Santander Holdings USA, Inc. - Quarter Report: 2011 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)

Virginia (State or other jurisdiction of incorporation or organization)		23-2453088 (I.R.S. Employer Identification No.)
75 State Street, Boston, Massachusetts (Address of principal executive offices)		02109 (Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o. No o.*
*Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time.

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Class		Outstanding at October 31, 2011
Common Stock (no par value)		517,107,043 shares

 

 

FORWARD LOOKING STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Santander Holdings USA, Inc. (“SHUSA” or the “Company”). SHUSA may from time to time make forward-looking statements in SHUSA’s filings with the Securities and Exchange Commission (the “SEC”) (including this Quarterly Report on Form 10-Q and the Exhibits hereto), in its reports to shareholders (including its Annual Report on Form 10-K for the fiscal year ended December 31, 2010) and in other communications by SHUSA, which are made in good faith by SHUSA, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Some of the statements made by SHUSA, including any statements preceded by, followed by or which include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” “anticipate,” “estimate,” “intend,” “plan,” “strive,” “hopefully,” “try,” “assume” or similar expressions constitute forward-looking statements.

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

	•		the strength of the United States economy in general and the strength of the regional and local economies in which SHUSA conducts operations, which may affect, among other things, the level of non-performing assets, charge-offs, and provision for credit losses;
	•		the effects of, or policies determined by the Federal Deposit Insurance Corporation, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
	•		inflation, interest rate, market and monetary fluctuations, which may, among other things reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;
	•		adverse movements and volatility in debt and equity capital markets;
	•		adverse changes in the securities markets, including those related to the financial condition of significant issuers in the Company’s investment portfolio;
	•		revenue enhancement initiatives may not be successful in the marketplace or may result in unintended costs;
	•		changing market conditions may force SHUSA to alter the implementation or continuation of cost savings or revenue enhancement strategies;
	•		SHUSA’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers;
	•		the willingness of customers to substitute competitors’ products and services and vice versa;
	•		the ability of SHUSA and its third party vendors to convert and maintain SHUSA’s data processing and related systems on a timely and acceptable basis and within projected cost estimates;
	•		the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles in the United States;
	•		the impact of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” enacted in July 2010, which is a significant development for the banking industry, the full reach of which will be unknown until the rulemaking processes mandated by the legislation are complete (although the impact will involve higher compliance costs and certain elements, that are likely to negatively affect SHUSA’s revenue and earnings);

FORWARD LOOKING STATEMENTS
(continued)

	•		additional legislation and regulations may be enacted or promulgated in the future, and management is unable to predict the form such legislation or regulation may take or to the degree which management needs to modify SHUSA’s businesses or operations to comply with such legislation or regulation;
	•		the cost and other effects of the consent order issued by the Office of Thrift Supervision to Sovereign Bank requiring the Bank to take certain steps to improve its mortgage servicing and foreclosures practices, as is further described in Part I, Item 2;
	•		technological changes;
	•		competitors of SHUSA may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than SHUSA;
	•		changes in consumer spending and savings habits;
	•		acts of terrorism or domestic or foreign military conflicts and acts of God, including natural disasters;
	•		regulatory or judicial proceedings;
	•		changes in asset quality;
	•		the outcome of ongoing tax audits by federal, state and local income tax authorities may require additional taxes be paid by SHUSA as compared to what has been accrued or paid as of period end; and
	•		SHUSA’s success in managing the risks involved in the foregoing.

If one or more of the factors affecting SHUSA’s forward-looking information and statements proves incorrect, 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.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 2011 and December 31, 2010			4
Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2011 and 2010			5-6
Consolidated Statement of Stockholder’s Equity for the nine-month periods ended September 30, 2011 and 2010			7
Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2011 and 2010			8-9
Notes to Consolidated Financial Statements			10-50
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			51-76
Item 3. Quantitative and Qualitative Disclosures About Market Risk			77
Item 4. Controls and Procedures			77
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			78
Item 1A. Risk Factors			78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			78
Item 6. Exhibits			79
SIGNATURES			80
EXHIBITS INDEX			81
Ex-31.1 Certification
Ex-31.2 Certification
Ex-32.1 Certification
Ex-32.2 Certification
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1- FINANCIAL INFORMATION

