHLB. The Bank is a member of FHLB Pittsburgh and has investments of $555.4 million as of December 31, 2011. The Bank utilized advances from the FHLB to fund balance sheet growth and provide liquidity. SHUSA had access to advances with the FHLB of up to $18.3 billion at December 31, 2011 and had outstanding advances of $11.1 billion at December 31, 2011. The level of borrowings capacity the Bank has with the FHLB is contingent upon the level of qualified collateral the Bank holds at a given time.

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In December 2008, the FHLB of Pittsburgh announced it was suspending dividends on its stock and that it would not repurchase any excess capital stock in order to maintain their liquidity and capital position. Management considered this and concluded that the investment in FHLB Pittsburgh is not impaired at December 31, 2011, 2010 and 2009. Starting October 29, 2010 and continuing on a quarterly basis during 2011, FHLB Pittsburgh repurchased excess shares of capital stock. The amount of repurchases during 2011 and 2010 totaled approximately $113.6 million and $32.3 million, respectively. The amount of excess capital stock repurchased from any member was the lesser of 5 percent of the member’s total capital stock outstanding or its excess capital stock outstanding through October 28, 2010. Management will continue to closely monitor this investment in future periods.

Community Reinvestment Act

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

Anti-Money Laundering and the USA Patriot Act

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

Financial Privacy

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

Other Legislation

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

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

The Dodd-Frank Act created the Consumer Financial Protection Bureau, which has broad power to adopt new regulations to protect consumers, which power it may exercise at its discretion as long as it advances the protection of consumers. Such regulations may further restrict the Bank from collecting certain fees, require changes to policies and procedures, and provide additional disclosures to consumers.

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Environmental Laws

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

Corporate Information

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

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Item 1A Risk Factors

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

The Company faces various material risks, including credit risk and the risk that the demand for products will decrease. In a recession or other economic downturn, these risks would probably become more acute. In an economic downturn, the Company’s credit risk and associated provision for credit losses and legal expense will increase. Also, decreases in consumer confidence, real estate values, and interest rates, usually associated with a downturn, could combine to make the types of loans the Bank originates less profitable and could cause elevated levels of losses on the Company’s commercial and consumer loans. While economic conditions in the United States and worldwide have begun to improve, there can be no assurance that this improvement will continue. Such conditions could adversely affect the credit quality of the Company’s loans, results of operations and financial condition.

As a wholly-owned subsidiary of Santander, significant aspects of the Company’s strategy, infrastructure and capital funding are dependent on its parent, Santander. Although Santander has a significant presence in various markets around the world, Santander’s results of operations are materially affected by conditions in the capital markets and the economy generally in Europe and Latin America. Accordingly, a significant decline in general economic conditions in Europe or Latin America, whether caused by recession, inflation, unemployment, changes in securities markets, acts of terrorism, or other occurrences could impact Santander, and, in turn, have a material adverse effect on the Company’s financial condition and results of operations.

Although market conditions have improved, unemployment in the United States continues to remain near historically high levels, and conditions are expected to remain challenging for financial institutions in 2012. Dramatic declines in the housing market during the most recent recession, with falling home prices and increasing foreclosures and unemployment, resulted in significant write–downs of asset values by financial institutions, including government–sponsored entities and major commercial and investment banks. These write–downs, initially of mortgage–backed securities but spreading to credit default swaps and other derivatives, have caused many financial institutions to seek additional capital and to merge with other financial institutions. Furthermore, certain European member countries have fiscal obligations that exceed their fiscal revenue, which has raised concerns about such countries’ abilities to continue to service their debt and foster economic growth. A weakened European economy may spread beyond Europe and could cause investors to lose confidence in the safety and soundness of European financial institutions and the stability of European member economies. Such events could, likewise, negatively affect U.S.-based financial institutions, counterparties with which SHUSA does business and the stability of the global financial markets. Disruptions in the global financial markets also adversely affected the corporate bond markets, debt and equity underwriting and other elements of the financial markets. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, some lenders and institutional investors reduced and, in some cases, ceased to provide funding to certain borrowers, including other financial institutions. The impact on available credit, increased volatility in the financial markets and reduced business activity has adversely affected, and may continue to adversely affect, SHUSA’s businesses, capital, liquidity or other financial condition and results of operations, access to credit and the trading price of SHUSA’s preferred stock or debt securities.

