UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

OR

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

For the transition period from to .

Commission File Number: 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)

Virginia (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 þ. No o.*

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Class	Outstanding at July 31, 2012
Common Stock (no par value)	520,307,043 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, 2011) 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:

• 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 ability of certain European member countries to continue to service their debt and the risk that a weakened European economy could negatively affect U.S.-based financial institutions, counterparties with which SHUSA does business and the stability of the global financial markets;

• 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 SHUSA's investment portfolio;

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

• changing market conditions may force management 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 applications and interpretations 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 industry. The full impact of this legislation to SHUSA and the industry will be unknown until the rulemaking processes mandated by the legislation are complete, although the impact will involve higher compliance costs and certain elements, which have and will negatively affect SHUSA's revenue and earnings;

• additional legislation and regulations or taxes, levies or other charges 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 need 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 the Comptroller of the Currency 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;

• 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.

1

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2012 and December 31, 2011	3
Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended June 30, 2012 and 2011	4
Consolidated Statement of Stockholder’s Equity for the six-month periods ended June 30, 2012 and 2011	5
Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2012 and 2011	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	66
Item 3. Quantitative and Qualitative Disclosures About Market Risk	98
Item 4. Controls and Procedures	99
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	100
Item 1A. Risk Factors	100
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	100
Item 6. Exhibits	101
SIGNATURES	102
EXHIBITS INDEX	103
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

2

PART 1- FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited at June 30, 2012, audited at December 31, 2011)

	June 30, 2012			December 31, 2011
	(in thousands)
ASSETS
Cash and amounts due from depository institutions	$	3,156,423		$	2,623,963
Investment securities:
Available-for-sale at fair value	15,368,212			15,578,576
Other investments	991,737			555,370
Loans held for investment	52,493,025			51,307,380
Allowance for loan losses	(1,055,501		)	(1,083,492		)
Net loans held for investment	51,437,524			50,223,888
Loans held for sale at fair value (1)	429,443			352,471
Premises and equipment (3)	694,437			669,143
Accrued interest receivable	212,696			209,010
Equity method investments	2,906,242			2,884,008
Goodwill	3,431,481			3,431,481
Core deposit intangibles and other intangibles, net	79,098			99,171
Bank owned life insurance	1,581,066			1,560,675
Restricted cash	400,020			36,660
Other assets (2)	2,255,237			2,340,783
TOTAL ASSETS	$	82,943,616		$	80,565,199
LIABILITIES
Total deposits and other customer accounts	48,718,415			47,797,515
Borrowings and other debt obligations	19,228,747			18,278,433
Advance payments by borrowers for taxes and insurance	167,536			150,397
Other liabilities	1,797,363			1,742,691
TOTAL LIABILITIES	69,912,061			67,969,036
STOCKHOLDER’S EQUITY
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at June 30, 2012 and at December 31, 2011)	195,445			195,445
Common stock (no par value; 800,000,000 shares authorized; 520,307,043 shares issued at June 30, 2012 and at December 31, 2011)	12,211,941			12,213,484
Accumulated other comprehensive loss	(15,197		)	(46,718		)
Retained earnings	639,366			233,952
TOTAL STOCKHOLDER’S EQUITY	13,031,555			12,596,163
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	82,943,616		$	80,565,199

⁽¹⁾ Amounts represent items for which the Company has elected the fair value option.

⁽²⁾ Includes residential mortgage servicing rights of $95.5 million for which the Company has elected the fair value option.

⁽³⁾ Net of accumulated depreciation of $522.0 million and $478.5 million at June 30, 2012 and December 31, 2011, respectively.

See accompanying notes to unaudited consolidated financial statements.

3

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
	2012			2011			2012		2011
	(in thousands)
INTEREST INCOME:
Interest on loans	$	541,273		$	1,198,461		$	1,088,518	$	2,401,871
Interest-earning deposits	1,411			2,256			2,577		3,396
Investment securities:
Available-for-sale	93,859			99,628			189,907		214,624
Other investments	5,693			22			9,989		99
TOTAL INTEREST INCOME	642,236			1,300,367			1,290,991		2,619,990
INTEREST EXPENSE:
Deposits and customer accounts	58,038			64,489			116,493		122,771
Borrowings and other debt obligations	160,579			286,151			319,981		565,065
TOTAL INTEREST EXPENSE	218,617			350,640			436,474		687,836
NET INTEREST INCOME	423,619			949,727			854,517		1,932,154
Provision for credit losses	107,700			273,144			210,800		580,916
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	315,919			676,583			643,717		1,351,238
NON-INTEREST INCOME:
Consumer fees	61,373			164,936			122,925		337,813
Commercial fees	43,341			41,696			89,729		86,318
Mortgage banking income, net	11,232			2,635			37,048		12,229
Income/(expense) from equity method investments	106,566			(3,284		)	263,898		(6,068		)
Bank owned life insurance	16,503			13,444			30,942		27,317
Miscellaneous income	12,554			7,337			24,317		16,687
TOTAL FEES AND OTHER INCOME	251,569			226,764			568,859		474,296
Total other-than-temporary impairment (“OTTI”) losses	—			(30,549		)	—		(34,266		)
Portion of OTTI recognized in other comprehensive income before taxes	—			30,224			—		33,941
OTTI recognized in earnings	—			(325		)	—		(325		)
Net gain on sale of investment securities	60,988			20,387			76,532		82,249
Net gain on investment securities recognized in earnings	60,988			20,062			76,532		81,924
TOTAL NON-INTEREST INCOME	312,557			246,826			645,391		556,220
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits	161,930			197,217			323,978		395,365
Occupancy and equipment expenses	82,813			81,898			160,157		165,436
Technology expense	28,791			31,240			54,127		61,744
Outside services	26,202			32,094			52,262		68,381
Marketing expense	7,566			8,016			14,626		17,313
Loan expense	20,972			60,560			44,662		117,769
Other administrative expenses	49,974			41,613			84,126		79,430
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES	378,248			452,638			733,938		905,438
OTHER EXPENSES:
Amortization of intangibles	9,423			16,103			20,073		29,903
Deposit insurance premiums	22,463			24,138			43,964		47,728
Loss on debt extinguishment	1,306			6,060			6,639		6,142
TOTAL OTHER EXPENSES	33,192			46,301			70,676		83,773
INCOME BEFORE INCOME TAXES	217,036			424,470			484,494		918,247
Income tax provision	33,309			145,419			71,780		322,133
NET INCOME INCLUDING NONCONTROLLING INTEREST	183,727			279,051			412,714		596,114
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	—			18,488			—		39,047
NET INCOME ATTRIBUTABLE TO SHUSA	183,727			260,563			412,714		557,067
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	7,012			(42,805		)	11,217		(19,773		)
Net unrealized gains/(losses) recognized on investment securities	(9,502		)	69,323			19,176		50,479
Amortization of defined benefit plans	564			315			1,128		711
TOTAL OTHER COMPREHENSIVE INCOME	(1,926		)	26,833			31,521		31,417
COMPREHENSIVE INCOME	181,801			305,884			444,235		627,531
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	—			18,488			—		39,047
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA	$	181,801		$	287,396		$	444,235	$	588,484

See accompanying notes to unaudited consolidated financial statements.

4

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2012 AND 2011

(Unaudited)

(in thousands)

	Common Shares Outstanding	Preferred Stock		Common Stock			Warrants		Accumulated Other Comprehensive Loss			Retained Earnings (Deficit)			Noncontrolling Interest			Total Stock- holder’s 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	—	—		—			—		31,417			557,067			39,047			627,531
Stock issued in connection with employee benefit and incentive compensation plans	—	—		(467		)	—		—			—			—			(467		)
Dividend to noncontrolling interest	—	—		—			—		—			—			(39,552		)	(39,552		)
Dividends paid on preferred stock	—	—		—			—		—			(7,300		)	—			(7,300		)
Balance, June 30, 2011	517,107	$	195,445	$	11,116,861		$	285,435	$	(202,773	)	$	420,783		$	25,131		$	11,840,882

	Common Shares Outstanding	Preferred Stock		Common Stock			Accumulated Other Comprehensive Loss			Retained Earnings (Deficit)			Total Stockholder’s Equity
Balance, December 31, 2011	520,307	$	195,445	$	12,213,484		$	(46,718	)	$	233,952		$	12,596,163
Comprehensive income	—	—		—			31,521			412,714			444,235
Stock issued in connection with employee benefit and incentive compensation plans	—	—		(1,543		)	—			—			(1,543		)
Dividends paid on preferred stock	—	—		—			—			(7,300		)	(7,300		)
Balance, June 30, 2012	520,307	$	195,445	$	12,211,941		$	(15,197	)	$	639,366		$	13,031,555

See accompanying notes to unaudited consolidated financial statements.

5

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six-Month Period Ended June 30,
	2012			2011
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interest	$	412,714		$	596,114
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	210,800			580,916
Deferred taxes	57,953			74,273
Depreciation and amortization	69,488			213,518
Net amortization/accretion of investment securities and loan premiums and discounts	57,365			(83,438		)
Net gain on sale of loans	(23,609		)	(6,095		)
Net gain on sale of investment securities	(76,532		)	(81,924		)
Loss on debt extinguishments	6,639			6,142
Net loss on real estate owned and premises and equipment	340			5,842
Stock-based compensation	(1,543		)	1,647
Remittance to Santander for stock-based compensation	—			(2,206		)
Equity earnings from equity method investments	(263,898		)	6,068
Dividends from equity method investments	214,389			—
Origination of loans held for sale, net of repayments	(1,604,963		)	(475,899		)
Proceeds from sales of loans held for sale	1,569,395			524,890
Net change in:
Accrued interest receivable	(3,686		)	18,150
Other assets and bank owned life insurance	(5,330		)	(178,861		)
Other liabilities	96,321			185,306
Other	(3,195		)	(2,953		)
Net cash provided by operating activities	712,648			1,381,490
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale investment securities	$	2,914,865		$	3,707,603
Proceeds from prepayments and maturities of available-for-sale investment securities	1,859,226			2,050,601
Purchases of available-for-sale investment securities	(4,053,561		)	(4,992,567		)
Net change in other investments	(436,367		)	60,591
Net change in restricted cash	(363,360		)	118,481
Proceeds from sales of loans held for investment	149,464			—
Purchase of loans held for investment	(1,216,825		)	(2,136,528		)
Net change in loans other than purchases and sales	(875,558		)	(54,557		)
Proceeds from sales of real estate owned and premises and equipment	38,476			36,118
Purchases of premises and equipment	(72,147		)	(84,887		)
Net cash used in investing activities	(2,055,787		)	(1,295,145		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	$	920,900		$	4,582,782
Net change in wholesale borrowings	2,384,780			(1,045,442		)
Net proceeds from senior notes, subordinated notes and credit facility	314,905			10,300,117
Repayments of borrowings and other debt obligations	(1,754,825		)	(11,441,896		)
Net change in advance payments by borrowers for taxes and insurance	17,139			14,854
Cash dividends paid to preferred stockholders	(7,300		)	(7,300		)
Cash dividends paid to noncontrolling interest	—			(65,328		)
Net cash provided by financing activities	1,875,599			2,337,787
NET CHANGE IN CASH AND CASH EQUIVALENTS	532,460			2,424,132
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	2,623,963			1,705,895
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,156,423		$	4,130,027
SUPPLEMENTAL DISCLOSURE
Net income taxes (received) / paid	$	(21,976	)	$	698,962
Interest paid	$	430,577		$	679,843
NON-CASH TRANSACTIONS
Foreclosed real estate	$	21,067		$	76,215
Other repossessed assets	$	—		$	810,425
Receipt of available for sale mortgage backed securities in exchange for mortgage loans held for sale	$	459,453		$	588,755
Dividends declared	$	—		$	8,224

See accompanying notes to unaudited consolidated financial statements

6

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Introduction

Santander Holdings USA, Inc. (“SHUSA” or the “Company”) is a bank holding company headquartered in Boston, Massachusetts. SHUSA and its subsidiaries offer its customers a broad array of financial services, including retail, business, and corporate banking; cash management; capital markets; private wealth management; and insurance.

Basis of Presentation

These consolidated financial statements include the accounts of the Company and its subsidiaries including its principal subsidiary, Sovereign Bank N.A. (the “Bank”) and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All significant intercompany balances and transactions have been eliminated in consolidation.

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 comprehensive income, 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.

Accounting Policies

Management identified accounting for the consolidation, allowance for loan losses and reserve for unfunded lending commitments, goodwill, derivatives and hedge activities and income taxes 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 consolidated financial statements should be read in conjunction with the Company's latest annual report on Form 10-K.

As of January 1, 2012, the Company elected to account for its existing portfolio of residential mortgage loan servicing rights (RMSRs) at fair value. See further discussion in Note 14. There have been no other significant changes to the Company's accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011, except for the changes discussed in Note 2.

Reclassifications

In the first quarter of 2012, the Company reclassified amounts related to equity investments of $2.8 million from "Other Expenses" to "Fees and Other Income" in the March 31, 2011 Consolidated Statement of Comprehensive Income. This reclassification had no effect on any other consolidated financial statement.

Use of Estimates

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.

The SCUSA Transaction

Santander Consumer USA, Inc. (SCUSA), a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers, was a consolidated subsidiary prior to December 31, 2011.

7

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)

On December 31, 2011, SCUSA increased its share capital through the issuance of shares to third party investors and certain members of its management for approximately $1.16 billion.

Also on December 31, 2011, SCUSA's investors entered into a shareholder agreement providing each of its investors with certain board representation, governance, registration and other rights with respect to their ownership interests in SCUSA thereby requiring each of its investors to jointly manage SCUSA and share control over it.

As a result, the Company's ownership interest was reduced to approximately 65% and its power to direct the activities that most significantly impact SCUSA's economic performance was reduced so that the Company no longer has a controlling interest in SCUSA.  Accordingly, SCUSA was deconsolidated on December 31, 2011, and is accounted for as an equity method investment.

Subsequent Events

The Company evaluated events from June 30, 2012, the date of the consolidated financial statements, through the issuance of these consolidated financial statements and have determined that there have been no material subsequent events.

8

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2) RECENT ACCOUNTING DEVELOPMENTS

In April 2011, the FASB issued ASU 2011-03, an update to ASC 860, “Transfers and Servicing” . 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 were effective for the Company beginning January 1, 2012. The implementation of this guidance did not 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 were effective beginning January 1, 2012 for the Company, and were applied prospectively. The implementation of this guidance did not 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 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity and now requires the presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. With either approach, an entity would have been required to present reclassification adjustments for items reclassified from other comprehensive income to net income in the statement(s). In December 2011, the FASB issued ASU 2011-12, which deferred certain aspects of ASC 2011-05 related to the presentation of reclassification adjustments out of accumulated other comprehensive income. These deferred aspects did not include the requirement to report comprehensive income in either a single statement or in two consecutive statements reporting net income and other comprehensive income.The amendments to ASC 220 were effective beginning January 1, 2012 for the Company, and were applied retrospectively. The deferral period began for the Company on January 1, 2012 and will remain in effect indefinitely. The implementation of ASU 2011-05 did not have a significant impact on the Company’s financial position or results of operations.

In September 2011, the FASB issued ASU 2011-08, an update to ASC 350, “Intangibles — Goodwill and Other”. 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 were effective beginning January 1, 2012 for the Company. The implementation of this guidance did not have a significant impact on the Company’s financial position or results of operations.

In December 2011, the FASB issued ASU 2011-11, an update to ASC 210, "Balance Sheet", which requires entities to disclose both gross information and net information about both financial instruments and transactions eligible for offset in the statement of financial position and transactions subject to an agreement similar to a master netting arrangement. The amendment is designed to enhance disclosures about the financial instruments and derivatives, which will allow the users of an entity's financial statements to evaluate the effect of netting arrangements on an entity's financial position. The scope includes derivatives, repurchase agreements and security borrowings. The amendments to ASC 210 are effective for interim and annual periods beginning January 1, 2013 for the Company, and should be applied retrospectively to the beginning of the first annual period presented. The Company does not expect the implementation of this guidance to have a significant impact on its financial position or results of operations.

In July 2012, the FASB issued ASU 2012-02, an update to ASC 350, "Intangibles-Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment". This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired as the basis for determining whether it is necessary to perform the two-step impairment test. The amendments to the ASC are effective January 1, 2013 and are to be applied prospectively. The implementation of this guidance is not expected to have any impact on the Company’s financial position or results of operations.