Item 1.		Consolidated Financial Statements

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited at September 30, 2011, audited at December 31, 2010)

		September 30,				December 31,
		2011				2010
		(in thousands)
ASSETS
Cash and amounts due from depository institutions		$	3,184,550			$	1,705,895
Investment securities:
Available-for-sale at fair value			13,834,050				13,371,848
Other investments			524,899				614,241
Loans held for investment (1)			65,626,619				65,017,884
Allowance for loan losses			(2,185,302	)			(2,197,450	)
Net loans held for investment			63,441,317				62,820,434
Loans held for sale at fair value			141,096				150,063
Premises and equipment, net of accumulated depreciation of $507,356 and $445,225 at September 30, 2011 and December 31, 2010, respectively			657,742				595,951
Accrued interest receivable			365,999				406,617
Goodwill			4,124,351				4,124,351
Core deposit intangibles and other intangibles			160,103				188,940
Bank owned life insurance			1,550,216				1,519,462
Restricted cash			487,179				583,637
Other assets (2)			3,331,689				3,570,376
TOTAL ASSETS		$	91,803,191			$	89,651,815
LIABILITIES
Deposits and other customer accounts		$	47,363,568			$	42,673,293
Borrowings and other debt obligations			30,191,424				33,630,117
Advance payments by borrowers for taxes and insurance			137,493				104,125
Other liabilities (3)			2,004,066				1,983,610
TOTAL LIABILITIES			79,696,551				78,391,145
STOCKHOLDER’S EQUITY
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at September 30, 2011 and at December 31, 2010)			195,445				195,445
Common stock (no par value; 800,000,000 shares authorized; 517,107,043 shares issued at September 30, 2011 and at December 31, 2010)			11,118,007				11,117,328
Warrants			285,435				285,435
Accumulated other comprehensive loss			(140,847	)			(234,190	)
Retained earnings/(deficit)			609,966				(128,984	)
TOTAL SHUSA STOCKHOLDER’S EQUITY			12,068,006				11,235,034
Noncontrolling interest			38,634				25,636
TOTAL STOCKHOLDER’S EQUITY			12,106,640				11,260,670
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY		$	91,803,191			$	89,651,815

See accompanying notes to unaudited consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Three-Month Period								Nine-Month Period
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
		(in thousands)
INTEREST INCOME:
Interest on loans		$	1,174,559			$	1,089,668			$	3,576,430			$	3,134,072
Interest-earning deposits			1,655				732				5,051				1,492
Investment securities:
Available-for-sale			101,904				121,117				316,528				358,391
Other investments			15				244				114				916
TOTAL INTEREST INCOME			1,278,133				1,211,761				3,898,123				3,494,871
INTEREST EXPENSE:
Deposits and customer accounts			65,066				51,207				187,837				174,422
Borrowings and other debt obligations			258,499				282,085				823,564				874,122
TOTAL INTEREST EXPENSE			323,565				333,292				1,011,401				1,048,544
NET INTEREST INCOME			954,568				878,469				2,886,722				2,446,327
Provision for credit losses			368,713				455,639				949,629				1,305,650
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES			585,855				422,830				1,937,093				1,140,677
NON-INTEREST INCOME:
Consumer banking fees			160,368				127,609				498,181				360,390
Commercial banking fees			43,877				47,842				130,195				139,718
Mortgage banking income/(expense), net			(25,943	)			2,602				(13,714	)			27,684
Capital markets revenue, net			6,009				3,290				18,723				11,517
Bank owned life insurance			15,541				13,593				42,858				40,685
Miscellaneous income/(expense)			(3,378	)			1,329				595				3,798
TOTAL FEES AND OTHER INCOME			196,474				196,265				676,838				583,792
Total other-than-temporary impairment (“OTTI”) losses			(4,180	)			(4,776	)			(38,446	)			(52,170	)
Portion of OTTI recognized in other comprehensive income before taxes			4,180				3,964				38,121				48,225
OTTI recognized in earnings			—				(812	)			(325	)			(3,945	)
Net gain on sale of investment securities			41,943				131,925				124,192				204,279
Net gain on investment securities recognized in earnings			41,943				131,113				123,867				200,334
TOTAL NON-INTEREST INCOME			238,417				327,378				800,705				784,126
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits			203,993				185,309				599,358				510,085
Occupancy and equipment expenses			89,061				78,848				254,497				235,484
Technology expense			30,194				28,432				91,938				81,996
Outside services			35,668				30,359				104,049				87,850
Marketing expense			9,426				9,984				26,739				25,679
Loan expense			48,182				34,998				165,951				90,146
Other administrative expenses			38,070				30,129				117,500				98,231
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES			454,594				398,059				1,360,032				1,129,471