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

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Adequate liquidity is essential to SHUSA’s businesses. The Bank primarily relies on the Federal Home Loan Bank, deposits and other third party sources of funding for its liquidity needs. SHUSA’s credit ratings are also important to its liquidity. A reduction in SHUSA’s credit ratings could adversely affect its liquidity, widen its credit spreads or otherwise increase its borrowing costs.

On August 5, 2011, Standard & Poor’s (“S&P”), one of three major credit rating agencies which also include Moody’s Investors Service and Fitch, lowered its long-term credit rating on the United States sovereign debt from AAA to AA+. Moody’s and Fitch each maintained the highest rating on U.S. sovereign debt, but have assigned a negative outlook to its ratings. The implications of these actions by the ratings agencies could include negative effects on U.S. Treasury securities as well as instruments issued, guaranteed or insured by government agencies or government-sponsored institutions. These types of instruments are significant assets for the Company. In addition, the potential impact could exacerbate the other risks to which the Company is subject to including, but not limited to, the risk factors described therein.

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

On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act”, which instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. The act includes a number of specific provisions designated to promote enhanced supervision and regulation of financials firms and financial markets, protect consumers and investors from financial abuse and provide the government with tools to manage a financial crisis and raise international regulatory standards. The act also introduces a substantial number of reforms that reshape the structure of the regulation of the financial services industry, requiring more than 60 studies to be conducted and more than 200 regulations to be written over the next two years. Although the true impact of this legislation to SHUSA and the industry will be unknown until these are complete, they will involve higher compliance costs and certain elements, such as the debit interchange legislation, will negatively affect the Company’s revenue and earnings. See further discussion on Dodd-Frank in Item 1-Business.

These and other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect SHUSA in substantial and unpredictable ways. Such changes present the risk of financial loss due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to adhere to applicable laws, regulations, and supervisory guidance.

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

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SHUSA is subject to the income tax laws of the U.S., its states and municipalities and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant Governmental taxing authorities which is sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, the Company must make judgments and interpretations about the application of these inherently complex tax laws.

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

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

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

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

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

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

Replacing these third party vendors could also entail significant delays and expense.

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

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

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

On January 30, 2009, the Company was acquired by Santander. Successful integration into existing businesses of Santander depends upon the integration of key systems to fully realize revenue synergies and cost savings from the transaction. By its nature, SHUSA’s businesses depend upon automated systems to record and process high volumes of transactions. Accordingly, performing system conversions may lead to business disruptions or certain errors being repeated or compounded before they are discovered and successfully rectified.

Please refer to Foreclosures section within Item 1—Business and Note 22 to the Consolidated Financial Statements for further discussion.

The Company is subject to the risk of data security breaches. In the ordinary course of business, the Company’s activities include the collection, storage and transmission of certain personal and financial information from individuals, such as customers and employees. Security breaches could expose the Company to a risk of loss of this information, litigation, and potential liability. The Company’s cyber security measures may be breached due to the actions of outside parties, employee error, or otherwise, and, as a result, an unauthorized party may obtain access to the Company’s or customers’ information. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to the Company’s or customers’ information. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to the Company’s reputation, and a loss of confidence that could potentially have an adverse effect on future business with current and potential customers. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of the Company’s security occurs, the market perception of the effectiveness of the Company’s cyber security measures could be harmed and the Company could lose potential future business.

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Item 1B Unresolved Staff Comments

None.

Item 2 Properties

SHUSA utilizes 778 buildings that occupy a total of 5.9 million square feet, including 223 owned properties with 1.7 million square feet, 431 leased properties with 2.5 million square feet and 124 sale and leaseback properties with 1.7 million square feet. Seven major buildings contain 1.2 million square feet, which serve as the headquarters or house significant operational and administrative functions:

Columbia Park Operations Center—Dorchester, Massachusetts—Leased

195 Montague Street Regional Headquarters for Independence Community Bank Corp. — Brooklyn, New York—Owned

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

75 State Street Bank Headquarters for SHUSA and Sovereign Bank—Boston, Massachusetts—Leased

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

601 Penn Street Loan Processing Center—Reading, Pennsylvania—Owned

1130 Berkshire Boulevard Administrative Offices—Wyomissing, Pennsylvania—Owned

The majority of the seven properties of the Company outlined above are utilized for general corporate purposes by the Other function. The remaining 771 properties consist primarily of bank branches and lending offices used by the Retail banking segment.