9

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:

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
Investment securities:
U.S. Treasury and government agency securities	$	8,994	$	—	$	—		$	8,994
Debentures of FHLB, FNMA, and FHLMC	19,577		423		—			20,000
Corporate debt securities	2,318,092		38,728		(22,363		)	2,334,457
Asset-backed securities	1,788,818		5,799		(14,166		)	1,780,451
Equity securities	5,020		13		—			5,033
State and municipal securities	1,631,763		55,947		(3,480		)	1,684,230
Mortgage-backed securities:
U.S. government agencies	5,649,066		61,027		(7,515		)	5,702,578
FHLMC and FNMA debt securities	3,763,789		68,492		(63		)	3,832,218
Non-agency securities	250		1		—			251
Total investment securities available-for-sale	$	15,185,369	$	230,430	$	(47,587	)	$	15,368,212

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
Investment securities:
U.S. Treasury and government agency securities	$	44,070	$	20	$	—		$	44,090
Debentures of FHLB, FNMA, and FHLMC	19,482		518		—			20,000
Corporate debt securities	2,070,255		16,249		(36,984		)	2,049,520
Asset-backed securities	2,639,397		8,191		(7,298		)	2,640,290
State and municipal securities	1,735,465		53,013		(3,700		)	1,784,778
Mortgage-backed securities:
U.S. government agencies	3,904,933		50,049		(4,022		)	3,950,960
FHLMC and FNMA debt securities	5,012,584		77,822		(1,760		)	5,088,646
Non-agency securities	290		2		—			292
Total investment securities available-for-sale	$	15,426,476	$	205,864	$	(53,764	)	$	15,578,576

As of June 30, 2012 and December 31, 2011, the Company had investment securities available-for-sale with an estimated fair value of $6.7 billion and $3.6 billion, respectively, pledged as collateral which was made up of the following: $2.1 billion and $1.9 billion, respectively, were pledged to secure Public Fund deposits, $4.2 billion and $1.3 billion, respectively, were pledged at various brokers to secure repurchase agreements as well as support hedging relationships and $359.7 million and $431.4 million, respectively, were pledged to secure the Bank's customer overnight sweep product.

In May 2012, the Company sold $918.7 million of FHLMC and FNMA mortgage-backed debt securities for a gain of $40.0 million. The Company used the specific identification method to determine the cost of the securities sold and the gain recognized.

The state and municipal bond portfolio consists of general obligation bonds of states, cities, counties and school districts. The portfolio has a weighted average underlying credit risk rating of AA-. The largest geographic concentrations of the state and local municipal bonds are in California, Texas and Florida which represented 20%, 17%, 16%, respectively, of the total portfolio. No other state had more than 10% of the total portfolio.

10

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) INVESTMENT SECURITIES (continued)

Contractual maturities of the Company’s investment securities available-for-sale at June 30, 2012 are as follows:

	Amortized Cost		Fair Value
	(in thousands)
Due within one year	$	600,763	$	600,878
Due after 1 within 5 years	2,106,080		2,133,821
Due after 5 within 10 years	751,587		733,929
Due after 10 years/ no maturity	11,726,939		11,899,584
Total	$	15,185,369	$	15,368,212

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

The following tables disclose the aggregate amount of unrealized losses as of June 30, 2012 and December 31, 2011 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 June 30, 2012
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Corporate debt securities	$	378,098	$	(13,769	)	$	178,530	$	(8,594	)	$	556,628	$	(22,363	)
Asset-backed securities	270,633		(1,169		)	220,846		(12,997		)	491,479		(14,166		)
State and municipal securities	207,098		(3,480		)	—		—			207,098		(3,480		)
Mortgage-backed securities:
U.S. government agencies	1,417,212		(7,515		)	—		—			1,417,212		(7,515		)
FHLMC and FNMA debt securities	360		(7		)	4,339		(56		)	4,699		(63		)
Total investment securities available-for-sale	$	2,273,401	$	(25,940	)	$	403,715	$	(21,647	)	$	2,677,116	$	(47,587	)

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) INVESTMENT SECURITIES (continued)

	At December 31, 2011
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Corporate debt securities	$	1,129,751	$	(23,499	)	$	108,931	$	(13,485	)	$	1,238,682	$	(36,984	)
Asset-backed securities	602,183		(2,754		)	219,016		(4,544		)	821,199		(7,298		)
State and municipal securities	26,910		(204		)	191,597		(3,496		)	218,507		(3,700		)
Mortgage-backed securities:
U.S. government agencies	856,687		(4,022		)	—		—			856,687		(4,022		)
FHLMC and FNMA debt securities	590,740		(1,667		)	6,847		(93		)	597,587		(1,760		)
Non-agency securities	—		—			—		—			—		—
Total investment securities available-for-sale	$	3,206,271	$	(32,146	)	$	526,391	$	(21,618	)	$	3,732,662	$	(53,764	)

The Company continuously evaluates 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 relative to its remaining investment securities portfolio.

Management evaluates all securities for other-than-temporary impairment on at least a quarterly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and (4) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average FICO and weighted average LTV, or rating/scoring, as applicable.

Management has concluded that the unrealized losses on its investment securities (which totaled 89 individual securities at June 30, 2012) 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. There were no investments with unrealized losses that were deemed to be other than temporary in nature.

In November 2011, the Company sold the majority of its non-agency mortgage backed securities portfolio. Prior to the sale, the Company held investments in these non-agency mortgage backed securities for which the Company did not expect to collect the entire scheduled principal.

12

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 those non-agency mortgage backed securities securities recognized in earnings for the six-month period ended June 30, 2011.

	Six-Month Period Ended June 30, 2011
Cumulative credit loss recognized on non-agency securities at the beginning of the period	$	210,919
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	(6,342		)
Additions for amount related to credit loss for which an other-than-temporary impairment was not previously recognized	—
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	126,829
Reductions for increases in cash flows expected to be collected and recognized over the remaining life of securities	(31,685		)
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	$	95,144

Proceeds from sales of investment securities and the realized gross gains and losses from those sales are as follows:

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
	2012		2011		2012			2011
	(in thousands)
Proceeds from the sales of investment securities	$	1,419,035	$	1,789,912	$	2,914,865		$	3,707,603
Gross realized gains	$	60,988	$	20,387	77,461			82,379
Gross realized losses	—		—		(929		)	(130		)
Net realized gains	$	60,988	$	20,387	$	76,532		$	82,249

13

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

	June 30, 2012				December 31, 2011
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial loans held for investment:
Commercial real estate loans	$	10,332,661	19.7	%	$	10,553,174	20.6	%
Commercial and industrial loans	12,738,174		24.3	%	11,084,292		21.6	%
Multi-family loans	7,151,608		13.6	%	7,100,620		13.8	%
Other	1,530,899		2.9	%	1,151,107		2.2	%
Total commercial loans held for investment	31,753,342		60.5	%	29,889,193		58.2	%
Consumer loans secured by real estate:
Residential mortgages	11,170,363		21.3	%	11,285,550		22.0	%
Home equity loans and lines of credit	6,797,463		12.9	%	6,868,939		13.4	%
Total consumer loans secured by real estate	17,967,826		34.2	%	18,154,489		35.4	%
Consumer loans not secured by real estate
Auto loans	506,743		1.0	%	958,345		1.9	%
Other	2,265,114		4.3	%	2,305,353		4.5	%
Total consumer loans	20,739,683		39.5	%	21,418,187		41.8	%
Total loans held for investment (1)	$	52,493,025	100.0	%	$	51,307,380	100.0	%
Total loans held for investment:
Fixed rate	$	25,262,444	48.1	%	$	26,280,371	51.2	%
Variable rate	27,230,581		51.9	%	25,027,009		48.8	%
Total loans held for investment (1)	$	52,493,025	100.0	%	$	51,307,380	100.0	%

(1) Total loans held for investment includes deferred loan origination costs, net of deferred loan fees and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net decrease in loan balances of $94.0 million and $106.0 million as of June 30, 2012 and December 31, 2011, respectively.

Loans pledged as collateral for borrowings totaled $38.4 billion at June 30, 2012 and $32.5 billion at December 31, 2011.

At June 30, 2012 and December 31, 2011, there was $137.5 million and $136.6 million of loan accrued interest.

The entire loans held for sale portfolio at June 30, 2012 and December 31, 2011 consists of fixed rate residential mortgages. The balance at June 30, 2012 was $429.4 million compared to $352.5 million at December 31, 2011.

On March 9, 2012, Santander transferred $374.0 million of commercial loans to the Company. In accordance with ASC 805, the loans and corresponding allowance were transferred at their carrying value.

On March 30, 2012, the Company purchased $273.9 million of multi-family loans.

14

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

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

	Three-Month Period Ended June 30,					Six-Month Period Ended June 30,
	2012		2011			2012			2011
	(in thousands)
Allowance for loan losses, beginning of period	$	1,082,014	$	2,207,347		$	1,083,492		$	2,197,450
Allowance recorded as part of loans transferred from Santander	—		—			3,341			—
Charge-offs:
Commercial	88,893		143,340			184,108			255,679
Consumer secured by real estate	37,705		38,998			74,074			68,065
Consumer not secured by real estate(2)	24,051		163,776			49,420			352,755
Total charge-offs	150,649		346,114			307,602			676,499
Recoveries:
Commercial	6,400		12,811			20,558			19,711
Consumer secured by real estate	1,215		1,268			4,355			2,411
Consumer not secured by real estate(2)	8,821		67,514			19,072			143,206
Total recoveries	16,436		81,593			43,985			165,328
Charge-offs, net of recoveries	134,213		264,521			263,617			511,171
Provision for loan losses (1)(2)	107,700		284,147			232,285			540,694
Allowance for loan losses, end of period	$	1,055,501	$	2,226,973		$	1,055,501		$	2,226,973
Reserve for unfunded lending commitments, beginning of period	$	235,000	$	351,846		$	256,485		$	300,621
(Release of)/ provision for unfunded lending commitments (1)	—		(11,003		)	(21,485		)	40,222
Reserve for unfunded lending commitments, end of period	$	235,000	$	340,843		$	235,000		$	340,843
Total allowance for credit losses, end of period	$	1,290,501	$	2,567,816		$	1,290,501		$	2,567,816

(1) The Company defines the provision for credit losses on the Consolidated Statement of Comprehensive Income as the sum of the total provision for loan losses and provision for unfunded lending commitments.

(2) On December 31, 2011, the Company deconsolidated SCUSA as a result of certain agreements with investors entered into during the fourth quarter 2011.   See further discussion on the SCUSA Transaction in Note 1. The activity in the three-month and six-month periods of 2012 does not include SCUSA activity.

15

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

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

	June 30, 2012		December 31, 2011
	(in thousands)
Non-accrual loans:
Commercial:
Commercial real estate	$	335,959	$	459,692
Commercial and industrial	174,215		213,617
Multi-family	52,247		126,738
Total commercial loans	562,421		800,047
Consumer:
Residential mortgages	439,624		438,461
Consumer loans secured by real estate	107,818		108,075
Consumer loans not secured by real estate	14,370		12,883
Total consumer loans	561,812		559,419
Total non-accrual loans	1,124,233		1,359,466
Other real estate owned	87,550		103,026
Other repossessed assets	3,779		5,671
Total other real estate owned and other repossessed assets	91,329		108,697
Total non-performing assets	$	1,215,562	$	1,468,163

Impaired loans are generally defined as all Troubled Debt Restructurings (“TDRs”) plus commercial non-accrual loans in excess of $1.0 million.

Impaired loans are summarized as follows:

	June 30, 2012		December 31, 2011
	(in thousands)
Impaired loans with a related allowance	$	1,012,140	$	1,118,591
Impaired loans without a related allowance	223,382		269,677
Total impaired loans	$	1,235,522	$	1,388,268
Allowance for loan losses reserved for impaired loans	$	293,182	$	252,556

Loans Acquired With Deteriorated Credit Quality

Prior to December 31, 2011, the Company, through SCUSA, acquired certain auto loans at a substantial discount from par from manufacturer-franchised dealers or other companies engaged in non-prime lending activities. Part of this discount was attributable to the expectation that not all contractual cash flows would be received from the borrowers. These loans were accounted for under the Receivable topic of the FASB Accounting Standards Codification (Section 310-30) “Loans and Debt Securities Acquired with Deteriorated Credit Quality”. The excess of cash flows expected over the estimated fair value at acquisition is referred to as the accretable yield and was recognized in interest income over the remaining life of the loans using the constant effective yield method. The difference between contractually required payments and the undiscounted cash flows expected to be collected at acquisition is referred to as the nonaccretable difference.

16

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

A rollforward of Company's consolidation of SCUSA's nonaccretable difference and accretable yield on loans accounted for under Section 310-30 is shown below for the six-month period ended June 30, 2011:

	Contractual Receivable Amount			Nonaccretable Yield			Accretable Premium/(Yield)			Carrying Amount
	(in thousands)
Balance, beginning of period December 31, 2010	$	9,147,004		$	(966,463	)	$	210,459		$	8,391,000
Customer repayments	(1,992,112		)	—			—			(1,992,112		)
Charge-offs	(155,030		)	155,030			—			—
Accretion of loan discount	—			—			(85,920		)	(85,920		)
Transfers between nonaccretable and accretable yield	—			47,616			(47,616		)	—
Settlement adjustments	10,288			(2,279		)	(262		)	7,747
Balance, end of period June 30, 2011	$	7,010,150		$	(766,096	)	$	76,661		$	6,320,715

On December 31, 2011, the Company deconsolidated SCUSA as a result of certain agreements with investors entered into during the fourth quarter 2011.   See further discussion on the SCUSA Transaction in Note 1. Any remaining balances related to the preceding purchased-impaired loans were deconsolidated from SHUSA on December 31, 2011. As of December 31, 2011 and June 30, 2012, the Company does not have any significant loan balances or loan portfolios that are accounted for under ASC Section 310-30.

Portfolio segments and classes

U.S. GAAP requires that entities disclose information about the credit quality of its financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes” based on management’s systematic methodology for determining its allowance for credit losses. As such, compared to the financial statement categorization of loans, the Company utilizes an alternate categorization for purposes of modeling and calculating the allowance for credit losses and for tracking the credit quality, delinquency and impairment status of the underlying commercial and consumer loan populations.

In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer segments. The commercial segmentation reflects line of business distinctions. “Corporate banking” includes the majority of commercial and industrial loans as well as related owner-occupied real estate. “Middle market commercial real estate” represents the portfolio of specialized lending for investment real estate. “Continuing care retirement communities” is the portfolio of financing for continuing care retirement communities. “Santander real estate capital” is the real estate portfolio of the specialized lending group. “Remaining commercial” represents principally the commercial equipment and vehicle funding business.

The consumer segmentation reflects product structure with minor variations from the financial statement categories. “Home mortgages” is generally residential mortgages, “Self-originated home equity” excludes purchased home equity portfolios, and “Indirect auto” excludes self-originated direct auto loans. “Indirect purchased” represents an acquired portfolio of marine and recreational vehicle contracts. Direct auto loans and purchased home equity loans make up the majority of balances in “Remaining consumer”. “Credit cards” includes all unsecured consumer credit cards.

Loans that have been classified as non-accrual generally remain classified as non-accrual until the loan is able to sustain a period of repayment which is typically defined as six months for a monthly amortizing loan at which time, accrual of interest resumes.