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

		Three-Month Period								Nine-Month Period
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
		(in thousands)
OTHER EXPENSES:
Amortization of intangibles		$	13,138			$	15,282			$	43,041			$	48,728
Deposit insurance premiums			18,551				23,227				66,279				70,529
Equity method investments			3,376				6,046				9,444				20,099
Loss on debt extinguishment			23,570				13				29,712				3,381
TOTAL OTHER EXPENSES			58,635				44,568				148,476				142,737
INCOME BEFORE INCOME TAXES			311,043				307,581				1,229,290				652,595
Income tax provision			104,707				87,419				426,840				195,229
NET INCOME INCLUDING NONCONTROLLING INTEREST		$	206,336			$	220,162			$	802,450			$	457,366
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST			13,503				7,073				52,550				20,113
NET INCOME ATTRIBUTABLE TO SHUSA		$	192,833			$	213,089			$	749,900			$	437,253

See accompanying notes to unaudited consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2011 AND 2010

(Unaudited)

(in thousands)

																		Accumulated												Total
		Common																Other				Retained								Stock-
		Shares				Preferred				Common								Comprehensive				Earnings				Noncontrolling				holder’s
		Outstanding				Stock				Stock				Warrants				Loss				(Deficit)				Interest				Equity
Balance, December 31, 2009			511,107			$	195,445			$	10,381,500			$	285,435			$	(349,869	)		$	(1,147,373	)		$	22,397			$	9,387,535
Cumulative effect from change in accounting principle			—				—				—				—				—				(3,747	)			—				(3,747	)
Balance, January 1, 2010			511,107			$	195,445			$	10,381,500			$	285,435			$	(349,869	)		$	(1,151,120	)		$	22,397			$	9,383,788
Comprehensive income:
Net income			—				—				—				—				—				437,253				20,113				457,366
Change in unrealized gain/loss, net of tax:
Investment securities available-for-sale			—				—				—				—				214,064				—				—				214,064
Pension liabilities			—				—				—				—				904				—				—				904
Cash flow hedges			—				—				—				—				(48,081	)			—				—				(48,081	)
Total comprehensive income			—				—				—				—				166,887				437,253				20,113				624,253
Insurance of common stock to parent			3,000				—				750,000				—				—				—				—				750,000
Stock issued in connection with employee benefit and incentive compensation plans			—				—				744				—				—				—				—				744
Dividends paid on preferred stock			—				—				—				—				—				(10,950	)			—				(10,950	)
Balance, September 30, 2010			514,107			$	195,445			$	11,132,244			$	285,435			$	(182,982	)		$	(724,817	)		$	42,510			$	10,747,835