Item 3 Legal Proceedings

Reference should be made to Note 19 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service/United States and “Litigation” in Note 22—“Commitments and Contingencies” for SHUSA’s litigation disclosure which is incorporated herein by reference.

Item 4 Mine Safety Disclosures

Not applicable.

PART II

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

The Company’s common stock was traded on the New York Stock Exchange (“NYSE”) under the symbol “SOV” through January 29, 2009. On January 30, 2009, all shares of the Company common stock were acquired by Santander and delisted from the NYSE. Following such delisting, there has not been, nor is there currently, an established public trading market in shares of the Company’s common stock. As of the date of this filing, Santander was the sole holder of the Company’s common stock.

Refer to the Liquidity and Capital Resources section in Item 7, MD&A for further discussion on dividends.

Refer to Note 20 to the Consolidated Financial Statements for further discussion on equity compensation plans.

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Item 6 Selected Financial Data

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Santander Holdings USA, Inc. and Subsidiaries

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

Executive Summary

The Company is comprised of one major subsidiary, the Bank. The Bank is a $78 billion financial institution as of December 31, 2011 with retail branches, operations and team members located principally in Pennsylvania, Massachusetts, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, Delaware and Maryland. The Bank gathers substantially all of its deposits in these market areas. The Bank uses these deposits, as well as other financing sources, to fund the loan and investment portfolios. The Bank earns interest income on the loan and investment portfolios. In addition, the Bank generates 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. The principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The volumes, and accordingly the financial results, are affected by the economic environment, including interest rates, consumer and business confidence and spending, as well as the competitive conditions within the Company’s geographic footprint. On January 30, 2009, the Company was acquired by Santander.

In July 2009, Santander contributed SCUSA, a majority owned subsidiary, into the Company. SCUSA’s results of operations were consolidated from January 2009 until December 31, 2011. On December 31, 2011, the Company deconsolidated SCUSA as a result of certain agreements with investors entered into during the fourth quarter 2011. Accordingly, as of December 31, 2011 SCUSA is accounted for as an equity method investment. Refer to the SCUSA Transaction section of this MD&A and Note 3 of the Notes to Consolidated Financial Statements for additional information.

Customers select the Bank for banking and other financial services based on its ability to assist customers and provide customized solutions. Following the acquisition by Santander, the Company began to change its strategy substantially. During 2009 and much of 2010, the Company’s primary emphasis was stabilization and turning around the operating results of the Company by realigning various elements of the Santander business model into the Company’s reporting structure. The second phase, transformation, has already begun and focuses on creating a sound, sustainable, and competitive franchise.

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

Moving forward, the Company’s priorities to transform the franchise include the following key initiatives:

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Santander Holdings USA, Inc. and Subsidiaries

In order to improve operating returns, management has continued to focus on acquiring and retaining customers by demonstrating convenience through the Bank’s locations, technology and business approach while offering innovative and easy-to-use products and services.

Economy

More than two-and-a-half years after the official end of the longest and deepest recession since World War II, the United States is continuing to undergo a slower-than-average recovery, similar to the experience of other countries facing financial crises. The recovery started strong with growth in the nation’s gross domestic product (GDP) averaging 3.0 percent over the first six quarters after the official end of the recession, but slowed considerably in the first half of 2011. Many analysts have referred to the recovery to date as “modest” or “disappointing.” The unemployment rate fell from a peak of 10.0% in late 2009 to 8.5 % by December 2011. The unemployment rate in the majority of the Company’s principal locations is lower than the national average, and is lower in December 2011 than December 2010. The slow recovery of the unemployment rate has been accompanied by a 2% decline in the labor force participation rate since the onset of the recession. The long-term unemployed, those out of work for 27 or more weeks, account for an unprecedented share of the unemployed. Home prices declined by more than 30% from their peak in early 2006, and the housing market remains at or very near record lows.