17

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

The activity in the allowance for loan losses by portfolio segment for the three-month and six-month periods ended June 30, 2012 and 2011 was as follows (in thousands):

	Three-Month Period Ended June 30, 2012
	Commercial			Consumer			Unallocated		Total
Allowance for loan losses, beginning of period	$	722,516		$	352,786		$	6,712	$	1,082,014
Allowance recorded as part of loans transferred from Santander	—			—			—		—
Provision for loan losses	16,860			56,477			34,363		107,700
Charge-offs	(88,893		)	(61,756		)	—		(150,649		)
Recoveries	6,400			10,036			—		16,436
Charge-offs, net of recoveries	(82,493		)	(51,720		)	—		(134,213		)
Allowance for loan losses, end of period	$	656,883		$	357,543		$	41,075	$	1,055,501
	Six-Month Period Ended June 30, 2012
	Commercial			Consumer			Unallocated		Total
Allowance for loan losses, beginning of period	$	766,865		$	292,816		$	23,811	$	1,083,492
Allowance recorded as part of loans transferred from Santander	3,341			—			—		3,341
Provision for loan losses	50,227			164,794			17,264		232,285
Charge-offs	(184,108		)	(123,494		)	—		(307,602		)
Recoveries	20,558			23,427			—		43,985
Charge-offs, net of recoveries	(163,550		)	(100,067		)	—		(263,617		)
Allowance for loan losses, end of period	$	656,883		$	357,543		$	41,075	$	1,055,501
Ending balance, individually evaluated for impairment	$	147,746		$	145,436		$	—	$	293,182
Ending balance, collectively evaluated for impairment	509,137			212,107			41,075		762,319
Financing receivables:
Ending balance	$	31,753,342		$	21,169,126		$	—	$	52,922,468
Ending balance, evaluated at fair value	—			429,443			—		429,443
Ending balance, individually evaluated for impairment	622,598			612,923			—		1,235,521
Ending balance, collectively evaluated for impairment	31,130,744			20,126,760			—		51,257,504

18

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

	Three-Month Period Ended June 30, 2011
	Commercial			Consumer			Unallocated		Total
Allowance for loan losses, beginning of period	$	879,989		$	1,301,907		$	25,451	$	2,207,347
Provision for loan losses	96,600			180,186			7,361		284,147
Charge-offs	(143,340		)	(202,775		)	—		(346,115		)
Recoveries	12,811			68,783			—		81,594
Charge-offs, net of recoveries	(130,529		)	(133,992		)	—		(264,521		)
Allowance for loan losses, end of period	$	846,060		$	1,348,101		$	32,812	$	2,226,973
	Six-Month Period Ended June 30, 2011
	Commercial			Consumer			Unallocated		Total
Allowance for loan losses, beginning of period	$	905,786		$	1,275,982		$	15,682	$	2,197,450
Provision for loan losses	176,242			347,322			17,130		540,694
Charge-offs	(255,679		)	(420,820		)	—		(676,499		)
Recoveries	19,711			145,617			—		165,328
Charge-offs, net of recoveries	(235,968		)	(275,203		)	—		(511,171		)
Allowance for loan losses, end of period	$	846,060		$	1,348,101		$	32,812	$	2,226,973
Ending balance, individually evaluated for impairment	273,287			167,859			—		441,146
Ending balance, collectively evaluated for impairment	572,773			1,069,142			32,812		1,674,727
Purchased impaired loans	—			111,100			—		111,100
Financing receivables:
Ending balance	$	29,248,434		$	36,911,395		$	—	$	66,159,829
Ending balance, evaluated at fair value	—			110,466			—		110,466
Ending balance, individually evaluated for impairment	1,042,005			960,435			—		2,002,440
Ending balance, collectively evaluated for impairment	28,206,429			29,581,343			—		57,787,772
Purchased impaired loans	—			6,259,151			—		6,259,151

19

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Non-accrual loans disaggregated by class of financing receivables are summarized as follows:

	June 30, 2012		December 31, 2011
	(in thousands)
Non-accrual loans:
Commercial:
Corporate banking	$	226,141	$	304,309
Middle market commercial real estate	129,520		167,446
Continuing care retirement communities	122,914		198,131
Santander real estate capital	82,266		127,537
Remaining commercial	1,580		2,624
Total commercial loans	562,421		800,047
Consumer:
Home mortgages	439,624		438,461
Self-originated home equity	64,596		64,481
Indirect auto	2,219		3,062
Indirect purchased	3,520		2,005
Remaining consumer	51,853		51,410
Total consumer loans	561,812		559,419
Total non-accrual loans	$	1,124,233	$	1,359,466

Delinquencies disaggregated by class of financing receivables are summarized as follows as of June 30, 2012:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables (1)		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Corporate banking	$	63,918	$	31,284	$	133,404	$	228,606	$	17,175,765	$	17,404,371	$	—
Middle market commercial real estate	24,073		4,770		82,040		110,883		3,605,995		3,716,878		—
Continuing care retirement communities	—		—		86,840		86,840		233,955		320,795		—
Santander real estate capital	17,595		3,229		36,305		57,129		9,289,576		9,346,705		—
Remaining commercial	2,151		419		1,100		3,670		960,923		964,593		—
Consumer:
Home mortgages	196,213		95,338		439,624		731,175		10,868,177		11,599,352		—
Self-originated home equity	33,572		12,261		64,596		110,429		6,348,381		6,458,810		—
Indirect auto	30,005		7,608		2,219		39,832		417,915		457,747		—
Indirect purchased	8,665		4,246		3,520		16,431		1,626,285		1,642,716		—
Credit cards	1,654		1,105		3,158		5,917		183,581		189,498		3,158
Remaining consumer	15,795		12,484		51,853		80,132		740,871		821,003		—
Total	$	393,641	$	172,744	$	904,659	$	1,471,044	$	51,451,424	$	52,922,468	$	3,158

20

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Delinquencies disaggregated by class of financing receivables are summarized as follows as of December 31, 2011:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables (1)		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Corporate banking	$	38,347	$	36,498	$	180,017	$	254,862	$	14,989,498	$	15,244,360	$	1,211
Middle market commercial real estate	14,862		16,508		79,160		110,530		3,743,790		3,854,320		—
Continuing care retirement communities	4,632		2,812		6,491		13,935		216,010		229,945		—
Santander real estate capital	8,383		24,214		89,885		122,482		9,175,480		9,297,962		—
Remaining commercial	2,568		13,765		132,741		149,074		1,113,532		1,262,606		—
Consumer:
Home mortgages	224,957		110,007		438,461		773,425		10,863,152		11,636,577		—
Self-originated home equity	22,026		13,272		64,482		99,780		6,404,702		6,504,482		—
Indirect auto	43,386		10,624		3,062		57,072		704,518		761,590		—
Indirect purchased	11,101		4,683		2,005		17,789		1,814,509		1,832,298		—
Credit cards	1,867		1,491		3,697		7,055		180,940		187,995		3,697
Remaining consumer	26,879		12,881		51,410		91,170		756,546		847,716		—
Total	$	399,008	$	246,755	$	1,051,411	$	1,697,174	$	49,962,677	$	51,659,851	$	4,908

(1) Financing Receivables includes loans held for sale.

21

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Impaired loans disaggregated by class of financing receivables, excluding purchased impaired loans, are summarized as follows:

June 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Corporate banking	$	63,467	$	78,677	$	—	$	53,053
Middle market commercial real estate	72,529		73,947		—		77,317
Continuing care retirement communities	45,463		45,463		—		46,180
Santander real estate capital	29,913		30,921		—		26,818
Remaining commercial	12,010		12,010		—		14,534
Consumer:
Self-originated home equity	—		—		—		19,161
Remaining consumer	—		—		—		9,468
With an allowance recorded:
Commercial:
Corporate banking	129,555		162,648		61,808		166,493
Middle market commercial real estate	96,215		129,163		19,534		114,165
Continuing care retirement communities	95,593		193,018		38,408		132,574
Santander real estate capital	77,028		89,816		27,868		97,066
Remaining commercial	825		1,410		128		1,392
Consumer:
Home mortgages	543,315		567,774		134,814		518,873
Self-originated home equity	43,311		44,043		3,494		21,656
Indirect auto
Credit cards	6,971		6,971		3,103		3,486
Remaining consumer	19,327		20,283		4,025		9,664
Total:
Commercial	$	622,598	$	817,073	$	147,746	$	729,592
Consumer	612,924		639,071		145,436		582,308
Total	$	1,235,522	$	1,456,144	$	293,182	$	1,311,900

The Company recognized interest income of $11.1 million on approximately $588.6 million of TDRs that were returned to performing status as of June 30, 2012.

22

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Corporate banking	$	42,639	$	55,673	$	—	$	88,397
Middle market commercial real estate	82,104		102,788		—		72,053
Continuing care retirement communities	46,897		63,210		—		23,940
Santander real estate capital	23,723		24,731		—		29,164
Remaining commercial	17,057		17,057		—		8,529
Consumer:
Home mortgages	—		—		—		33,879
Self-originated home equity	38,322		38,699		—		19,161
Remaining consumer	18,935		19,684		—		9,468
With an allowance recorded:
Commercial:
Corporate banking	203,430		260,620		100,551		195,363
Middle market commercial real estate	132,115		169,361		27,473		194,877
Continuing care retirement communities	169,554		270,470		60,632		136,819
Santander real estate capital	117,103		125,114		28,494		106,843
Remaining commercial	1,958		2,553		715		13,978
Consumer:
Home mortgages	494,431		507,898		34,691		519,754
Indirect auto	—		—		—		101,222
Total:
Commercial	$	836,580	$	1,091,577	$	217,865	$	869,963
Consumer	551,688		566,281		34,691		683,484
Total	$	1,388,268	$	1,657,858	$	252,556	$	1,553,447

The Company recognized interest income of $17.6 million on approximately $527.6 million of TDRs that were returned to performing status as of December 31, 2011.

Commercial credit quality disaggregated by class of financing receivables is summarized according to standard regulatory classifications as follows:

PASS. Asset is well protected by the current net worth and paying capacity of the obligor or guarantors, if any, or by the fair value, less costs to acquire and sell any underlying collateral in a timely manner.

SPECIAL MENTION. Asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for an asset at some future date. Special Mention assets are not adversely classified.

SUBSTANDARD. Asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. A well-defined weakness or weaknesses exist that jeopardize the liquidation of the debt. The loans are characterized by distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

23

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

DOUBTFUL. Exhibits the inherent weaknesses of a substandard credit. Additional characteristics exist that make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. Possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the credit, an estimated loss cannot yet be determined.

LOSS. Credit is considered uncollectible and of such little value that it does not warrant consideration as an active asset. There may be some recovery or salvage value, but there is doubt as to whether, how much or when the recovery would occur.

The Company places consumer loans, excluding certain auto loans and credit card loans, on non-performing status at 90 days delinquent. For the majority of auto loans, the Company places them on non-performing status at 90 days delinquent. Credit cards remain performing until they are 180 days delinquent, at which point they are charged-off and all interest is removed from interest income.

Regulatory classifications by class of financing receivables are summarized as follows:

June 30, 2012	Corporate banking		Middle market commercial real estate		Continuing care retirement communities		Santander real estate capital		Remaining commercial		Total
	(in thousands)
Regulatory Rating:
Pass	$	16,184,695	$	2,667,255	$	73,985	$	8,718,223	$	921,343	$	28,565,501
Special Mention	513,383		604,091		38,198		434,842		18,820		1,609,334
Substandard	638,807		366,289		106,381		145,481		24,430		1,281,388
Doubtful	67,486		79,243		102,231		48,159		—		297,119
Total commercial loans	$	17,404,371	$	3,716,878	$	320,795	$	9,346,705	$	964,593	$	31,753,342

December 31, 2011	Corporate banking		Middle market commercial real estate		Continuing care retirement communities		Santander real estate capital		Remaining commercial		Total
	(in thousands)
Regulatory Rating:
Pass	$	13,907,745	$	2,625,160	$	186,914	$	8,750,869	$	921,325	$	26,392,013
Special Mention	531,205		639,258		29,480		284,757		38,293		1,522,993
Substandard	690,303		485,994		10,460		228,210		104,802		1,519,769
Doubtful	115,107		103,908		3,091		34,126		198,186		454,418
Total commercial loans	$	15,244,360	$	3,854,320	$	229,945	$	9,297,962	$	1,262,606	$	29,889,193

24

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Consumer credit quality disaggregated by class of financing receivables is summarized as follows:

June 30, 2012	Home mortgages		Self-originated home equity		Indirect auto		Indirect purchased		Credit cards		Remaining consumer		Total(1)
	(in thousands)
Performing	$	11,159,728	$	6,394,214	$	455,528	$	1,639,196	$	189,498	$	769,150	$	20,607,314
Non-performing	439,624		64,596		2,219		3,520		—		51,853		561,812
Total consumer loans	$	11,599,352	$	6,458,810	$	457,747	$	1,642,716	$	189,498	$	821,003	$	21,169,126

December 31, 2011	Home mortgages		Self-originated home equity		Indirect auto		Indirect purchased		Credit cards		Remaining consumer		Total(1)
	(in thousands)
Performing	$	11,198,116	$	6,440,001	$	758,528	$	1,830,293	$	187,995	$	796,306	$	21,211,239
Non-performing	438,461		64,481		3,062		2,005		—		51,410		559,419
Total consumer loans	$	11,636,577	$	6,504,482	$	761,590	$	1,832,298	$	187,995	$	847,716	$	21,770,658

(1) Financing Receivables includes loans held for sale.

Troubled Debt Restructurings

Troubled debt restructurings (“TDRs”) are loans that have been modified whereby the Company has agreed to make certain concessions to customers to both meet the needs of the customers and to maximize the ultimate recovery of a loan. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.

The following table summarizes the Company’s performing and non-performing TDRs at the dates indicated:

	June 30, 2012		December 31, 2011
	(in thousands)
Performing	$	588,619	$	527,646
Non-performing	286,469		217,255
Total	$	875,088	$	744,901

25

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the facts of the individual customer, including their complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time. Modifications for commercial loan TDRs generally, though not always, result in bifurcation of the original loan into A and B notes. The A note is restructured to allow for upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically six months for monthly payment schedules). A B note, if any, is structured as a deficiency note; the balance is charged off but the debt is usually not forgiven. As TDRs, they will be subject to analysis for specific reserves by either calculating the present value of expected future cash flows or, if collateral dependent, calculating the fair value of the collateral less its estimated cost to sell. The TDR classification will remain on the loan until it is paid in full or liquidated.

Consumer Loan TDRs

The primary modification program for the Company’s home mortgage and self-originated home equity portfolios is a proprietary program designed to keep customers in their homes, and when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income ratio (“DTI”) range. The main modification benefits of the program allow for a limit on accrued interest charged; term extensions; interest rate reductions; or deferment of principal. The Company will review each customer on a case-by-case basis to determine which benefit or combination of benefits will be offered to achieve the target DTI range.

For the Company’s other consumer portfolios (indirect auto, indirect purchased, and remaining consumer) the terms of the modifications include one or a combination of the following; a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk; an extension of the maturity date.

Consumer TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms are reasonably assured and a sustained period of repayment performance has been achieved (typically defined as six months for a monthly amortizing loan). However, any loan that has remained current for the six months immediately prior to modification will remain on accrual status after the modification is enacted. The TDR classification will remain on the loan until it is paid in full or liquidated.

TDR Impact to Allowance for Loan Losses

Allowance for loan losses are established to recognize losses inherent in funded loans intended to be held-for-investment that are probable and can be reasonable estimated. Prior to a TDR modification, the Company generally measures its allowance under a loss contingency methodology whereby consumer loans with similar risk characteristics are pooled and loss experience information are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, loan to values, and credit scores.

Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence using the effective interest rate. The amount of the required valuation allowance is equal to the difference between the loan’s impaired value and the recorded investment.

When a consumer TDR subsequently defaults, the Company generally measures impairment based on the fair value of the collateral less its estimated cost to sell.

26

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Typically, commercial loans whose terms are modified in a TDR will have previously been identified as impaired prior to modification and accounted for generally using a present value of expected future cash flows methodology unless the loan is considered collateral dependent. Loans considered collateral dependent are measured for impairment based on their fair values of collateral less its estimated cost to sell. Accordingly, upon TDR modification, the allowance methodology remains unchanged. When a commercial TDR subsequently defaults, the Company generally measures impairment based on the fair value of the collateral less its estimated cost to sell.

The following tables detail the activity of TDRs for the three-month and six-month periods ended June 30, 2012.

	Three-Month Period Ended June 30, 2012
	Number of Contracts	Pre-Modification Outstanding Recorded Investment (1)		Post-Modification Outstanding Recorded Investment (2)
Commercial:
Middle market commercial real estate	2	$	12,696	$	12,103
Continuing care retirement communities	1	20,002		9,280
Santander real estate capital	—	—		—
Remaining commercial	3	35,996		33,576
Consumer:
Home mortgages(3)	159	33,259		33,401
Self-originated home equity	32	3,220		3,310
Total	197	$	105,173	$	91,670

	Six-Month Period Ended June 30, 2012
	Number of Contracts	Pre-Modification Outstanding Recorded Investment (1)		Post-Modification Outstanding Recorded Investment (2)
Commercial:
Middle market commercial real estate	3	$	36,696	$	36,103
Continuing care retirement communities	2	33,664		21,423
Santander real estate capital	1	5,439		5,439
Remaining commercial	7	43,845		50,971
Consumer:
Home mortgages (3)	304	69,765		69,439
Self-originated home equity	84	8,265		8,355
Total	401	$	197,674	$	191,730

(1) Pre-Modification Outstanding Recorded Investment amount is the month-end balance prior to the month the modification occurred. Dollars in thousands.