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

																		Accumulated												Total
		Common																Other				Retained								Stock-
		Shares				Preferred				Common								Comprehensive				Earnings				Noncontrolling				holder’s
		Outstanding				Stock				Stock				Warrants				Loss				(Deficit)				Interest				Equity
Balance, December 31, 2010			517,107			$	195,445			$	11,117,328			$	285,435			$	(234,190	)		$	(128,984	)		$	25,636			$	11,260,670
Comprehensive income:
Net income			—				—				—				—				—				749,900				52,550				802,450
Change in unrealized gain/loss, net of tax:
Investment securities available-for-sale			—				—				—				—				151,749				—				—				151,749
Pension liabilities			—				—				—				—				1,027				—				—				1,027
Cash flow hedges			—				—				—				—				(59,433	)			—				—				(59,433	)
Total comprehensive income			—				—				—				—				93,343				749,900				52,550				895,793
Stock issued in connection with employee benefit and incentive compensation plans			—				—				679				—				—				—				—				679
Dividends to noncontrolling interest			—				—				—				—				—				—				(39,552	)			(39,552	)
Dividends paid on preferred stock			—				—				—				—				—				(10,950	)			—				(10,950	)
Balance, September 30, 2011			517,107			$	195,445			$	11,118,007			$	285,435			$	(140,847	)		$	609,966			$	38,634			$	12,106,640

See accompanying notes to unaudited consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine-Month Period
		Ended September 30,
		2011				2010
		(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interest		$	802,450			$	457,366
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses			949,629				1,305,650
Deferred taxes			79,477				(40,952	)
Depreciation and amortization			153,434				174,218
Net amortization/accretion of investment securities and loan premiums and discounts			37,110				(118,881	)
Net gain on sale of loans			(13,050	)			(21,425	)
Net gain on sale of investment securities			(124,192	)			(204,279	)
OTTI recognized in earnings			325				3,945
Loss on debt extinguishments			29,712				3,381
Net loss on real estate owned and premises and equipment			8,296				12,086
Stock-based compensation			2,885				1,557
Remittance to Santander for stock-based compensation			(2,206	)			(877	)
Origination of loans held for sale, net of repayments			(828,333	)			(1,313,915	)
Proceeds from sales of loans held for sale			850,627				964,546
Net change in:
Accrued interest receivable			40,618				19,720
Other assets and bank owned life insurance			(214,213	)			401,952
Other liabilities			141,996				226,519
Net cash provided by operating activities		$	1,914,565			$	1,870,611
CASH FLOWS FROM INVESTING ACTIVITIES:
Adjustments to reconcile net cash used in by investing activities:
Proceeds from sales of available-for-sale investment securities		$	4,946,458			$	5,075,900
Proceeds from prepayments and maturities of available-for-sale investment securities			2,585,805				3,449,231
Purchases of available-for-sale investment securities			(7,023,632	)			(4,890,607	)
Net change in other investments			89,342				28,902
Net change in restricted cash			96,458				(8,755	)
Proceeds from sales of loans held for investment			651				7,373
Purchase of loans held for investment			(2,657,786	)			(7,748,910	)
Net change in loans other than purchases and sales			419,918				147,439
Purchase of other assets from third party			—				(121,715	)
Proceeds from sales of real estate owned and premises and equipment			67,477				43,786
Purchases of premises and equipment			(135,888	)			(132,168	)
Net cash used in investing activities		$	(1,611,197	)		$	(4,149,524	)

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

		Nine-Month Period
		Ended September 30,
		2011				2010
		(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Adjustments to reconcile net cash provided by financing activities:
Net change in deposits and other customer accounts		$	4,690,275			$	(3,163,726	)
Net change in borrowings			(1,798,779	)			1,583,392
Net proceeds from senior notes, subordinated notes and credit facility			9,268,672				9,950,047
Repayments of borrowings and other debt obligations			(10,941,971	)			(5,089,651	)
Net change in advance payments by borrowers for taxes and insurance			33,368				41,385
Cash dividends paid to preferred stockholders			(10,950	)			(10,950	)
Cash dividends paid to noncontrolling interest			(65,328	)			—
Proceeds from the issuance of common stock			—				750,000
Net cash provided by financing activities		$	1,175,287			$	4,060,497
NET CHANGE IN CASH AND CASH EQUIVALENTS		$	1,478,655			$	1,781,584
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			1,705,895				2,323,290
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	3,184,550			$	4,104,874
SUPPLEMENTAL DISCLOSURE
Net income taxes paid		$	1,265,192			$	264,244
Interest paid		$	1,036,357			$	1,050,245
NON-CASH TRANSACTIONS
Foreclosed real estate		$	87,553			$	133,058
Other repossessed assets		$	1,229,160			$	1,011,200
Receipt of available for sale mortgage backed securities in exchange for mortgage loans held for investment		$	649,676			$	1,375,502
Consolidation of commercial mortgage backed securitization portfolio		$	—			$	(860,486	)
Sale of previously consolidated commercial mortgage backed securitization portfolio		$	—				$860,486
Dividends declared		$	8,224			$	—