Recent Industry Consolidation in the Geographic Footprint

The Company believes its acquisition by Santander strengthened the Company’s financial position and enabled the Company to execute its strategy of focusing on its core retail and commercial customers in the Company’s geographic footprint. The banking industry has experienced significant consolidation in recent years, which is likely to continue in future periods. Consolidation may affect the markets in which the Company 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, has affected the competitive landscape in the markets the Company serves. Management continually monitors the environment in which it operates to assess the impact of the industry consolidation on the Company, as well as the practices and strategies of the Company’s 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 the Company and the industry will be unknown until these reforms are complete, although they will involve higher compliance costs. Certain elements have, and will continue to, negatively affect the Company’s revenue and earnings; while certain other elements, such as the “Collins Amendment”, will phase in the heightened capital standards by eliminating trust preferred securities as tier 1 regulatory capital for certain financial institutions. Other impacts include increases to the levels of deposit insurance assessments on large insured depository institutions, impacts to the nature and levels of fees charged to consumers, changes to the types of derivative activities that the Bank and other insured depository institutions may conduct, and other increases to capital, leverage and liquidity requirements for banks and bank holding companies. Financial institutions deemed to be systemically important (generally defined as financial institutions, similar to the Company, with greater than $50 billion in total assets) will be subject to additional supervision and requirements to develop resolution plans for potential economic and market events that could have a significant negative impact on their business. These changes could impact the future profitability and growth of the Company.

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Santander Holdings USA, Inc. and Subsidiaries

In the fourth quarter of 2009, The Federal Reserve Board (FRB) announced regulatory changes to debit card and ATM overdraft practices that were effective July 1, 2010. These changes prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. These changes have adversely impacted consumer banking fee revenue.

In December 2010, the Basel Committee on Banking Supervision issued “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). Basel III is a comprehensive set of reform measures designed to strengthen the regulation, supervision and risk management of the banking sector. Basel III is expected to significantly increase the capital required to be held by banks or holding companies and narrow the types of instruments which would qualify as providing appropriate capital. Banks or holding companies will also be required to hold a capital conservation buffer, which would be designed to absorb losses during periods of economic stress. Banks or holding companies not meeting these requirements will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The phase-in period for the new minimum capital requirements and related buffers will begin in 2013 and is expected to be completed by 2019.

In July 2011, the Basel Committee issued the proposed consultative document “Globally Systemic Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement” which sets out measures for global, systemically important financial institutions including the methodology for measuring systemic importance, and the additional capital requirements. In November 2011, the Basel Committee issued the final provisions of the document. This will be phased in from 2016 through 2018.

The Basel III rules do not apply to U.S. banks or holding companies automatically. As timing for the U.S. banking agency’s publication to implement the Basel III capital framework and the implementation schedule is unknown, significant uncertainty exists to the ultimate impacts of Basel III on U.S. financial institutions.

Recent Developments in Bank Regulation

In May 2011, the Bank applied to the Office of the Comptroller of the Currency (“OCC”) to become a national bank organized under the National Bank Act. In connection with this application, the Company submitted an application to the FRB to become a bank holding company, upon the conversion of the bank to a national bank, under the Bank Holding Company Act of 1956, as amended. On October 14, 2011, the FRB approved the Company’s application. On November 8, 2011 the OCC approved the application by the Bank. Effective on January 26, 2012, the Bank converted from a federal savings bank to a national banking association. In connection with the charter conversion, the Bank has changed its name to Sovereign Bank, National Association. Also effective on January 26, 2012, the Company has become a bank holding company.

As a national bank, the Bank is no longer subject to federal thrift regulations and instead is subject to the OCC’s regulations under the National Bank Act. The various laws and regulations administered by the OCC for national banks affect corporate practices and impose certain restrictions on activities and investments, but the Company does not believe that the Bank’s current or currently proposed business will be limited materially, if at all, by these restrictions. In addition, as a national bank, the Bank is no longer subject to the qualified thrift lender requirement, which requires thrifts to maintain a certain percentage of their “portfolio assets” in certain ‘qualified thrift investments,” such as residential housing related loans, certain consumer and small business loans and residential mortgage-backed securities. The Bank is no longer subject to the restrictions in the Home Owners’ Loan Act limiting the amount of commercial loans that the Bank may make.

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Santander Holdings USA, Inc. and Subsidiaries

As a bank holding company, the Company is subject to the comprehensive, consolidated supervision and regulation of the FRB. The Company is subject to risk-based and leverage capital requirements and information reporting requirements. The Company believes that it is “well capitalized” under the FRB’s capital standards.