(2) Post-Modification Outstanding Recorded Investment amount is the month-end balance for the month that the modification occurred. Dollars in thousands.

(3) The Post-Modification Outstanding Recorded Investment amounts for home mortgages exclude interest reserves.

27

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

The following table details TDRs that were modified for during the past twelve-month period and have subsequently defaulted during the three-month and six-month periods ended June 30, 2012.

	Three-Month Period Ended June 30, 2012
	Number of Contracts	Recorded Investment (1)
Consumer:
Home mortgages	3	$	1,497
Self-originated home equity	1	47
Total	4	$	1,544

	Six-Month Period Ended June 30, 2012
	Number of Contracts	Recorded Investment (1)
Consumer:
Home mortgages	4	$	1,520
Self-originated home equity	1	47
Total	5	$	1,567

(1) The recorded investment represents the period-end balance at June 30, 2012. Dollars in thousands.

28

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(5) VARIABLE INTEREST ENTITIES

The Company, in the normal course of business, engages in a variety of activities that involve Variable Interest Entities (VIEs), which are legal entities that lack sufficient equity to finance their activities, or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The primary beneficiary of a VIE is generally the enterprise that has both the power to direct the activities most significant to the economic performance of the VIE and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. The Company evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Company is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that requires a reconsideration. If the Company is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Company is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under the equity method of accounting or other accounting standards as appropriate.

The Company does not have any involvement with VIEs for which it is considered the primary beneficiary. The following tables provide a summary of the assets and liabilities included in the Company's unaudited Consolidated Financial Statements, as well as the components of its maximum exposure to losses, associated with its interests related to unconsolidated VIEs for which the Company holds an interest, but is not the primary beneficiary, to the VIE at June 30, 2012, and December 31, 2011:

					Maximum Exposure
	Carrying		Carrying		Investment
	Amount of		Amount of		in
June 30, 2012	Assets(1)		Liabilities(1)		Equity		Commitments		Total
	(in thousands)
Low income housing partnerships	$	73,561	$	—	$	73,561	$	—	$	73,561
New market partnerships	47,575		—		47,575		154		47,729
Total	$	121,136	$	—	$	121,136	$	154	$	121,290
					Maximum Exposure
	Carrying		Carrying		Investment
	Amount of		Amount of		in
December 31, 2011	Assets(1)		Liabilities(1)		Equity		Commitments		Total
	(in thousands)
Low income housing partnerships	$	88,600	$	—	$	88,600	$	—	$	88,600
New market partnerships	67,802		—		67,802		167		67,969
Total	$	156,402	$	—	$	156,402	$	167	$	156,569

⁽¹⁾ Amount represents the carrying value of the VIE's assets and liabilities on the Company's consolidated financial statements

which are classified within Equity Method Investments on the Consolidated Balance Sheet.

29

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(5) VARIABLE INTEREST ENTITIES (continued)

The Company makes certain equity investments in various limited partnerships which are considered VIEs that invest in and lend to affordable housing designated real estate properties which qualify for Federal tax credits under the Low Income Housing Tax Credit and New Market Tax Credit programs. The Company acts only in a limited partnership capacity in connection with these partnerships such that the Company has determined that it is not the primary beneficiary of these partnerships because it does not have the power to direct the activities of the partnership that most significantly impact the partnership's economic performance.

The Company's risk of loss is limited to its investment in these partnerships, which totaled $121.3 million and $156.6 million at June 30, 2012 and December 31, 2011, respectively, plus future cash obligations that the Company is committed to the partnerships totaling $154 thousand at June 30, 2012. The Company does not provide financial or other support to the partnerships that is not contractually required.

The aggregate amount of the assets and liabilities held by the VIE's was approximately $700 million and $290 million at June 30, 2012 and December 31, 2011, respectively. Aggregate assets and aggregate liabilities are based on limited availability of financial information associated with certain partnerships.

As part of previously reported mergers and as part of transactions initiated by the Company, the Company has several home equity loans securitizations ("securitizations"). These home equity securitizations are considered VIEs because the holders of the equity investment at risk, including the Company, do not have any obligation to absorb credit losses on the loans within the securitizations. Therefore, the Company has determined that it is not the primary beneficiary of the securitizations. As of June 30, 2012 and December 31, 2011, the Company had $4.2 million and $4.2 million, respectively of receivables related to advances made by the Company on behalf of the securitizations. The Company does not hold any other assets or liabilities related to the securitizations. The total principal amount of securitized home equity loans was $51.2 million and $55.1 million as of June 30, 2012 and December 31, 2011, respectively. As of June 30, 2012, the portion of principal 90 days past due was $4.5 million and net credit losses were $0.9 million. As of December 31, 2011, the portion of principal 90 days past due was $3.1 million and net credit losses were $1.2 million.

30

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(6) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill totaled $2.3 billion in the Retail banking segment and $1.2 billion in the Corporate banking segment at June 30, 2012. There were no additions or impairments to goodwill in 2012 or 2011. No impairment indicators were noted since the annual review on December 31, 2011, and as such, no impairment test has been performed. The Company will perform its next annual goodwill impairment test at December 31, 2012 unless circumstances require an earlier impairment test.

The following table details amounts related to the Company's finite-lived intangible assets as of June 30, 2012 and December 31, 2011.

	June 30, 2012				December 31, 2011
	Net Carrying Amount		Accumulated Amortization		Net Carrying Amount		Accumulated Amortization
	(in thousands)
Core deposit intangibles	$	61,407	$	177,693	$	79,389	$	159,711
Purchased credit card relationships (“PCCR”)	8,340		5,864		9,636		4,568
Operating lease agreements	9,351		6,354		10,146		5,558
Total	$	79,098	$	189,911	$	99,171	$	169,837

Intangible assets decreased as a result of normal amortization. Amortization expense on intangible assets for the three-month and six-month periods ended June 30, 2012 was $9.4 million and $20.1 million, respectively. Amortization expense on intangible assets for the three-month and six-month periods ended June 30, 2011 was $16.1 million and $29.9 million, respectively.

The Company does not have any indefinite-lived intangible assets.

31

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(7) MORTGAGE SERVICING RIGHTS

At June 30, 2012 and December 31, 2011, the Company serviced residential real estate loans for others totaling $13.6 billion and $13.7 billion, respectively. The Company elected on January 1, 2012 to account for residential mortgage servicing rights ("RMSRs") using the fair value option, and accordingly, eliminated the valuation allowance at that time. Subsequent changes in fair value are recorded through the Consolidated Statements of Comprehensive Income. The carrying value of the RMSRs based on the fair value option at June 30, 2012 was $95.5 million. The carrying value of RMSRs at December 31, 2011 based on the amortization method was $91.3 million. See further discussion on the valuation of the RSMRs in Note 14.

For the three-month and six-month periods ended June 30, 2012, the Company recorded net changes in fair value of RMSRs totaling $(21.0) million and $(19.2) million, respectively, representing both “amortization” reflecting actual payments and changes in present value due to the passage of time and changes in assumptions primarily related to anticipated loan prepayment rates (CPR) . For the three-month period ended June 30, 2011, the Company recorded an impairment of $4.5 million on the RSMRs resulting primarily from changes in anticipated loan prepayment rates (CPR) due to changes residential mortgage rates at the time. The following table presents a summary of activity for the Company’s residential mortgage servicing rights.

	Six-Month Period Ended June 30,
	2012			2011
	(in thousands)
Gross book balance at beginning of period	$	161,291		$	173,549
Write-off of reserves	(70,040		)	—
Mortgage servicing assets recognized	23,443			13,483
Amortization and permanent impairment	—			(17,746		)
Change in fair value	(19,158		)	—
Gross balance at end of period	95,536			169,286
Valuation allowance	—			(30,376		)
Book balance at end of period	$	95,536		$	138,910

Prior to election of the fair value option, a valuation allowance was established for the excess of the cost of each residential mortgage servicing asset stratum over the estimated fair value. Consistent with the relatively significant valuation allowance at December 31, 2011, the carrying value of residential mortgage servicing rights was approximately equal to market. Activity in the valuation allowance for mortgage servicing rights for the six-month period ended June 30, 2012 and 2011 consisted of the following:

	Six-Month Period Ended June 30,
	2012			2011
	(in thousands)
Balance at beginning of period	$	70,040		$	27,525
Write-off of reserves	(70,040		)	—
Net change in valuation allowance for mortgage servicing rights	—			2,851
Balance at end of period	$	—		$	30,376

Historically, the Company originated and sold multi-family loans in the secondary market to Fannie Mae while retaining servicing. The Company has not sold multi-family loans to Fannie Mae since 2009. At June 30, 2012 and December 31, 2011, the Company serviced $8.5 billion and $9.3 billion of loans for Fannie Mae, respectively. The Company had recorded servicing assets of $0.4 million at December 31, 2011. This servicing asset has been completely amortized during the second quarter of 2012. The Company recorded servicing asset amortization related to the multi-family loans sold to Fannie Mae of $0.2 million and $0.5 million for the three-month and six-month periods ended June 30, 2012 compared to $0.9 million and $3.1 million for the three-month and six-month periods ended June 30, 2011, respectively. The Company recorded multi-family servicing recoveries of $0.1 million for the three-month and six-month periods ended June 30, 2012 compared to $0.3 million and $4.7 million for the three-month and six-month periods ended June 30, 2011, respectively.

32

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(7) MORTGAGE SERVICING RIGHTS (continued)

Mortgage servicing fee income was $16.1 million and $28.1 million for the three-month and six-month periods ended June 30, 2012 compared to $12.9 million and $25.8 million for the corresponding periods ended June 30, 2011. The Company had gains/(losses) on the sale of mortgage loans and home equity loans of $8.9 million and $22.6 million for the three-month and six month periods ended June 30, 2012 compared to $(0.1) million and $5.2 million for the corresponding periods ended June 30, 2011.

(8) BORROWINGS AND OTHER DEBT OBLIGATIONS

On June 1, 2012, a subsidiary of SHUSA executed a financing agreement with third party lenders for a $160 million seven-year term loan due February 2, 2019 (the “Term Loan”). The subsidiary used the proceeds at closing to repay the outstanding balance under, and concurrently terminate, its existing $154.9 million loan with Santander. At closing, the existing debt had unamortized debt issuance costs which were recognized as a loss on debt extinguishment in the second quarter of 2012. Total fees and costs incurred related to the assumption of the Term Loan were $5.7 million which are being deferred and capitalized. The Term Loan bears interest an effective rate of 4.38%. The Term Loan contains customary financial and operating covenants and restrictions.

In June 2012, the 2.5% senior unsecured notes with the FDIC-guarantee under the TLG Program matured and were repaid by SHUSA in the amount of $250 million.

33

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(9) DERIVATIVES

The Company uses derivative instruments as part of the interest rate risk management process to manage risk associated with its financial assets and liabilities, its mortgage banking activities, and to assist the commercial banking customers with risk management strategies and for certain other market exposures. The Company hedges foreign currency exchange risk using cross currency swaps.

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

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

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

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

Credit Risk Contingent Features

The Company has entered into certain derivative contracts that require the posting of collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to the Company's long-term senior unsecured credit ratings. In a limited number of instances, counterparties also have the right to terminate their ISDA Master Agreements if the Company's ratings fall below investment grade; as of June 30, 2012 derivatives in this scenario had a fair value of $78.5 million. In the event of credit downgrades, the Company could be required to provide $8.5 million of additional collateral as of June 30, 2012. As a result of credit downgrades in April 2012, the Company was required to post additional collateral of $23.0 million as of April 30, 2012.

As of June 30, 2012, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) that were in a net liability position totaled $306.7 million. The Company had $353.0 million in cash and securities collateral posted to cover those positions as of June 30, 2012.

The fair value of all derivative balances are recorded within Other Assets and Other Liabilities on the Consolidated Balance Sheet. See Note 14 for discussion on the valuation methodology for derivative instruments.

Fair Value Hedges

The Company enters into cross currency swaps in order to hedge the Company's foreign currency exchange risk on certain Euro denominated investments. The Company includes all components of each derivatives gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the three-month or six-month periods ended June 30, 2012. The last of the hedges is scheduled to expire in October 2017.

34

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(9) DERIVATIVES (continued)

The Company has historically entered into pay-variable, receive-fixed interest rate swaps to hedge changes in fair values of certain brokered certificate of deposits and certain debt obligations. At June 30, 2012, the Company had $19.2 million of deferred net after-tax losses on terminated derivative instruments that were hedging fair value changes. These losses will continue to be deferred in other liabilities and will be reclassified into interest expense over the remaining lives of the hedged assets and liabilities. During the three-month and six-month periods ended June 30, 2012, $1.5 million and $2.9 million of the losses were recognized in the Consolidated Statement of Comprehensive Income.

Cash Flow Hedges

The Company hedges exposures to changes in cash flows associated with forecasted interest payments on variable-rate liabilities, through the use of pay-fixed, receive variable interest rate swaps. The last of the hedges is scheduled to expire in August 2025. The Company includes all components of each derivatives gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the three-month or six-month periods ended June 30, 2012. As of June 30, 2012, the Company expects approximately $10.1 million of gross losses recorded in accumulated other comprehensive income to be reclassified to earnings during the next twelve months as the future cash flows occur.

At June 30, 2012, the Company has $1.9 million of deferred losses on terminated derivative instruments that were hedging the future cash flows on certain borrowings. These losses will continue to be deferred in accumulated other comprehensive income and will be reclassified into interest expense as the future cash flows occur, unless it becomes probable that the forecast interest payments will not occur, in which case, the losses in accumulated other comprehensive income will be recognized immediately. As of June 30, 2012, the Company expects approximately $1.2 million of the deferred net after-tax loss on derivative instruments included in accumulated other comprehensive income to be reclassified to earnings during the next twelve months as the future cash flows occur.

Shown below is a summary of the derivatives designated as accounting hedges at June 30, 2012 and December 31, 2011:

	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		WeightedAverage Life (Years)
	(in thousands)
June 30, 2012
Fair value hedges:
Cross currency swaps	$	79,765	$	12,112	$	9,158	3.42	%	3.41	%	4.2
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	4,152,738		—		144,608		0.45	%	2.65	%	2.3
Total	$	4,232,503	$	12,112	$	153,766	0.51	%	2.66	%	2.3
December 31, 2011
Fair Value hedges:
Cross currency swaps	$	33,367	$	3,888	$	3,346	3.93	%	3.90	%	4.8
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	3,900,000		—		158,174		0.46	%	2.68	%	2.3
Total	$	3,933,367	$	3,888	$	161,520	0.49	%	2.69	%	2.3

See Note 11 for detail of the amounts included in accumulated other comprehensive income related to derivative activity.

35

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

36

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(9) DERIVATIVES (continued)

Other Derivative Activities

The Company’s derivative portfolio also includes mortgage banking interest rate lock commitments and forward sale commitments used for risk management purposes and derivatives executed with commercial banking customers, primarily interest rate swaps and foreign currency contracts.

In June 2010, the Company sold Visa Inc. Class B common shares and entered into a total return swap in which the Company will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. This total return swap is accounted for as a free standing derivative.

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

Summary information regarding other derivative activities at June 30, 2012 and December 31, 2011 follows:

	Asset derivatives Fair value				Liability derivatives Fair value
	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
	(in thousands)
Mortgage banking derivatives:
Forward commitments to sell loans	$	—	$	—	$	11,430	$	8,574
Interest rate lock commitments	12,944		7,323		—		—
Total mortgage banking risk management	12,944		7,323		11,430		8,574
Customer related derivatives:
Swaps receive fixed	393,486		357,062		6		95
Swaps pay fixed	56		126		394,973		379,423
Other	3,089		4,161		2,933		4,014
Total customer related derivatives	396,631		361,349		397,912		383,532
Other derivative activities:
VISA total return swap	—		—		1,558		5,460
Foreign exchange contracts	11,855		11,950		11,828		11,930
Other	8,085		12,098		8,108		12,375
Total	$	429,515	$	392,720	$	430,836	$	421,871

The above derivative positions had notional amounts totaling $15.1 billion at June 30, 2012 and $13.5 billion at December 31, 2011 which were not designated to obtain hedge accounting treatment.