See accompanying notes to unaudited consolidated financial statements

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The consolidated financial statements of Santander Holdings USA, Inc. and Subsidiaries (“SHUSA” or the “Company”) include the accounts of Santander Holdings USA, Inc. and its subsidiaries, including Sovereign Bank (the “Bank”), Santander Consumer USA, Inc (“SCUSA”), Independence Community Bank Corp. (“Independence”) and Sovereign Delaware Investment Corporation. All intercompany balances and transactions have been eliminated in consolidation. SHUSA is a wholly owned subsidiary of Banco Santander SA (“Santander”). Santander is a retail and commercial bank, based in Spain, with a presence in ten major markets throughout the world. At the end of 2010, Santander was the largest bank in the euro zone and 10th in the world by market capitalization. Founded in 1857, Santander had over 95 million customers, 14,082 branches — more than any other international bank — and approximately 179,000 employees, at December 2010. 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.

These consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements, prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary to present fairly the consolidated balance sheets, statements of operations, statement of stockholder’s equity and statements of cash flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s latest annual report on Form 10-K.

In the second quarter of 2011, the Company reclassified amounts presented in the December 31, 2010 consolidated balance sheet of $583.6 million from “Other Assets” to “Restricted Cash”. The Company believes that this presentation provides a more meaningful presentation of cash available for general operations. This reclassification had no effect on the consolidated statement of operations.

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Management identified accounting for the allowance for loan losses, derivatives, income taxes and goodwill as the most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results, and require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis and the December 31, 2010 Management’s Discussion and Analysis filed in the 2010 Form 10-K. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.

The Company evaluated events from September 30, 2011, the date of the consolidated financial statements, through the issuance of these consolidated financial statements included in this Quarterly Report on Form 10-Q.

There have been no significant changes to the Company’s accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2010.

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

(2) RECENT ACCOUNTING DEVELOPMENTS

In December 2010, the FASB issued ASU 2010-28, an update to Topic 350, “Intangibles — Goodwill and Other: When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments to Topic 350 modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining this, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. These amendments were effective for the Company on January 1, 2011. The implementation of this guidance did not have an impact on the Company’s financial position or results of operations.

In April 2011, the FASB issued ASU 2011-02, an update to ASC 310-40, “Receivables — Troubled Debt Restructurings by Creditors.” The amendments to Topic 310 were effective on July 1, 2011 for the Company, and should be applied retrospectively to the beginning of the annual period of adoption. In evaluating whether a restructuring constitutes a troubled debt restructuring, the Company must separately conclude that the restructuring constitutes a concession as well as the debtor must be experiencing financial difficulties. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether it has granted a concession and the debtor is experiencing financial difficulties. The implementation of this guidance did not have a significant impact on the Company’s financial position or results of operations.

In April 2011, the FASB issued ASU 2011-03, an update to ASC 860, “Transfers and Servicing” to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments to ASC 860 are effective for the Company beginning January 1, 2012. The implementation of this guidance is not expected to have an impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, an update to ASC 820, “Fair Value Measurement” to provide guidance about how fair value should be determined where it is already required or permitted under U.S. GAAP. The guidance clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risks and the concept of valuation premise and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures. The amendments to ASC 820 are effective for the first interim and annual periods beginning January 1, 2012 for the Company, and should be applied prospectively. The implementation of this guidance is not expected to have a significant impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, an update to ASC 220, “Comprehensive Income”, which requires comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The amendments do not change what items are reported in other comprehensive income or the requirement to report classification of items from other comprehensive income to net income. The amendments to ASC 220 are effective for the first interim and annual period beginning January 1, 2012 for the Company, and should be applied retrospectively to the beginning of the annual period of adoption. The implementation of this guidance is not expected to have a significant impact on the Company’s financial position or results of operations. A proposed deferral for certain aspects of this guidance was issued in October 2011. If the proposed deferral is adopted unchanged, the deferral period would be begin for the Company on January 1, 2012 and would remain in effect indefinitely.