Additionally, because the Company has more than $50 billion in total consolidated assets, as a bank holding company it will become subject to the heightened prudential and other requirements for large bank holding companies. The Dodd-Frank Act imposes heightened prudential requirements on bank holding companies with at least $50 billion in total consolidated assets and requires the FRB to establish prudential standards for such large bank holding companies that are more stringent than those applicable to other bank holding companies, including standards for risk-based capital requirements and leverage limits, liquidity, risk-management requirements, and credit exposure reporting and concentration limits. As part of the Dodd-Frank enhanced supervision framework, the Company will be subject to annual stress tests by the FRB, and the Company and the Bank will be required to conduct semi-annual and annual stress tests, respectively, reporting results to the FRB and the OCC. The FRB also has discretionary authority to establish additional prudential standards, on its own or at the Financial Stability Oversight Council’s recommendation, regarding contingent capital, enhanced public disclosures, short-term debt limits, and otherwise as it deems appropriate.

Additionally, federal laws restrict the types of activities in which bank holding companies may engage, and subject them to a range of supervisory requirements, including regulatory enforcement actions for violations of laws and policies. Bank holding companies may engage in the business of banking and managing and controlling banks, as well as closely related activities. The Company does not expect the limitations described above will adversely affect the current operations or materially prohibit the Company from engaging in activities that are currently contemplated by its business strategies.

On June 29, 2011, the FRB issued the final rule implementing the debit card interchange fee and routing regulation rules pursuant to the “Durbin amendment”. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are “reasonable and proportional” to the costs incurred by issuers for electronic debit transactions. In addition, the final rule prohibits network exclusivity arrangements on debit cards to ensure merchants have choices in how debit card transactions are routed. The effective date for the provision regarding debit card interchange fees and the network exclusivity prohibition was October 1, 2011 and April 1, 2012, respectively. The negative impact of the Durbin amendment on revenue is approximately $50 to $60 million annually based on the current debit card transaction volume.

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. Currently, the Company is in an asset sensitive interest rate risk position. During 2011, the net interest margin increased to 4.86% from 4.69% in 2010. This increase in margin is primarily attributable to the changing interest rate environment combined with a mix shift from higher cost wholesale deposits to lower cost retail deposits. Net interest margin in future periods will be impacted by several factors such as but not limited to, the Company’s ability to grow and retain core deposits, the future interest rate environment, loan and investment prepayment rates, and changes in nonaccrual loans. See further discussion in “Asset and Liability Management” including the estimated impact of changes in interest rates on the Company’s net interest income.

Credit Risk Environment

The credit quality of the loan portfolio has a significant impact on the operating results. The Company had net charge-offs of $1.3 billion in 2011 compared to $1.2 billion in 2010. Net charge-offs related to SCUSA in 2011 were $451.3 million compared to $432.0 million in 2010. The provision for credit losses was $1.3 billion in 2011 compared to $1.6 billion in 2010.

Unemployment in the United States continues to remain near historically high levels, and conditions are expected to remain challenging for financial institutions into 2012. Conditions in the housing market have been difficult over the past few years and declining real estate values and financial stress on borrowers have resulted in elevated levels of delinquencies and charge-offs. Accordingly, consumers and financial institutions remain cautious as weak housing markets, high unemployment, and volatile global credit and market environments remain a concern.

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Santander Holdings USA, Inc. and Subsidiaries

Conditions in the housing market have significantly impacted areas of the Company’s business. Certain segments of the Bank’s consumer and commercial loan portfolios have exposure to the housing market. Total residential real estate loans including held for sale increased to $11.6 billion at December 31, 2011 from $11.2 billion at December 31, 2010, while Alt-A residential real estate loans (also known as limited documentation) decreased to $1.5 billion from $1.9 billion over the same respective period. Charge-offs on the Alt-A residential real estate loans have increased year-over-year and totaled $95.8 million for the year ended December 31, 2011 compared to $45.3 million for the year ended December 31, 2010. The increase in charge-offs in the Alt-A residential real estate loan portfolio during 2011 was due to a one-time write-off of $46.8 million of Specific Valuation Allowances (SVAs) in this portfolio. In certain circumstances, SVAs were permitted to be used instead of partial charge-offs by the OTS, the Company’s former regulator. To conform to OCC policies, the Bank charged-off $103.7 million of mortgage loans against their related SVAs during 2011. These charge-offs did not have an impact on the results of operations. Future performance of the residential loan portfolio will continue to be significantly influenced by home prices in the residential real estate market, unemployment and general economic conditions.