37

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(9) DERIVATIVES (continued)

The following Consolidated Statement of Comprehensive Income line items were impacted by the Company’s derivative activity for the three-month and six-month periods ended June 30, 2012 and 2011:

	Three-Month Period Ended
Derivative Activity	June 30, 2012	June 30, 2011
Fair value hedges:
Cross currency swaps	Increase in other income of $0.1 million.	No effect on income
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Decrease in net interest income of $21.6 million.	Decrease in net interest income of $51.1 million.
Other derivative activities:
Forward commitments to sell loans	Decrease in mortgage banking revenues of $10.6 million.	Increase in mortgage banking revenues of $0.8 million.
Interest rate lock commitments	Increase in mortgage banking revenues of $7.2 million.	Increase in mortgage banking revenues of $0.2 million.
Customer related derivatives	Increase in miscellaneous other income of $7.7 million.	Increase in miscellaneous other income of $3.0 million.
Total return swap associated with sale of Visa, Inc. Class B shares	Increase in other non-interest income of $0.1 million	Increase in other non-interest income of $1.0 million.
Foreign exchange	Decrease in commercial banking fees of $19 thousand.	Decrease in commercial banking fees of $0.4 million.
Other	Decrease to miscellaneous other income of $0.2 million.	Increase to miscellaneous other income of $2.4 million.

	Six-Month Period Ended
Derivative Activity	June 30, 2012	June 30, 2011
Fair value hedges:
Cross currency swaps	Increase in other income of $0.1 million.	No effect on income
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Decrease in net interest income of $42.6 million.	Decrease in net interest income of $99.5 million.
Other derivative activities:
Forward commitments to sell loans	Decrease in mortgage banking revenues of $2.9 million.	Decrease in mortgage banking revenues of $3.5 million.
Interest rate lock commitments	Increase in mortgage banking revenues of $5.6 million.	Increase in mortgage banking revenues of $0.8 million.
Customer related derivatives	Increase in miscellaneous other income of $20.9 million.	Increase in miscellaneous other income of $7.1 million.
Total return swap associated with sale of Visa, Inc. Class B shares	Increase in other non-interest income of $3.9 million	Increase in other non-interest income of $1.0 million.
Foreign exchange	Increase in commercial banking fees of $6 thousand.	Increase in commercial banking fees of $1.8 million.
Other	Increase to miscellaneous other income of $0.4 million.	Increase to miscellaneous other income of $6.9 million.

38

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(10) INCOME TAXES

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

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews the tax balances quarterly and as new information becomes available, the balances are adjusted, as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions.

On June 17, 2009, the Company filed a lawsuit against the United States in Federal District Court seeking a refund of assessed taxes paid for tax years 2003-2005 related to two separate financing transactions with an international bank totaling $1.2 billion. As a result of these two financing transactions, the Company was subject to foreign taxes of $154.0 million during the years 2003 through 2005 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the IRS disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $24.9 million in tax liability, and assessed interest and penalties totaling approximately $69.6 million. In 2006 and 2007, the Company was subject to an additional $87.6 million and $22.5 million of foreign taxes, respectively, as a result of the two financing transactions, and the Company's entitlement to foreign tax credits in these amounts will be determined by the outcome of the 2003-2005 litigation. In addition, the outcome of the litigation will determine whether the Company is subject to an additional tax liability of $49.8 million related to interest expense and transaction cost deductions, and whether the Company will be subject to $12.1 million in interest and $12.5 million in penalties for 2006 and 2007. The Company continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe the Company is entitled to tax deductions for the related issuance costs and interest deductions based on tax law. The Company maintains a tax reserve of $96.9 million as of June 30, 2012 for this matter. The Company believes this reserve amount adequately provides for potential exposure to the IRS related to these items. However, as the Company continues to go through the litigation process, management will continue to evaluate the appropriate tax reserve levels for this position and any changes made to the tax reserves may materially affect the Company's income tax provision, net income and regulatory capital in future periods. A trial date has been set in this litigation for October 7, 2013.

In addition to the adjustments for items related to the two financing transactions discussed above, following the conclusion of the IRS's exam of the Company's 2006 and 2007 tax returns, the IRS proposed to recharacterize ordinary losses related to the sale of certain assets as capital losses. The Company has paid the tax assessment resulting from the recharacterization from capital to ordinary losses, and will contest the adjustment through the administrative appeals process. The Company is confident that its position related to its ordinary tax treatment of the losses will ultimately be upheld, therefore no amounts have been accrued related to this matter. If the Company is not successful in defending its position, the maximum potential tax liability resulting from this IRS adjustment would be approximately $95.0 million. Additionally, with respect to the 2006-2007 tax periods, the Company faces potential interest and penalties resulting from the recharacterization adjustment and other unrelated adjustments of approximately $11.1 million in interest and $14.5 million in penalties.

39

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(11) ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)

The following table presents the components of accumulated other comprehensive loss, net of related tax, for the three-month and six-month periods ended June 30, 2012 and 2011. All dollars are presented in thousands.

	Total Other Comprehensive Income									Total Accumulated Other Comprehensive Loss
	For the Three-Month Period Ended June 30, 2012									March 31, 2012						June 30, 2012
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments	$	(12,283	)	$	3,858		$	(8,425	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments	23,750			(8,313		)	15,437
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	11,467			(4,455		)	7,012			$	(103,791	)	$	7,012		$	(96,779	)
Change in unrealized gains on investment securities available-for-sale	45,783			(15,643		)	30,140
Reclassification adjustment for net gains included in net income	(60,988		)	21,346			(39,642		)
Net unrealized gains on investment securities available-for-sale	(15,205		)	5,703			(9,502		)	116,431			(9,502		)	106,929
Amortization of defined benefit plans	929			(365		)	564			(25,911		)	564			(25,347		)
Total, June 30, 2012	$	(2,809	)	$	883		$	(1,926	)	$	(13,271	)	$	(1,926	)	$	(15,197	)

40

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(11) ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)

	Total Other Comprehensive Income									Total Accumulated Other Comprehensive Loss
	For the Six-Month Period Ended June 30, 2012									December 31, 2011					June 30, 2012
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity		Ending Balance
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments	$	(28,795	)	$	9,398		$	(19,397	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments	47,100			(16,486		)	30,614
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	18,305			(7,088		)	11,217			$	(107,996	)	$	11,217	$	(96,779	)
Change in unrealized gains/(losses) on investment securities available-for-sale	106,849			(37,929		)	68,920
Reclassification adjustment for net gains included in net income	(76,532		)	26,788			(49,744		)
Net unrealized gains on investment securities available-for-sale	30,317			(11,141		)	19,176			87,753			19,176		106,929
Amortization of defined benefit plans	1,859			(731		)	1,128			(26,475		)	1,128		(25,347		)
Total, June 30, 2012	$	50,481		$	(18,960	)	$	31,521		$	(46,718	)	$	31,521	$	(15,197	)

41

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(11) ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)

	Total Other Comprehensive Income									Total Accumulated Other Comprehensive Loss
	For the Three-Month Period Ended June 30, 2011									March 31, 2011						June 30, 2011
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments	$	(66,028	)	$	25,710		$	(40,318	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments	(3,826		)	1,339			(2,487		)
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	(69,854		)	27,049			(42,805		)	$	(101,908	)	$	(42,805	)	$	(144,713	)
Change in unrealized gains/(losses) on investment securities available-for-sale	91,842			(29,394		)	62,448
Reclassification adjustment for net gains included in net income	20,062			(13,187		)	6,875
Net unrealized losses on investment securities available-for-sale	111,904			(42,581		)	69,323			(111,619		)	69,323			(42,296		)
Amortization of defined benefit plans	519			(204		)	315			(16,079		)	315			(15,764		)
Total, June 30, 2011	$	42,569		$	(15,736	)	$	26,833		$	(229,606	)	$	26,833		$	(202,773	)

42

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(11) ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)

	Total Other Comprehensive Income									Total Accumulated Other Comprehensive Loss
	For the Six-Month Period Ended June 30, 2011									December 31, 2010						June 30, 2011
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments	$	(24,528	)	$	9,702		$	(14,826	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments	(7,610		)	2,663			(4,947		)
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	(32,138		)	12,365			(19,773		)	$	(124,940	)	$	(19,773	)	$	(144,713	)
Change in unrealized gains/(losses) on investment securities available-for-sale	2,353			(944		)	1,409
Reclassification adjustment for net gains included in net income	81,924			(32,854		)	49,070
Net unrealized losses on investment securities available-for-sale	84,277			(33,798		)	50,479			(92,775		)	50,479			(42,296		)
Amortization of defined benefit plans	1,166			(455		)	711			(16,475		)	711			(15,764		)
Total, June 30, 2011	$	53,305		$	(21,888	)	$	31,417		$	(234,190	)	$	31,417		$	(202,773	)

43

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(12) COMMITMENTS, CONTINGENCIES, AND GUARANTEES

Off-Balance Sheet Risk - Financial Instruments

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

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

The following table details the amount of commitment expiration per period for financial instruments where contract amounts represent credit risk at June 30, 2012:

Other Commitments	Contract or notional amount		Less than 1 year		Over 1 yr to 3 yrs		Over 3 yrs to 5 yrs		Over 5 yrs
	(in thousands)
Commitments to extend credit	$	21,981,249	$	7,706,122	$	4,580,558	$	7,738,768	$	1,955,801
Standby letters of credit	2,429,659		1,596,088		557,389		176,876		99,306
Loans sold with recourse	205,677		31,599		43,122		40,318		90,638
Forward buy commitments	677,420		637,650		39,770		—		—
Total commitments	$	25,294,005	$	9,971,459	$	5,220,839	$	7,955,962	$	2,145,745

The Company’s standby letters of credit meet the definition of a guarantee under the guarantees topic of the FASB Accounting Standards Codification 460. These transactions are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments is 1.2 years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company has various forms of collateral, such as real estate assets and customer business assets. The maximum undiscounted exposure related to these commitments at June 30, 2012 was $2.4 billion, and the approximate value of the underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $1.4 billion. The fees related to standby letters of credit are deferred and amortized over the life of the commitment. These fees are immaterial to the Company’s financial statements at June 30, 2012. Management believes that the utilization rate of these standby letters of credit will continue to be substantially less than the amount of these commitments, as has been the Company’s experience to date. As of June 30, 2012 and December 31, 2011, the reserve related to these standby letters of credit was $151.9 million and $177.9 million, respectively, which is recorded within the reserve for unfunded commitments in Other Liabilities on the Consolidated Balance Sheet. The credit risk associated with standby letters of credit is monitored using the same risk rating system utilized within its loan and lease portfolio.

44

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(12) COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

The Company has loans sold with recourse that meet the definition of a guarantee under the guarantees topic of the FASB Accounting Standards Codification. For loans sold with recourse under the terms of the multi-family sales program with Fannie Mae, the Company retained a portion of the credit risk associated with such loans. The unpaid principal balance outstanding of loans sold with these programs was $8.5 billion as of June 30, 2012 and $9.3 billion as of December 31, 2011. As a result of this agreement with Fannie Mae, the Company retained a 100% first loss position on each multi-family loan sold to Fannie Mae under such program until the earlier to occur of (i) the aggregate approved losses on the multi-family loans sold to Fannie Mae reaching the maximum loss exposure for the portfolio as a whole ($161.7 million as of June 30, 2012 which includes a reduction of $8.3 million for losses pending approval by Fannie Mae) or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off. Any losses sustained as a result of impediments in standard representations and warranties would be in addition to the maximum loss exposure.

The Company has established a liability which represents the fair value of the retained credit exposure. This liability represents the amount that the Company estimates that it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses that the portfolio is projected to incur based upon internal specific information and an industry-based default curve with a range of estimated losses. At June 30, 2012 and December 31, 2011, SHUSA had $130.2 million and $135.5 million of reserves classified in other liabilities related to the fair value of the retained credit exposure for loans sold to Fannie Mae under this sales program. The Company's commitment will expire in March 2039 based on the maturity of the loans sold with recourse. Losses sustained by the Company may be offset, or partially offset, from proceeds resulting from the disposition of the underlying mortgaged properties. Approval from Fannie Mae is required for all transactions related to the liquidation of properties underlying the mortgages.

In the standard course of business, the Company sells residential loans on a non-recourse Government sponsored basis to Fannie Mae and other GSEs (collectively, the GSEs). In connection with these sales, the Company entered into agreements containing various representation and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan's compliance with any applicable loan criteria established by the GSEs, including underwriting standards and the ongoing existence of mortgage insurance, absence of delinquent taxes or liens against the property securing the loan and the loan's compliance with applicable federal, state, and local laws. Breaches of these representation and warranties may result in the requirement for the Company to repurchase the mortgage loans or if the loan has been foreclosed, the underlying collateral or to otherwise make whole or provide other remedies to the GSEs.

Other Off-Balance Sheet Risk

Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in the applicable accounting guidance, and from other relationships which include items such as indemnifications provided in the ordinary course of business and intercompany guarantees.

Litigation

In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of consumer protection, securities, environmental, banking, employment and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. In the ordinary course of business, the Company and its subsidiaries are also subject to regulatory examinations, information gathering requests, inquiries and investigations.

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

45

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(12) COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable at which time an accrued liability is established with respect to such loss contingency. The Company continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. For certain legal matters in which the Company is involved, the Company is able to estimate a range of reasonably possible losses. For other matters for which a loss is probable or reasonably possible, such an estimate is not possible. Excluding the matters discussed below, management currently estimates that it is reasonably possible that the Company could incur losses in an aggregate amount up to approximately $60.0 million in excess of the accrued liability, if any, with it also being reasonably possible that the Company could incur no such losses at all in these matters. This estimated range of reasonably possible losses represents the estimate of possible losses over the life of such legal matters, which may span an indeterminable number of years, and is based on information available as of June 30, 2012.

Complaint from Trustee for the Trust PIERS

On December 17, 2010, The Bank of New York Mellon Trust Company, National Association (the “Trustee”) filed a complaint in the U.S. District Court for the Southern District of New York solely as the Trustee for the Trust PIERS under an Indenture dated September 1, 1999, as amended, against SHUSA. The complaint asserts that the acquisition by Santander of SHUSA on January 31, 2009, constituted a “change of control” under the Trust PIERS.

If the acquisition constituted a “change of control” under the definitions applicable to the Trust PIERS, SHUSA would be required to pay a significantly higher rate of interest on subordinated debentures of SHUSA held in trust for the holders of Trust PIERS and the principal amount of the debentures would accrete to $50 per debenture as of the effective date of the “change of control”. There is no “change in control” under the Trust PIERS, among other reasons, if the consideration in the acquisition consisted of shares of common stock traded on a national securities exchange. Santander issued American Depositary Shares in connection with the acquisition which were and are listed on the New York Stock Exchange.

The complaint asks the Court to declare that the acquisition of the Company was a "change of control" under the Indenture and seeks damages equal to the interest that the complaint alleges should have been paid by the Company for the benefit of holders of Trust PIERS. On December 13, 2011, the Court issued its decision granting the Trustee's motion for summary judgment and denying the Bank's cross-motion. The Court ruled that the term “common stock” used in the Indenture's “change of control” provision does not include ADSs and, therefore, a Change of Control has occurred. The Court referred the matter of damages to a magistrate judge for an inquest.

As a result of the December 13, 2011 decision by the Court, at December 31, 2011, SHUSA recorded a reduction of pre-tax income of $344.2 million for the Trust PIERS litigation. Of that total, $70.8 million represents the liability for accrued interest at the rate of 7.41% from January 31, 2009 to December 31, 2011 (which was increased to $83.0 million through June 30, 2012 based on the same 7.41% rate). The remaining $273.4 million was recorded as Other Expense on the Consolidated Statements of Comprehensive Income and a credit to the debt obligation to accrete the principal amount of each Trust PIERS security to $50. In its application for damages, the Trustee argued that the reset rate should be 13.61%, which if accepted by the Court, would increase the impact of the unfavorable outcome noted above. The Trustee requests damages in excess of $305.6 million representing the Trustee's calculation of unpaid back interest through June 1, 2012 (at a rate of 13.61%) plus approximately $2.0 million in legal fees.

On April 16, 2012 the Company submitted a response to the Trustee's damages application, which included a third party expert opinion that the reset rate should be 7.41% and in no event higher than 8.31%. The magistrate judge held a hearing as to damages on July 16, 2012. The damages inquest is unlikely to be completed before September 2012. A final appealable judgment will not enter until damages are determined. The Company intends to appeal the Court's finding that the acquisition was a “change of control” and the damages assessment, upon completion of the inquest and entry of final judgment against the Company. 