In September 2011, the FASB issued ASU 2011-08, an update to ASC 350, “Intangibles — Goodwill and Other”, which requires companies to perform goodwill and indefinite-life intangible asset impairment testing using a two-step process. The amendments to the ASU permits companies to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as basis for determining whether it is necessary to perform the two-step impairment test. The amendments to ASC 350 are effective for interim and annual periods beginning after December 15, 2011 for the Company. The implementation of this guidance is not expected to have a significant impact on the Company’s financial position or results of operations.

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

(3) INVESTMENT SECURITIES

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

		September 30, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Loss				Value
		(in thousands)
Investment securities:
U.S. Treasury and government agency securities		$	43,956			$	24			$	—			$	43,980
Debentures of FHLB, FNMA, and FHLMC			19,435				565				—				20,000
Corporate debt securities			1,625,010				18,666				29,241				1,614,435
Asset-backed securities			2,611,922				23,679				7,130				2,628,471
State and municipal securities			1,775,376				66,880				10,324				1,831,932
Mortgage-backed securities:
U.S. government agencies			1,459,874				51,107				—				1,510,981
FHLMC and FNMA debt securities			5,052,670				106,229				3,369				5,155,530
Non-agency securities			1,133,913				3,538				108,730				1,028,721
Total investment securities available-for-sale		$	13,722,156			$	270,688			$	158,794			$	13,834,050

		December 31, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Loss				Value
		(in thousands)
Investment securities:
U.S. Treasury and government agency securities		$	12,997			$	—			$	—			$	12,997
Debentures of FHLB, FNMA, and FHLMC			24,291				708				—				24,999
Corporate debt securities			2,148,919				66,924				13,056				2,202,787
Asset-backed securities			3,097,959				37,849				11,205				3,124,603
State and municipal securities			2,000,974				1,609				120,303				1,882,280
Mortgage-backed securities:
U.S. government agencies			364,331				75				10				364,396
FHLMC and FNMA debt securities			4,254,734				51,473				7,204				4,299,003
Non-agency securities			1,607,514				260				146,991				1,460,783
Total investment securities available-for-sale		$	13,511,719			$	158,898			$	298,769			$	13,371,848

Investment securities available-for-sale with an estimated fair value of $2.7 billion and $5.7 billion were pledged as collateral for borrowings, standby letters of credit, interest rate agreements and certain public deposits at September 30, 2011 and December 31, 2010, respectively.

Contractual maturities of the Company’s investment securities available-for-sale at September 30, 2011 are as follows:

		Amortized				Fair
		Cost				Value
		(in thousands)
Due within one year		$	313,515			$	315,278
Due after 1 within 5 years			2,922,350				2,942,214
Due after 5 within 10 years			786,645				777,514
Due after 10 years/ no maturity			9,699,646				9,799,044
Total		$	13,722,156			$	13,834,050

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

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

(3) INVESTMENT SECURITIES (continued)

The following tables disclose the aggregate amount of unrealized losses as of September 30, 2011 and December 31, 2010 on securities in the Company’s investment portfolio classified according to the amount of time that those securities have been in a continuous loss position:

		At September 30, 2011
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(in thousands)
Investment securities:
Corporate debt securities		$	796,958			$	(17,419	)		$	60,330			$	(11,822	)		$	857,288			$	(29,241	)
Asset-backed securities			562,671				(2,431	)			123,272				(4,699	)			685,943				(7,130	)
State and municipal securities			64,881				(1,152	)			306,202				(9,172	)			371,083				(10,324	)
Mortgage-backed securities:
FHLMC and FNMA debt securities			1,010,513				(3,236	)			7,747				(133	)			1,018,260				(3,369	)
Non-agency securities			53,391				(3,515	)			839,501				(105,215	)			892,892				(108,730	)
Total investment securities available-for-sale		$	2,488,414			$	(27,753	)		$	1,337,052			$	(131,041	)		$	3,825,466			$	(158,794	)