The homebuilder industry also has been impacted by difficult new home sales volumes and values of residential real estate which has impacted the profitability and liquidity of these companies. Declines in real estate prices have been the most pronounced in certain states where previous increases were the largest, such as California, Florida and Nevada. Additionally, heightened foreclosure volumes have continued in various other areas due to the generally challenging economic environment and levels of unemployment. The Company provided financing to various homebuilder companies which is included in the commercial loan portfolio. The Company has been reducing its loss exposure to this loan portfolio which has resulted in the decline to $95.8 million at December 31, 2011 compared to $189.4 million at December 31, 2010. At December 31, 2011, the entire homebuilder loan portfolio is in the Company’s geographic footprint which generally has had more stable economic conditions on a relative basis compared to the national economy. Management 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.

Concerns regarding Greece’s ability to meet its debt obligations have continued to heighten. In addition, recent market sentiment has raised serious doubt about the credit quality of certain other European jurisdictions. Other than transactions with the parent company, Santander, as further described in Notes 13 and 27 to the Consolidated Financial Statements, the Company’s exposure to Eurozone countries includes the following (amounts are in thousands):

Overall, gross exposure to these countries is less than 1.0% of the Company’s total assets as of December 31, 2011. The Company has no exposure to any other country in the Eurozone including Ireland or Greece. The Company currently does not have credit protection on any of these exposures. During 2011, the Company entered into cross currency swaps in order to hedge the foreign exchange risk on certain Euro denominated investments.

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Santander Holdings USA, Inc. and Subsidiaries

On August 5, 2011, Standard & Poor’s (“S&P”), one of three major credit rating agencies which also include Moody’s Investors Service and Fitch, lowered its long-term credit rating on the United States sovereign debt from AAA to AA+. Moody’s and Fitch each maintained the highest rating on U.S. sovereign debt, but have assigned a negative outlook to its ratings. The implications of these actions by the ratings agencies could include negative effects on U.S. Treasury securities as well as instruments issued, guaranteed or insured by government agencies or government-sponsored institutions. These types of instruments are significant assets for the Company. In addition, the potential impact could exacerbate the other risks to which the Company is subject to including, but not limited to, the risk factors described in Part I, Item 1A – Risk Factors of the Annual Report on Form 10-K.

On October 11, 2011, Fitch Ratings downgraded six Spanish banks, including Santander, indicating that this was due to the downgrade of the Kingdom of Spain to AA-, as well as to the fact that banks worldwide and particularly in Europe, face challenges in fundamentals and in the markets. Fitch ratings were downgraded for Banco Santander from AA with stable outlook to AA- with negative outlook. Also on October 11, 2011, Standard & Poor’s downgraded Spanish banks because it believes the sluggish growth prospects, the still depressed real estate market and increased turbulence in capital markets will impact financial entities in the coming months. Banco Santander’s long-term debt ratings are AA- with negative outlook. On October 19, 2011, Moody’s also downgraded Spanish entities as a result of downgrading Spain’s sovereign debt to A1. The long-term debt ratings of Banco Santander were downgraded from Aa2 to Aa3, maintaining a negative outlook.

As a result of the continuing decline in the European markets, as well as the downgrade of the Kingdom of Spain from AA- to A on January 27, 2012, Fitch Ratings downgraded fifteen Spanish banks, including Santander on February 13, 2012. Fitch ratings were downgraded for Santander from AA- to A. Also on February 13, 2012, Standard & Poor’s downgraded Spanish banks because it expects Spanish banks’ profitability to remain below the historical average over the medium term, owing to high credit provisions which could impair the Spanish banking system’s competitive dynamics. Santander’s long-term debt rating was downgraded from AA- to A+ with negative outlook. On February 16, 2012, Moody’s put over 100 banks, including certain Spanish banks on rating review for possible downgrade. The long-term debt ratings of Banco Santander are currently listed as “rate under review” for possible downgrade from its current rating of Aa3 with a negative outlook.