46

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(12) COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Fabrikant & Sons Bankruptcy Adversary Proceeding

In October 2007, the official committee of unsecured creditors of the debtors, M. Fabrikant & Sons (“MFS”) and a related company, Fabrikant-Leer International, Ltd. (“FLI”), filed an adversary proceeding against Sovereign Precious Metals, LLC (“SPM”), a wholly owned subsidiary of the Bank, and the Bank in the United States Bankruptcy Court for the Southern District of New York. The proceeding seeks to avoid $22.0 million in obligations otherwise due to the Bank (and formerly SPM) with respect to gold previously consigned to debtor by the Bank. In addition, the adversary proceeding seeks to recover over $9.8 million in payments made to the Bank by an affiliate of the debtors. Several other financial institutions were named as defendants based upon other alleged fraudulent transfers. The defendants' motions to dismiss were denied in part and allowed in part. Claims remain against the Bank for approximately $33.0 million.

The plaintiff has appealed the court's dismissal of its claims, including those claims based on "actual fraud". The appeal has been fully briefed. Discovery has been stayed in the case pending a ruling on the appeal. The disposition of the appeal will not affect the Bank's exposure in the case.

Overdraft Litigation

The putative class action litigation filed against the Bank by Diane Lewis, on behalf of herself and others similarly situated, in the United States District Court for the District of Maryland was transferred to and consolidated for pre-trial proceedings in the United States District Court for the Southern District of Florida (the "MDL Court") under the caption In re Checking Account Overdraft Litigation. The complaint alleges violations of law in connection with the Bank's overdraft/transaction ordering and fees practices and seeks unspecified damages. The Bank filed a motion seeking dismissal of the complaint. On July 26, 2012, the MDL Court determined that the Plaintiff's claims are preempted by federal banking law. Accordingly, the MDL Court granted the Bank's motion and dismissed all claims against the Bank.

Foreclosure Matters

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 June 30, 2012, the Bank services approximately 150,000 residential mortgage loans including approximately 3,500 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 240 loans 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 220 and 225, as of June 30, 2012 and December 31, 2011, 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 OCC, 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 mitigation and foreclosure processes and taking certain other remedial actions. Under the Order, the Bank has retained an independent consultant to conduct a review of certain foreclosure actions or proceedings for loans serviced by the Bank. If the independent consultant determines that borrowers suffered financial injury as a result of an act or failure to act by the Bank, those borrowers will be eligible for compensation.  We are unable to determine at the current time how many borrowers will be eligible for compensation or how much the Bank will be obligated to pay eligible borrowers.  

47

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(12) COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

The Company incurred $24.7 million and $26.9 million of costs in 2011 and the first six months of 2012, respectively relating to compliance with the Order. The total estimated costs for 2012 is $31 million. 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 and $484 thousand of costs in 2011 and the first half of 2012 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 time frames 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 and 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.

Other

Reference should be made to Note 10 for disclosure regarding the lawsuit filed by the Company against the Internal Revenue Service/United States. In addition to the proceedings described above and the litigation described in Note 10 above, the Company in the normal course of business is subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. The Company does not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material effect on the Company's financial position. However, the Company cannot now determine whether or not any claims asserted against the Company, whether in the proceedings specifically described above, the matter described in Note 10 above, or otherwise, will have a material effect on the Company's results of operations in any future reporting period, which will depend on, among other things, the amount of any loss resulting from the claim and the amount of income otherwise reported for the reporting period.

48

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(13) RELATED PARTY TRANSACTIONS

The Company has various debt agreements with Santander. For a listing of these debt agreements, see the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

In December 2011, the Company issued 3.2 million shares of common stock to Santander, which raised proceeds of $800.0 million, and declared a $800.0 million dividend to Santander. This was a non-cash transaction.

The Company has $1.9 billion of public securities consisting of various senior note obligations, trust preferred security obligations and preferred stock issuances. Santander owns approximately 39.8% of these securities as of June 30, 2012.

The Company has entered into derivative agreements with Santander with a notional value of $5.9 billion, which consist primarily of swap agreements to hedge interest rate risk and foreign currency exposure.

In 2006, Santander provided confirmation of standby letters of credit issued by the Bank. During the six-month periods ended June 30, 2012 and 2011, the average unfunded balance outstanding under these commitments was $276.5 million and $839.5 million, respectively. The Bank paid approximately $1.0 million and $2.1 million in fees to Santander in the three-month and six-month periods ended June 30, 2012 in connection with these commitments compared to $3.7 million and $7.2 million in fees in the corresponding periods in the prior year.

Santander also extended a line of credit to SHUSA in the amount of $1.5 billion, which matures in September 2012. There was no outstanding balance on this line at June 30, 2012 and December 31, 2011.

In the ordinary course of business, certain directors and executive officers of the Company became indebted to the Company in the form of loans for various business and personal interests. The outstanding balance of these loans was $6.4 million and $6.2 million at June 30, 2012 and December 31, 2011, respectively.

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

• Nw Services Co., a Santander affiliate doing business as Aquanima, is under contract with the Bank to provide procurement services, with fees paid in the three-month and six-month periods ended June 30, 2012 in the amounts of $0.9 million and $2.0 million, compared to $0.6 million and $1.7 million for the same periods in 2011.

• Geoban, S.A., a Santander affiliate, is under contract with the Bank to provide services in the form of debit card disputes and claims support, and consumer and mortgage loan set-up and review, with fees paid in the three-month and six-month periods ended June 30, 2012 in the amounts of $12.0 million and $13.1 million, compared to $0.7 million and $0.8 million for the same periods in 2011.

• Ingenieria De Software Bancario S.L., a Santander affiliate, is under contract with the Bank to provide information technology development, support and administration, with fees paid in the three-month and six-month periods ended June 30, 2012 in the amounts of $48.5 million and $70.4 million, compared to $29.3 million and $56.9 million for the same periods in 2011.

• Produban Servicios Informaticos Generales S.L., a Santander affiliate, is under contract with the Bank to provide professional services, and administration and support of information technology production systems, telecommunications and internal/external applications, with fees paid in the three-month and six-month periods ended June 30, 2012 in the amounts of $33.6 million and $51.3 million, compared to $18.8 million and $39.4 million for the same periods in 2011.

49

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(13) RELATED PARTY TRANSACTIONS (continued)

• Santander Back-Offices Globales Mayoristas S.A., a Santander affiliate, is under contract with the Bank to provide logistical support for Sovereign Bank’s derivative and hedging transactions and programs. In the three-month and six-month periods ended June 30, 2012, fees in the amounts of $95.2 thousand and $191.8 thousand were paid to Santander Back-Offices Globales Mayoristas S.A. with respect to this agreement, compared to fees in the amounts of $83.6 thousand and $174.4 thousand for the same periods in 2011.

• Santander Global Facilities (“SGF”), a Santander affiliate, is under contract with the Bank to provide (i) administration and management of employee benefits and payroll functions for the Bank and other affiliates, including employee benefits and payroll processing services provided by third party vendors through sponsorship by SGF, and (ii) property management and related services. In the three-month and six-month periods ended June 30, 2012, fees in the amounts of $2.2 million and $4.9 million were paid to SGF with respect to this agreement, compared to $2.6 million and $5.2 million for the same periods in 2011.

In 2010, the Company extended a $10.0 million unsecured loan to Servicios de Cobranza, Recuperacion y Seguimiento, S.A. DE C.V, a subsidiary of Santander Mexico. At June 30, 2012, the principal balance was $1.4 million, compared to $2.0 million at December 31, 2011.

During the three-month and six-month periods ended June 30, 2012, the Company recorded income of $0 and $15.9 thousand, respectively, and expenses of $7.3 million and $14.7 million, respectively, related to transactions with SCUSA. During the three-month and six-month periods ended June 30, 2011, the Company recorded expenses of $7.3 million and $15.4 million. No income was recorded in 2011 related to these transactions. In addition, as of June 30, 2012 and December 31, 2011, the Company had receivables and prepaid expenses with SCUSA in the amounts of $84.7 million and $99.1 million, respectively. The activity is primarily related to SCUSA's servicing of certain SHUSA outstanding loan portfolios and dividends paid by SCUSA to SHUSA. Transactions which occurred prior to the SCUSA Transaction, which was effective December 31, 2011, have been eliminated from the Consolidated Statements of Comprehensive Income at June 30, 2011 as intercompany transactions.

50

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE

Fair value is defined in U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. U.S. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below:

• Level 1 - Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments or futures contracts.

• Level 2 - Assets and liabilities valued based on observable market data for similar instruments.

• Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

51

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of June 30, 2012 and December 31, 2011.

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at June 30, 2012
	(in thousands)
Financial assets:
US Treasury and government agency securities	$	—	$	8,994	$	—	$	8,994
Debentures of FHLB, FNMA and FHLMC	—		20,000		—		20,000
Corporate debt	—		2,334,457		—		2,334,457
Asset-backed securities	—		1,030,758		749,693		1,780,451
Equity Securities	5,033		—		—		5,033
State and municipal securities	—		1,684,230		—		1,684,230
Mortgage backed securities	—		9,535,047		—		9,535,047
Total investment securities available-for-sale	5,033		14,613,486		749,693		15,368,212
Loans held for sale	—		429,443		—		429,443
Mortgage servicing rights	—		—		95,536		95,536
Derivatives:
Fair value	—		12,112		—		12,112
Mortgage banking interest rate lock commitments	—		—		12,944		12,944
Customer related	—		396,631		—		396,631
Foreign exchange	—		11,855		—		11,855
Other	—		8,020		65		8,085
Total financial assets	$	5,033	$	15,471,547	$	858,238	$	16,334,818
Financial liabilities:
Derivatives:
Fair value	$	—	$	9,158	$	—	$	9,158
Cash flow	—		144,608		—		144,608
Mortgage banking interest rate lock commitments	—		11,430		—		11,430
Customer related	—		397,912		—		397,912
Total return swap	—		—		1,558		1,558
Foreign exchange	—		11,828		—		11,828
Other	—		7,948		160		8,108
Total financial liabilities	$	—	$	582,884	$	1,718	$	584,602

52

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2011
	(in thousands)
Financial assets:
US Treasury and government agency securities	$	—	$	44,090	$	—	$	44,090
Debentures of FHLB, FNMA and FHLMC	—		20,000		—		20,000
Corporate debt	—		2,049,520		—		2,049,520
Asset-backed securities	—		2,587,993		52,297		2,640,290
State and municipal securities	—		1,784,778		—		1,784,778
Mortgage backed securities	—		9,039,880		18		9,039,898
Total investment securities available-for-sale	—		15,526,261		52,315		15,578,576
Loans held for sale	—		352,471		—		352,471
Derivatives:
Fair value	—		3,888		—		3,888
Mortgage banking interest rate lock commitments	—		—		7,323		7,323
Customer related	—		361,349		—		361,349
Foreign exchange	—		11,950		—		11,950
Other	—		12,098		—		12,098
Total financial assets	$	—	$	16,268,017	$	59,638	$	16,327,655
Financial liabilities:
Derivatives:
Fair value	$	—	$	3,346	$	—	$	3,346
Cash flow	—		158,174		—		158,174
Mortgage banking interest rate lock commitments	—		8,574		—		8,574
Customer related	—		383,532		—		383,532
Total return swap	—		—		5,460		5,460
Foreign exchange	—		11,930		—		11,930
Other	—		11,655		720		12,375
Total financial liabilities	$	—	$	577,211	$	6,180	$	583,391

53

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or certain impairment measures. At June 30, 2012, assets measured at fair value on a nonrecurring basis, that were still held at the balance sheet, were as follows:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value at June 30, 2012
	(in thousands)
June 30, 2012
Impaired loans held for investment (1)	$	—	$	449,812	$	—	$	449,812
Foreclosed assets (2)	—		17,785		—		17,785
Mortgage servicing rights (3)	—		—		—		—
December 31, 2011
Impaired loans held for investment (1)	$	—	$	1,388,268	$	—	$	1,388,268
Foreclosed assets (2)	—		74,031		—		74,031
Mortgage servicing rights	—		—		91,686		91,686

⁽¹⁾  Represents recorded investment. Periodically, the Company records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.

(2) Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.

(3) As of January 1, 2012, the Company elected to account for its existing portfolio of residential mortgage loan servicing rights (RMSRs) at fair value. There was no value of the multi-family mortgage loan servicing rights at June 30, 2012.

The following table presents the increases and decreases in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Consolidated Statement of Comprehensive Income, relating to assets held at period end. All balances are presented in thousands.

	Comprehensive Income Location	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
		2012			2011			2012			2011
Impaired loans held for investment	Provision for credit losses	$	20,021		$	(25,892	)	$	36,878		$	(23,273	)
Foreclosed assets	Other administrative expense	(1,399		)	(3,540		)	(3,073		)	(6,002		)
Mortgage servicing rights	Mortgage banking income	88			(4,269		)	88			1,898
		$	18,710		$	(33,701	)	$	33,893		$	(27,377	)

54

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

The tables below presents the changes in all of the Level 3 balances for the three-month and six-month periods ended June 30, 2012 and 2011. All balances are presented in thousands.

Three-Month Period Ended June 30, 2012
	Investments Available-for-Sale			Mortgage Servicing Rights			Derivatives		Total
Balance, March 31, 2012	$	625,023		$	106,587		$	3,689	$	735,299
Gains/(losses) in other comprehensive income	(2,921		)	—			—		(2,921		)
Gains/(losses) in earnings	(50		)	(20,896		)	7,602		(13,344		)
Purchases	148,000			—			—		148,000
Issuances	—			10,006			—		10,006
Sales	(20,000		)	—			—		(20,000		)
Settlements(1)	(359		)	—			—		(359		)
Amortization	—			(161		)	—		(161		)
Transfers into/out of Level 3	—			—			—		—
Balance, June 30, 2012	$	749,693		$	95,536		$	11,291	$	856,520
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2012	$	—		$	(20,984	)	$	391	$	(20,593	)

Six-Month Period Ended June 30, 2012
	Investments Available-for-Sale			Mortgage Servicing Rights			Derivatives		Total
Balance, December 31, 2011	$	52,315		$	91,686		$	1,143	$	145,144
Gains/(losses) in other comprehensive income	(6,283		)	—			—		(6,283		)
Gains/(losses) in earnings	(50		)	(19,070		)	10,148		(8,972		)
Purchases	148,000						—		148,000
Issuances	—			23,443			—		23,443
Sales	(20,000		)	—			—		(20,000		)
Settlements(1)	(749		)	—			—		(749		)
Amortization	—			(523		)	—		(523		)
Transfers into/out of Level 3	576,460			—			—		576,460
Balance, June 30, 2012	$	749,693		$	95,536		$	11,291	$	856,520
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2012	$	—		$	(19,158	)	$	4,527	$	(14,631	)

55

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

Three-Month Period Ended June 30, 2011
	Investments Available-for-Sale			Mortgage Servicing Rights			Derivatives			Total
Balance, March 31, 2011	$	1,424,401		$	150,136		$	(5,389	)	$	1,569,148
Gains/(losses) in other comprehensive income	(48,303		)	—			(473		)	(48,776		)
Gains/(losses) in earnings	9,843			(4,270		)	2,041			7,614
Purchases	—			—			—			—
Issuances	—			4,382			—			4,382
Sales	(180,611		)	—			—			(180,611		)
Settlements(1)	(87,858		)	—			2,263			(85,595		)
Amortization	—			(9,651		)	—			(9,651		)
Transfers into/out of Level 3	—			—			—			—
Balance, June 30, 2011	$	1,117,472		$	140,597		$	(1,558	)	$	1,256,511
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2011	$	—		$	(4,270	)	$	1,793		$	(2,477	)

Six-Month Period Ended June 30, 2011
	Investments Available-for-Sale			Mortgage Servicing Rights			Derivatives			Total
Balance, December 31, 2010	$	1,511,847		$	146,028		$	(7,951	)	$	1,649,924
Gains/(losses) in other comprehensive income	(2,975		)	—			(216		)	(3,191		)
Gains/(losses) in earnings	9,843			1,898			2,905			14,646
Purchases	—			—			—			—
Issuances	—			13,483			—			13,483
Sales	(180,611		)	—			—			(180,611		)
Settlements(1)	(220,632		)	—			3,704			(216,928		)
Amortization	—			(20,812		)	—			(20,812		)
Transfers into/out of Level 3	—			—			—			—
Balance, June 30, 2011	$	1,117,472		$	140,597		$	(1,558	)	$	1,256,511
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2011	$	—		$	1,898		$	2,141		$	4,039

(1) Settlements include prepayments. paydowns and maturities.