		At December 31, 2010
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(in thousands)
Investment securities:
Corporate debt securities		$	535,892			$	(12,356	)		$	9,426			$	(700	)		$	545,318			$	(13,056	)
Asset-backed securities			660,683				(4,498	)			96,005				(6,707	)			756,688				(11,205	)
State and municipal securities			1,420,899				(83,641	)			245,067				(36,662	)			1,665,966				(120,303	)
Mortgage-backed securities:
U.S. government agencies			5,380				(10	)			—				—				5,380				(10	)
FHLMC and FNMA debt securities			947,311				(7,078	)			13,537				(126	)			960,848				(7,204	)
Non-agency securities			62,744				(3,879	)			1,358,715				(143,112	)			1,421,459				(146,991	)
Total investment securities available-for-sale		$	3,632,909			$	(111,462	)		$	1,722,750			$	(187,307	)		$	5,355,659			$	(298,769	)

The unrealized losses on the Company’s state and municipal bond portfolio were $10.3 million at September 30, 2011 compared to $120.3 million at December 31, 2010. This portfolio consists of 98.8% general obligation bonds of states, cities, counties and school districts. The portfolio has a weighted average underlying credit risk rating of AA. Approximately 76% of these bonds are insured with various companies and as such, carry additional credit protection. The largest geographic concentrations of the state and local municipal bonds are in California, which represented 22% of the total portfolio. No other state had more than 20% of the total portfolio. The Company has determined that the unrealized losses on the portfolio are due to an increase in credit spreads since acquisition, principally for obligors in certain geographic locations.

The unrealized losses on the non-agency securities portfolio were $108.7 million at September 30, 2011 compared with $147.0 million at December 31, 2010. Excluding the securities discussed in the following paragraph, this portfolio consists primarily of highly rated non-agency mortgage-backed securities from a diverse group of issuers in the private-label market. The Company has determined that the unrealized losses on these securities above are due to an increase in credit spreads since acquisition and liquidity issues in the marketplace. The Company has concluded these unrealized losses are temporary in nature on the majority of this portfolio since management believes based on modeled projections, that there is sufficient credit subordination associated with these securities.

At September 30, 2011, the Company had thirteen investments in certain non-agency mortgage backed securities with ending book values of $623.8 million which the Company does not expect to collect the entire scheduled principal. At September 30, 2010, the Company had fourteen investments in certain non-agency mortgage backed securities with ending book values of $920.7 million which the Company does not expect to collect the entire scheduled principal. Cumulative credit losses for these securities recognized in earnings were $142.8 million at September 30, 2011 and $210.1 million at September 30, 2010.

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

(3) INVESTMENT SECURITIES (continued)

The following table displays changes in credit losses for debt securities recognized in earnings for the nine-month period ended September 30, 2011 and 2010, and expected to be recognized in earnings over the remaining life of the securities.

		Nine-				Nine-
		Month				Month
		Period				Period
		Ending				Ending
		September				September
		30, 2011				30, 2010
		(in thousands)
Cumulative credit loss recognized on non-agency securities at the beginning of the period		$	210,919			$	206,155
Cumulative reduction as of the beginning of the period for accretion into interest income for the expected increase in cash flow on certain non-agency securities			(9,631	)			—
Current period accretion into interest income for the expected increase in cash flow on certain non-agency securities			(7,903	)			(5,833	)
Additions for amount related to credit loss for which an other-than-temporary impairment was not previously recognized			—				3,945
Reductions for securities sold during the period			(68,442	)			—
Additional increases to credit losses for previously recognized other-than-temporary impairment charges when the entity does not intend to sell the security			325				—
Net cumulative credit loss recognized on non-agency securities as of the end of the period			125,268				204,267
Reductions for increases in cash flows expected to be collected and recognized over the remaining life of securities			(28,586	)			(66,165	)
Projected ending balance of the amount related to credit losses on debt securities at the end of the period for which a portion of an other-than-temporary impairment was recognized in other comprehensive income		$	96,682			$	138,102