During 2011 and 2012 the rating agencies took the following actions regarding the Company and the Bank:

Standard and Poor’s: On October 14, 2011 Standard & Poor’s said that its ratings on SHUSA and the Bank were not affected by the downgrade of Santander on October 11, 2011. Standard & Poor’s ratings remained at A/A-1 with a stable outlook for SHUSA and the Bank. On November 29, 2011, reflecting its new rating methodology, Standard & Poor’s raised SHUSA and the Bank’s ratings to A+/A-1 with a negative outlook. On February 13, 2012, in conjunction with its downgrade of Banco Santander, Standard and Poor also downgraded SHUSA and the Bank’s ratings from A+ with negative outlook to A with negative outlook.

Fitch: In conjunction with its downgrade of Banco Santander, on October 11, 2011 Fitch also downgraded SHUSA and the Bank’s ratings from AA- with stable outlook to A+ with negative outlook for both SHUSA and the Bank. On February 13, 2012, in conjunction with its downgrade of Banco Santander, Fitch also downgraded SHUSA and the Bank’s ratings from A+ with negative outlook to A- with negative outlook.

Moody’s: In April 2011, Moody’s upgraded the Bank’s long-term debt ratings from A3 to A2 and its short term rating from P-2 to P-1. In addition, SHUSA’s outlook was improved from negative to stable but remains at a long-term debt rating of Baa1. There have been no additional actions from Moody’s related to SHUSA or the Bank’s ratings.

25

Santander Holdings USA, Inc. and Subsidiaries

Results of Operations for the Years Ended December 31, 2011 and 2010

The major factors affecting comparison of earnings between 2011 and 2010 were:

26

Santander Holdings USA, Inc. and Subsidiaries

Net Interest Income

Net interest income for 2011 was $3.9 billion compared to $3.4 billion for 2010, an increase of 13.7%. The increase in net interest income in 2011 was primarily due to increased earnings on loans. Excluding SCUSA, net interest income was $1.7 billion for 2011, compared to $1.6 billion for 2010, an increase of 2.4%. Additionally, the Bank continued to focus on net interest spreads, both in loans and deposits, as the interest rate environment remained low in 2011.

Interest on investment securities and interest-earning deposits was $419.0 million for 2011 compared to $470.7 million for 2010. Though the average investment portfolio increased by $1.4 billion during 2011, the average investment portfolio continued to be approximately 18.0% of the total average assets. The average life of the investment portfolio has decreased to 4.24 years at December 31, 2011 compared to 6.06 years at December 31, 2010. As higher yielding investments continue to mature and available funds are used to purchase lower yielding investments, the yield on investments decreased to 2.74% in 2011 from 3.36% in 2010.

Interest on loans was $4.8 billion and $4.3 billion for 2011 and 2010, respectively. The average balance of loans was $66.1 billion with an average yield of 7.32% for 2011 compared to an average balance of $60.4 billion with an average yield of 7.17% for 2010. These increases are driven by $8.0 billion of loans acquired by SCUSA during the latter half of 2010, $1.7 billion of loans acquired by the Bank during the first quarter of 2011, and $181.9 million of credit card loans acquired by the Bank during the second quarter of 2011. At December 31, 2011, approximately 35% of the Bank’s total loan portfolio reprices monthly or more frequently.

Interest on total deposits was $248.7 million for 2011 compared to $228.6 million for 2010. The average balance of deposits was $39.2 billion with an average cost of 0.64% for 2011 compared to an average balance of $35.0 billion with an average cost of 0.65% for 2010. The decrease in interest expense is due to the continued lower interest rate environment in 2011, as well as repricing efforts on promotional money market and time deposit accounts during 2011. Additionally, the average balance of non-interest bearing deposits increased to $7.6 billion in 2011 from $7.1 billion in 2010.

Interest on borrowings and other debt obligations was $1.1 billion and $1.2 billion for 2011 and 2010, respectively. The average balance of total borrowings and other debt obligations was $30.9 billion with an average cost of 3.69% for 2011 compared to an average balance of $30.2 billion with an average cost of 3.84% for 2010. The increase in borrowing levels is primarily due to SCUSA asset earning growth which has been funded with increased borrowing.

27

Santander Holdings USA, Inc. and Subsidiaries

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

Table 1: Net Interest Margin