56

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

The Company reviews the methodologies utilized to determine fair value on a quarterly basis. Any changes in methodologies or significant inputs used in determining fair values are further reviewed to determine if a fair value level hierarchy change has occurred. Transfers in and out of Level 1, 2 and 3 are considered to be effective as of the end of the quarter in which they occur.

During the Company's review of its investment portfolio performed during the first three months of 2012, the Company transferred its collateralized loan obligation securities ("CLO's") which are asset backed securities from Level 2 to Level 3 due to the lack of price transparency in connection with its limited trading activity. There were no other transfers between Level 1, 2, and 3 during the three-month and six-month periods ended June 30, 2012.

There were no transfers between the levels in the fair value hierarchy during the three-month and six-month periods ended June 30, 2011.

As of June 30, 2012, $16.3 billion of the Company’s total assets consisted of financial instruments measured at fair value on a recurring basis, including financial instruments for which the Company elected the fair value option. Approximately $15.5 billion of these financial instruments, net of counterparty and cash collateral balances, were measured using valuation methodologies involving market-based or market-derived information. Approximately $858.2 million of these financial instruments were measured using model-based techniques, or using Level 3 inputs, and represented approximately 5.3% of the total assets measured at fair value and approximately 1.0% of the total consolidated assets.

Following is a description of the valuation techniques used for instruments measured at fair value.

Investments securities available-for-sale

Quoted market prices for the investments in securities available for sale held at the Company, such as government agency bonds, corporate debt, state and municipal securities, etc, are not readily available. The Company's principal markets for its investment securities are the secondary institutional markets with an exit price that is predominantly reflective of bid level pricing in these markets.

The Company’s Level 3 assets are primarily comprised of certain sale-lease back securities and collateralized loan obligations. These investments are thinly traded and the Company determined the estimated fair values for these securities by evaluating pricing information from a combination of sources such as third party pricing services, third party broker quotes for certain securities and from other independent third party valuation sources. These quotes are benchmarked against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates assigned to these securities assume liquidation in an orderly fashion and not under distressed circumstances. Due to the credit risk and lack of liquidity of certain securities, the market value of these securities are highly sensitive to assumption changes and market volatility.

Gains and losses on investments are recognized on the Consolidated Statements of Comprehensive Income through “Net gain on sale of investment securities”.

Loans Held for Sale

The fair value of these loans are estimated using published forward agency prices to agency buyers such as Fannie Mae and Freddie Mac. The majority of the residential loan held for sale portfolio is sold to these two agencies. See further discussion below in the Fair Value Option for Financial Assets and Financial Liabilities section.

57

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

Mortgage servicing rights

During the first quarter, the Company implemented a new model that it believes to be widely used among large mortgage servicers for the valuation of mortgage servicing rights. This model estimates the present value of the future net cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential mortgage servicing rights are anticipated loan prepayment rates (CPR) and the discount rate reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rate and servicing costs result in lower valuations of mortgage servicing rights. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of mortgage servicing rights. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing mortgage servicing rights and are derived and/or benchmarked against independent public sources.

Gains and losses on RMSR's are recognized on the Consolidated Statements of Comprehensive Income through “Mortgage Banking Income”.

Listed below are the most significant inputs that are utilized by the Company in the evaluation of residential mortgage servicing rights:

• A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $5.5 million and $10.4 million, respectively at June 30, 2012.

• A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $2.9 million and $5.6 million, respectively at June 30, 2012.

Significant increases (decreases) in any of those inputs in isolation would result in a significantly higher (lower) fair value measurement. These sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase and decrease when market interest rates decline and/or credit and liquidity conditions improve.

See further discussion on mortgage servicing rights in Note 7.

Derivatives

Currently, the Company uses derivative instruments to manage its various risks including interest rate risk, credit risk, equity risk and foreign exchange currency risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurement of its derivatives. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and guarantees. Effective January 1, 2012, the Company made an election to use the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for derivative instruments.

58

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. Certain of the Company's derivatives utilize Level 3 inputs, which are primarily related to mortgage banking derivatives.

The discounted cash flow model is utilized to determine the fair value for the mortgage banking derivatives. The significant unobservable inputs for mortgage banking derivatives used in the fair value measurement of the reporting entity‘s loan commitments (pipeline) are pull through percentage and the MSR value that is inherent in the underlying loan value. The pull through percentage represents the dollar volume of loans that a seller delivers versus the dollar value of loans committed for delivery. Significant increases (decreases) in any of those inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the fair value of a mortgage banking derivative asset (liability) results when the probability of funding increases (decreases). Significant increases (decreases) in the fair value of a mortgage loan commitment result when the embedded servicing value increases (decreases).

Gains and losses related to derivatives affect various line items on the Consolidated Statements of Comprehensive Income. See Note 9 for the discussion of derivatives activity on the Consolidated Statements of Comprehensive Income.

Quantitative Information about the significant unobservable inputs within Level 3 Recurring Assets and Liabilities. All balances are presented in thousands.

	Fair Value at June 30, 2012		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Financial assets:
Asset-backed securities
Collateralized loan obligations	$	705,535	Consensus Pricing (1)	Offered quotes	99.21%-101.01% (100.07%)
Sale-lease back securities	44,158		Consensus Pricing (1)	Offered quotes	Single Security (111.88%)
	749,693
Mortgage servicing rights	95,536		Discounted Cash Flow	Prepayment rate (CPR)	0.42%-50.09% (17.89%)
				Discount Rate	10.00	%
Mortgage banking interest rate lock commitments	12,944		Discounted Cash Flow	Pull through percentage	75.22	%
				MSR value (2)	0.625%-0.95% (0.878%)
Total Assets	858,173
Financial liabilities:
Total return swap	1,558		Discounted Cash Flow	Timing of litigation settlement
	$	1,558

(1) Consensus pricing refers to fair value estimates that are generally internally developed using information such as dealer quotes or other third-party provided valuations or comparable asset prices.

(2) MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance.

59

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

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

	June 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	3,156,423	$	3,156,423	$	2,623,963	$	2,623,963
Available-for-sale investment securities	15,368,212		15,368,212		15,578,576		15,578,576
Other investments	991,737		991,737		555,370		555,370
Loans held for investment, net	51,437,524		50,888,852		50,223,888		49,286,606
Loans held for sale	429,443		429,443		352,471		352,471
Mortgage servicing rights	95,536		95,536		91,686		99,556
Derivatives:
Fair value	12,112		12,112		3,888		3,888
Mortgage banking	12,944		12,944		7,323		7,323
Customer related	396,631		396,631		361,349		361,349
Foreign exchange	11,855		11,855		11,950		11,950
Other	8,085		8,085		12,098		12,098
Financial liabilities:
Deposits	48,718,415		48,500,483		47,797,515		47,330,243
Borrowings and other debt obligations	19,228,747		20,339,425		18,278,433		19,372,350
Derivatives:
Fair value	9,158		9,158		3,346		3,346
Cash flow	144,608		144,608		158,174		158,174
Mortgage banking	11,430		11,430		8,574		8,574
Customer related	397,912		397,912		383,532		383,532
Total return swap	1,558		1,558		5,460		5,460
Foreign exchange	11,828		11,828		11,930		11,930
Other	8,108		8,108		12,385		12,385

60

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

The following methods and assumptions were used to estimate the fair value of each class of financial instruments not measured at fair value in the Consolidated Balance Sheet:

Cash and amounts due from depository institutions

Cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. As of June 30, 2012 and December 31, 2011, the Company had $400.0 million and $36.7 million, respectively of restricted cash. Restricted cash is related to cash restricted for investment purposes, cash posted for collateral purposes, and cash advanced for loan purchases. Cash and cash equivalents including restricted cash have maturities of three months or less, and accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value. The related fair value measurement have generally been classified as Level 1 as carrying value approximates fair value due to the short-nature of the asset.

Other investments

Other investments include the Company's investment in the stock of the Federal Home Loan Bank ("FHLB") of Pittsburgh and the Federal Reserve Board. The stock does not have a readily determinable fair value, because its ownership is restricted and it lacks a market. The stock can be sold back only at its par value of $100 per share and only to the FHLBs or to another member institution or the Federal Reserve Board. Accordingly, the stock is carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The related fair value measurement have generally been classified as Level 2.

Loans held for investment

Fair value is estimated by discounting cash flows with discount rates that incorporate the level of market (credit risk-free) observable rates for instruments with similar maturity and the level of an estimated credit risk spread by type of product, as a proxy of the expected premium that a market participant would require to compensate the specific level of credit risk. As the credit spread is specific to each product and is not readily observable in the market, the related fair value measurements have generally been classified as Level 3.

Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, interest bearing demand deposit accounts, savings accounts and certain money market accounts, is equal to the amount payable on demand and does not take into account the significant value of the cost advantage and stability of the Corporation’s long-term relationships with depositors. The fair value of fixed-maturity certificates of deposit is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities. The related fair value measurement have generally been classified as Level 1 for core deposits as the carrying value approximates fair value to the short-term nature of the liabilities. All other deposits are considered to be Level 2.

Borrowings and other debt obligations

Fair value is estimated by discounting cash flows using rates currently available to the Company for other borrowings with similar terms and remaining maturities. Certain other debt obligations instruments are valued using available market quotes which contemplates issuer default risk. The related fair value measurement have generally been classified as Level 2.

61

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(14) FAIR VALUE (continued)

Fair Value Option for Financial Assets and Financial Liabilities

A description of the financial assets and liabilities elected to be measured at fair value is as follows. The Company's intent in electing fair value for all of these items was to mitigate a divergence between accounting losses and economic exposure for certain assets and liabilities.

Loans held for sale

The Company adopted the fair value option on residential mortgage loans classified as held for sale which allows the Company to record the mortgage loan held for sale portfolio at fair market value versus the lower of cost or market. The Company economically hedges its residential loans held for sale portfolio with forward sale agreements which are reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value which reduces earnings volatility as the amounts more closely offset, particularly in environments when interest rates are declining.

The Company's residential loan held for sale portfolio had an aggregate fair value of $429.4 million at June 30, 2012. The contractual principal amount of these loans totaled $413.8 million at June 30, 2012. The difference in fair value compared to principal balance of $15.7 million was recorded in mortgage banking revenues during the six-month period ended June 30, 2012. Substantially all of these loans are current and none are in non-accrual status. Interest income on these loans is credited to interest income as earned.

Residential Mortgage Servicing Rights

As of January 1, 2012, the Company elected to account for its existing portfolio of residential mortgage loan servicing rights (RMSRs) at fair value. Prior to this election, RMSRs were accounted for using the amortization method subject to impairment. This election will create a greater flexibility with regards to any ongoing decisions relating to risk management of the asset by mitigating the effects of changes to the RMSRs fair value through the use of risk management instruments.

The Company's RMSRs had an aggregate fair value of $95.5 million at June 30, 2012. Changes in fair value totaling a loss of $19.2 million was recorded in mortgage banking income during the six-month period ended June 30, 2012.

62

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(15) BUSINESS SEGMENT INFORMATION

The Company’s segments are focused principally around the customers the Bank serves. The Company has identified the following reportable segments:

• 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 lines of credit. The Retail banking segment also includes business banking loans and small business loans to individuals.

• 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 segment includes businesses with large corporate domestic and foreign clients.

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

• The Other category includes investment portfolio activity, intangibles and certain unallocated corporate income and expenses.

• 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. As a result of the SCUSA Transaction (see further discussion in Note 1), SCUSA is now accounted for as an equity method investment. As of June 30, 2012, the Company owned approximately 65% of SCUSA. The Company's investment balance in SCUSA as of June 30, 2012 was $2.7 billion.

The following table represents the financial results and position of SCUSA as a stand-alone company for the three-month and six-month periods ended June 30, 2012 and 2011.

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Interest income	$	618,123	$	532,316	$	1,220,340	$	1,078,884
Net interest income after provision for credit losses	255,984		384,056		746,013		808,881
Income before taxes	221,054		333,480		630,150		718,923
Net income	142,711		217,510		399,145		459,378
Total assets	$	—	$	—	$	18,288,127	$	15,622,915

The Company’s segment results, excluding SCUSA, are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of the segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(15) BUSINESS SEGMENT INFORMATION (continued)

The application and development of management reporting methodologies is a dynamic process and is subject to periodic enhancements. The implementation of these enhancements to the internal management reporting methodology may materially affect the results disclosed for each segment with no impact on the consolidated results. Whenever significant changes to management reporting methodologies take place, prior period information is reclassified wherever practicable.

During the second quarter of 2011, the multi-family and large corporate commercial specialty groups were merged into the Corporate banking segment from the Specialized Business segment. Since the Specialized Business segment had no goodwill allocated to it, this reporting structure change had no impact on the amount of goodwill assigned to other segments. Prior period results were recast to conform to current methodologies for the segments.

During the first quarter of 2012, the allocation of the provision for credit losses to each segment was refined. First, the provision for credit losses recorded for each segment is now based on the net charge-offs of each business and changes in total reserves allocated to each business, instead of changes in specific reserves only. Second, the Company refined the determination of specific reserves related to mortgage TDRs. For management purposes, provisions for TDRs in the retail segment reflect changes in those specific reserves for each period presented under a consistent methodology. As a result of these changes, provision expense was appropriately allocated across segments. Prior period results were recast to conform to current methodologies for the segments.

During the first quarter of 2012, the methodology to allocate general and administrative expenses to each segment was modified. Previously, all general and administrative expenses, including corporate overhead costs, were allocated to the segments for profitability reporting. Only expenses directly related to each segment are allocated to each segment, and indirect expenses remain in the Other category. This change provides a more accurate representation of each segment's performance. In addition, general and administrative expenses and other expenses were combined to present total expenses, which is representative of how expenses are reviewed by management for each segment. Prior period results were recast to conform to current methodologies for the segments.

During the first quarter of 2012, the Company's funds transfer pricing (FTP) methodology was modified to better represent the actual costs of funds of the Company, which included adding a liquidity premium to compute an appropriate market participant spread for commercial loans and deposits by analyzing the mix of borrowings available to the Company with comparable maturity periods. Therefore, interest income increased for segments with a surplus of interest and non interest earning deposits and interest expense increased for those segments with a deficit of interest and non interest earning deposits. Prior period results have been recast based on our best estimate to conform to current methodologies for the segments.

During the first quarter of 2012, the Company began including net gains on the sale of investment securities within fees and other income for each segment. Previously, these gains were excluded from the segment disclosure.

The following tables present certain information regarding the Company’s segments. All balances are presented in thousands.

For the Three-Month Period Ended							Global Banking			Specialized Business
June 30, 2012	Retail			Corporate									Other (2)			Equity method investment in SCUSA		Total
Net interest income	$	218,219		$	108,527		$	25,420		$	10,162		$	61,291		$	—	$	423,619
Total non-interest income	112,482			18,802			11,883			3,380			57,487			108,523		312,557
(Release) / provision for credit losses	70,680			26,703			13,220			(17,849		)	14,946			—		107,700
Total expenses	225,042			32,528			11,032			6,634			136,204			—		411,440
Income/(loss) before income taxes	34,979			68,098			13,051			24,757			(32,372		)	108,523		217,036
Intersegment revenue/(expense) (1)	(19,985		)	(103,659		)	(11,857		)	(14,657		)	150,158			—		—
Total average assets	$	25,342,154		$	21,291,010		$	5,676,578		$	1,567,669		$	28,999,061		$	—	$	82,876,472

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(15) BUSINESS SEGMENT INFORMATION (continued)

For the Six-Month Period Ended							Global Banking			Specialized Business
June 30, 2012	Retail			Corporate									Other (2)			Equity method investment in SCUSA		Total
Net interest income	$	426,052		$	219,130		$	47,276		$	21,222		$	140,837		$	—	$	854,517
Total non-interest income	226,287			34,808			24,851			8,193			77,513			273,739		645,391
(Release) / provision for credit losses	136,557			10,658			21,907			(14,895		)	56,573			—		210,800
Total expenses	439,173			62,377			21,360			13,453			268,251			—		804,614
Income/(loss) before income taxes	76,609			180,903			28,860			30,857			(106,474		)	273,739		484,494
Intersegment revenue/(expense) (1)	(42,994		)	(210,067		)	(20,608		)	(31,792		)	305,461			—		—
Total average assets	$	25,377,201		$	21,153,729		$	5,176,215		$	1,702,862		$	28,867,770		$	—	$	82,277,777

For the Three-Month Period Ended							Global Banking			Specialized Business
June 30, 2011	Retail			Corporate									Other (2)			SCUSA		Total
Net interest income	$	214,422		$	103,793		$	11,843		$	16,860		$	67,308		$	535,501	$	949,727
Total non-interest income	104,331			17,773			6,385			4,269			27,586			86,482		246,826
Provision for credit losses	48,027			59,343			4,175			21,698			(8,360		)	148,261		273,144
Total expenses	213,186			27,103			2,528			6,380			109,500			140,242		498,939
Income/(loss) before income taxes	57,540			35,120			11,525			(6,949		)	(6,246		)	333,480		424,470
Intersegment revenue/(expense) (1)	(16,657		)	(119,703		)	(4,004		)	(26,860		)	167,224			—		—
Total average assets	$	24,653,197		$	20,676,933		$	3,325,508		$	2,704,402		$	25,427,524		$	15,855,264	$	92,642,828

For the Six-Month Period Ended							Global Banking			Specialized Business
June 30, 2011	Retail			Corporate									Other (2)			SCUSA		Total
Net interest income	$	429,191		$	201,862		$	20,524		$	35,451		$	163,015		$	1,082,111	$	1,932,154
Total non-interest income	238,011			40,520			14,442			9,113			61,085			193,049		556,220
Provision for credit losses	144,452			99,254			8,100			67,105			(7,998		)	270,003		580,916
Total expenses	414,431			54,517			4,993			13,863			215,173			286,234		989,211
Income/(loss) before income taxes	108,319			88,611			21,873			(36,404		)	16,925			718,923		918,247
Intersegment revenue/(expense) (1)	(34,782		)	(244,222		)	(8,567		)	(57,729		)	345,300			—		—
Total average assets	$	24,516,263		$	20,715,674		$	3,103,670		$	2,897,628		$	24,848,250		$	16,084,139	$	92,165,624

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

(2) The Other category includes earnings from the investment portfolio, interest expense on the Bank’s borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.