The thirteen and fourteen bonds that the Company has recorded other-than-temporary impairments on have a weighted average S&P credit rating of CC at September 30, 2011 and CCC at September 30, 2010. Each of these securities contains various levels of credit subordination. The underlying mortgage loans that comprise these investment securities were primarily originated in the years 2005 through 2007. Approximately 55.9% of these loans were jumbo loans, and approximately 70.1% of the collateral backing these securities were limited documentation loans. A summary of the key assumptions utilized to forecast future expected cash flows on the securities determined to have other-than-temporary-impairment were as follows at September 30, 2011 and September 30, 2010.

		September 30, 2011				September 30, 2010
Loss severity			52.86	%			49.17	%
Expected cumulative loss percentage			24.35	%			23.62	%
Cumulative loss percentage to date			5.79	%			4.20	%
Weighted average FICO			711				711
Weighted average LTV			67.7	%			68.4	%

Based upon the analysis performed above, the Company recognized other-than-temporary impairment losses of $0 and $0.3 million in earnings during the three-month and nine-month period ended September 30, 2011, respectively. As of September 30, 2010, the Company recognized other-than-temporary impairment losses of $0.8 million and $3.9 million during the three-month and nine-month periods, respectively. Excluding the securities above, management has concluded that the unrealized losses on the remaining investment securities (which totaled 140 individual securities) are temporary in nature since (1) they are not related to the underlying credit quality of the issuers, (2) the principal and interest on these securities are from investment grade issuers, (3) the Company does not intend to sell these investments, and (4) it is more likely than not that the Company will not be required to sell the investments before recovery of the amortized cost basis, which may be maturity.

The Company is evaluating its investment strategies in light of changes in the regulatory environment that could have an impact on capital and liquidity. Based on this evaluation, it is reasonably possible the Company may elect to pursue other strategies.

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

(3) INVESTMENT SECURITIES (continued)

The Company evaluates the fair value of investment securities that are sold to determine realized gains or losses on the transaction. Proceeds from sales of investment securities and the realized gross gains and losses from those sales are as follows:

		Three-Month Period								Nine-Month Period
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
		(in thousands)
Proceeds from the sales of investment securities		$	1,238,856			$	3,078,931			$	4,946,458			$	5,075,900
Gross realized gains		$	41,958			$	131,928			$	124,345			$	205,239
Gross realized losses			(15	)			(3	)			(153	)			(960	)
Net realized gains		$	41,943			$	131,925			$	124,192			$	204,279

(4) LOANS

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

		September 30, 2011								December 31, 2010
		Amount				Percent				Amount				Percent
		(dollars in thousands)
Commercial loans held for investment:
Commercial real estate loans		$	10,560,501				16.1	%		$	11,311,167				17.4	%
Commercial and industrial loans			10,540,775				16.1				9,931,143				15.3
Multi-family loans			7,010,929				10.7				6,746,558				10.4
Other			1,133,820				1.7				1,170,044				1.8
Total commercial loans held for investment			29,246,025				44.6				29,158,912				44.9
Consumer loans secured by real estate:
Residential mortgages			11,292,374				17.2				11,029,650				17.0
Home equity loans and lines of credit			6,902,605				10.5				7,005,539				10.7
Total consumer loans secured by real estate			18,194,979				27.7				18,035,189				27.7
Consumer loans not secured by real estate
Auto loans			15,335,070				23.4				16,714,124				25.7
Other			2,850,545				4.3				1,109,659				1.7
Total consumer loans			36,380,594				55.4				35,858,972				55.1
Total loans held for investment (1)		$	65,626,619				100.0	%		$	65,017,884				100.0	%
Total loans held for investment:
Fixed rate		$	41,079,106				62.6	%		$	41,405,419				63.7	%
Variable rate			24,547,513				37.4				23,612,465				36.3
Total loans held for investment (1)		$	65,626,619				100.0	%		$	65,017,884				100.0	%