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

EXECUTIVE SUMMARY

Santander Holdings USA, Inc (“SHUSA” or the “Company") is the parent company of Sovereign Bank, N.A. (“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, N.A. Also effective on January 26, 2012, SHUSA became a bank holding company.

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.

The Bank has $80.4 billion in assets as of June 30, 2012 with retail branches, operations and team members located principally in Pennsylvania, Massachusetts, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, Maryland, and Delaware. The Bank gathers substantially all of its deposits in these market areas. The Bank uses the deposits, as well as other financing sources, to fund the loan and investment portfolios. The Bank earns interest income on the loans and investments. In addition, the Bank generates other 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 Bank’s principal expenses include interest expense on deposits, borrowings and other debt obligations, employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The Bank’s 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 Bank’s geographic footprint.

On January 30, 2009, SHUSA became a wholly owned subsidiary of Banco Santander, S.A. (“Santander”). Santander is a retail and commercial bank, headquartered in Spain, with a global presence in 10 core markets. At the end of the first half of 2012, Santander was the largest bank in the euro zone and 20th in the world by market capitalization. Founded in 1857, Santander had at June 30, 2012 €1,418 billion in managed funds, more than 100 million customers, 14,569 branches - more than any other international bank - and approximately 187,000 employees. Furthermore, it has relevant positions in the United Kingdom, Portugal, Germany, Poland, Argentina, Brazil, Mexico, Chile, and U.S. Santander had €1.7 billion in net attributable profit in the first six months of 2012 primarily generated in Brazil 26%, Spain 14%, United Kingdom 13%, Mexico 12% and U.S. 10%.

Santander Consumer USA, Inc. (SCUSA), a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers, was a consolidated subsidiary prior to December 31, 2011. On December 31, 2011, SCUSA increased its share capital through the issuance of shares to third party investors and certain members of its management for approximately $1.16 billion. Also on December 31, 2011, SCUSA's investors entered into a shareholder agreement providing each of its investors with certain board representation, governance, registration and other rights with respect to their ownership interests in SCUSA thereby requiring each of its investors to jointly manage SCUSA and share control over it. As a result, the Company's ownership interest was reduced to approximately 65% and its power to direct the activities that most significantly impact SCUSA's economic performance was reduced so that the Company no longer has a controlling interest in SCUSA.  Accordingly, SCUSA was deconsolidated on December 31, 2011, and is now accounted for as an equity method investment (the "SCUSA Transaction").

Following the acquisition by Santander, the Company began to change its strategy substantially. The Company has successfully completed the first phase which included stabilization and turning around the operating results of the Company. Successful stabilization efforts have included improving risk management and collections, improving the Company’s margins and efficiency. The second phase, transformation, beginning in 2010 and expected to continue through 2014, focuses on strengthening the soundness, sustainability, and competitiveness of the retail and commercial bank.

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

Noteworthy accomplishments in 2011 and the first half of 2012 include execution of the national bank charter change, the 10th consecutive quarter of profitability as of the second quarter of 2012, continuing to remain profitable and strengthening the Company's competitive position during the current challenging economic times, growth in the deposit base, increase in loan production to small businesses by more than 30% since 2010, continued improvements in the asset quality of the Bank's loan portfolio which included reducing non-performing loans to total loans to below 3% and a reduction in the run-off portfolio, increase in capital, and improvement in the cost to asset ratio. Global Banking and Market's (GBM) net revenue increased year-over-year due to strong loan and fee income growth. In addition the Company also expansed into energy and technology sectors in Corporate banking, which has and will continue to make it possible to attract new clients to the Bank.

During the second quarter of 2012, the Company successfully launched a new proprietary technology platform and servicing portal, which impacted the majority of its customer accounts. This migration allows the Company to better compete and actively bring to market its capabilities.

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

• Retail Banking efforts are focused on increasing market share in the existing primary service area, cross-selling to existing and new customers, and reducing dependence on third-party service providers. Significant initiatives in Retail Banking include transforming the retail banking platform and subsequent implementation of more robust product applications and MIS, enhancing the online, ATM, and call center platforms, introducing mobile banking and enhanced functionality in the existing electronic banking platform, and developing the capability to issue and service credit cards directly.

• Growing Corporate Banking is a key priority for the Bank. Management plans to take a measured and gradual approach to building a strong franchise. Significant Corporate Banking initiatives include strengthening the Large Corporate unit as a competitive provider for large corporate customers, balancing penetration of different Corporate Banking units within the Bank's footprint in New England, Metro New York, and the Mid-Atlantic region, upgrading the technology platform and operational capabilities.

• Management's priority in GBM is to grow the business by developing relationships in the U.S. with global companies through a sector specific approach with a differentiated product offering. This will include different types of financing, hedging and transactional services with the objective of improving the existing cross-selling and increasing revenue per client. GBM also expects to grow as a product provider to the Large Corporate and Middle Market client segments served by the Bank.

• Integrating information technology and operations systems by building a reliable and sales-oriented technology infrastructure to drive efficiency across all areas of the Bank. This allows leverage of the Company's access to Santander's factories, technology expertise and cost management approach as appropriate to minimize costs while maintaining quality of service.

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.

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

CURRENT REGULATORY ENVIRONMENT

National Charter Change and conversion to a Bank Holding Company

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 changed its name to Sovereign Bank, N.A. Also, effective on January 26, 2012, the Company became 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.

As a bank holding company, the Company is subject to the comprehensive, consolidated supervision and regulation of the Federal Reserve Bank ("FRB"). The Company is subject to risk-based and leverage capital requirements and information reporting requirements. The Company is “well capitalized” as of June 30, 2012 under the FRB's capital standards.

Additionally, because the Company has more than $50.0 billion in total consolidated assets, as a bank holding company, it is 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 $50.0 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 expects to be subject to annual stress tests by the FRB in 2013, 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.

Dodd-Frank Wall Street Reform and Consumer Protection Act” (“Dodd-Frank Act”)

On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which has been 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 introduced a substantial number of reforms that reshape the structure of the regulation of the financial services industry.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

The true impact of this legislation to the Company and the industry will be unknown until these reforms are complete, although they have and will involve higher compliance costs. Certain elements, such as the debit interchange legislation, have negatively affected the Company’s revenue and earnings; while certain other elements will phase in the heightened capital standards, including 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, changes 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 $50.0 billion in total assets) will be subject to additional prudential standards and 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.

Basel III

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, and introduces for the first time an official definition and guideline for Tier 1 common equity and liquidity.

Beginning January 1, 2013, banks with regulators adopting the Basel III capital framework in full will be required to meet the following minimum capital ratios - 3.5% common equity Tier 1 to risk-weighted assets, 4.5% Tier 1 capital to risk-weighted assets and 8.0% total capital to risk-weighted assets. The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). When the requirements for the fully phased-in capital conservation buffer are included, the resulting minimum levels for Tier 1 capital and total risk-based capital will be higher than the U.S.'s current "well-capitalized" minimums. While the rules are still under review, the Company expects to be able to satisfy the Basel III capital framework when U.S. regulations corresponding to it are finalized.

The Basel III liquidity framework could require U.S. banks to initiate additional liquidity management initiatives, including liquid assets, issuing term debt, and modifying product pricing for loans, commitments, and deposits. U.S. regulators have indicated that they may elect to make certain refinements to the Basel III liquidity framework.While the Company has a strong liquidity position, the impact of the Basel III liquidity framework to the Company is unknown.

Durbin Amendment

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 has been approximately $50-60 million on an annual basis.

Comprehensive Capital Analysis and Review (CCAR)

On January 24, 2012, the federal banking regulators published proposed rules on annual stress tests to be performed by banks having total consolidated assets of more than $10 billion. The Company would be subject to these annual tests. Such tests are already required by the Dodd-Frank Act. In addition to the annual stress testing requirement, under the proposal, the Company will also be subject to certain reporting and disclosure requirements. The Company will be required to conduct its first stress test and report results to the FRB in January 2013.

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

Foreclosure Matters

See discussion on foreclosure matters in Note 12 to the Consolidated Financial Statements.

CREDIT RISK ENVIRONMENT

Economy

Three 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. Growth isn't accelerating as swiftly as it normally does in a recovery, and that's rendering the economy particularly vulnerable to possible shocks, such as war, terrorism and severe natural disasters. U.S. real gross domestic product increased at an annual rate of 1.5 percent in the second quarter of 2012. In the first quarter, real GDP increased 2.0 percent. On an annual basis, the economy is expected to grow at a rate of 1.9% to 2.4% in 2012. The international economy will grow even more slowly than previously expected as flagging momentum in the U.S., a fiscal crisis in Europe and tumbling demand in China and India keep the recovery lethargic, according to the International Monetary Fund. The IMF lowered its outlook for expansion to 3.5% this year, and it isn’t much more optimistic for next year, when it says the global economy will grow 3.9%.

Unemployment in the United States continues to remain near historically high levels, and conditions are expected to remain challenging for financial institutions into 2012. The unemployment rate fell from a peak of 10.0% in late 2009 to 8.2 % by June 2012. The unemployment rate in the majority of the Company's principal locations is lower than the national average.

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.

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 grew consistently at $11.6 billion at June 30, 2012 compared to $11.6 billion at December 31, 2011, and Alt-A residential real estate loans (also known as limited documentation) reduced moderately at $1.4 billion at June 30, 2012 and $1.5 billion at December 31, 2011. Charge-offs on the Alt-A residential real estate loans were $10.0 million and $14.6 million during the three-month and six-month periods ended June 30, 2012 compared to $9.5 million and $17.0 million for the corresponding periods in the prior year. 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.

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

European Exposure

Recent economic market developments have raised doubt about the credit quality of certain European jurisdictions. Other than transactions with the parent company, Santander, as further described in Note 13 to the Consolidated Financial Statements, the Company's exposure to European countries includes the following :

Country	Covered Bonds		Financial Institution Bonds		Non-Financial Institutions Bonds		Government Institution Bonds		Total
	(in thousands)
Germany	$	—	$	—	$	37,000	$	—	$	37,000
Spain	92,395		—		121,160		74,750		288,305
Switzerland	102,000		44,010		—		—		146,010
Great Britain	53,548		142,235		95,065		—		290,848
Netherlands	99,350		71,700		5,000		—		176,050
Sweden	78,372		—		—		—		78,372
France	—		98,400		30,000		—		128,400
Greece	—		—		—		—		—
Ireland	—		—		—		—		—
Italy	—		—		69,768		—		69,768
Portugal	—		—		74,300		—		74,300
	$	425,665	$	356,345	$	432,293	$	74,750	$	1,289,053

Overall, gross exposure to the foregoing countries is less than 2.0% of the Company's total assets as of June 30, 2012. The Company currently does not have credit protection on any of these exposures. The Company enters into cross currency swaps in order to hedge the foreign exchange risk on certain Euro denominated investments.

Credit Rating Actions

United States

On August 5, 2011, Standard and Poor's, 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.

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

Spain and Santander

Standard and Poor's: On February 13, 2012, Standard and Poor's downgraded Spanish banks due to the expectation that their profitability could 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 a negative outlook. On April 30, 2012 Standard and Poor's downgraded Banco Santander's long-term rating from A+ to A- with negative outlook.

Fitch: On January 27, 2012, Fitch downgraded the Kingdom of Spain from AA- to A, and on June 7, 2012 downgraded again from A to BBB. On February 13, 2012, Fitch downgraded sixteen Spanish banks, including Banco Santander from AA- to A, and on June 11, 2012, downgraded Banco Santander again from A to BBB+ with a negative outlook.

Moody's: On February 13, 2012 Moody's lowered the ratings of the Kingdom of Spain from A1 to A3 with negative outlook, and on June 7, 2012, downgraded again from A3 to Baa3. On February 16, 2012, Moody's put over 100 banks, including certain Spanish banks on rating review for possible downgrade. On May 17, 2012 Moody's downgraded Banco Santander from Aa3 to A3 with negative outlook, and on June 25, 2012, downgraded again from A3 to Baa2.

SHUSA and the Bank

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

Standard and Poor's: 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. On April 30, 2012, Standard and Poor's lowered its credit ratings of SHUSA and the Bank to BBB+ from A with negative outlook. At the same time, Standard and Poor's lowered its subordinated and preferred ratings on SHUSA and the Bank and placed the ratings on CreditWatch with negative implications. The rating actions on SHUSA and the Bank follow the downgrade of Santander. Based on Standard and Poor's group methodology criteria, these rating actions are linked because as SHUSA is considered as "highly strategic" to Santander.

Fitch: 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. On June 11, 2012, Fitch downgraded both SHUSA and the Bank's long-term ratings from A- to BBB due to their downgrade of Banco Santander on the same day.

Moody's: On May 18, 2012, as a result of the Santander downgrade, SHUSA and the Bank were lowered from Baa1 to Baa2 with a negative outlook and A2 to A3 with negative outlook, respectively. Moody's further downgraded the Bank's rating from A3 to Baa1 on June 27, 2012 due to its downgrade of Santander two days prior. SHUSA and Sovereign's ratings remain under review by Moody's in conjunction with their review of the ratings of Spain as well as Santander.

72

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

CURRENT INTEREST RATE ENVIRONMENT

Net interest income represents a significant portion of the Company’s revenues. Accordingly, the interest rate environment has a substantial impact on the Company’s earnings. Currently, the Company is in an asset sensitive interest rate risk position. During the three-months ended June 30, 2012, the net interest margin decreased to 2.47% from 4.74% in the three-month period ended June 30, 2011. This decrease is primarily attributable to the impact of the SCUSA Transaction, which accounted for approximately 2.18% of the total 2.27% decrease. During the six months ended June 30, 2012, the net interest margin decreased to 2.52% from 4.88% in the six-month period ended June 30, 2011. This decrease is primarily attributable to the impact of the SCUSA Transaction, which accounted for approximately 2.21% of the total 2.36% decrease. 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 non-accrual loans. See the discussion of “Asset and Liability Management” practices, including the estimated impact of changes in interest rates on the Company’s net interest income.

RECENT INDUSTRY CONSOLIDATION

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.    

RESULTS OF OPERATIONS

GENERAL

The following tables show the Company's results of operations on a pro-forma basis (assuming the SCUSA Transaction occurred on January 1, 2009) for the three-month and six-month periods ended June 30, 2011 as well as actual results for the three-month and six-month periods ended June 30, 2012. See further discussion on the SCUSA Transaction in the Executive Summary section of this MD&A and Note 1 to the Consolidated Financial Statements.

73

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

	Three-Month Period Ended
	June 30, 2011									June 30, 2012
	SHUSA as reported (1)			Proforma adjustments (2)			Unaudited Pro-forma Balance (3)			SHUSA as reported (4)
	(in thousands)
Net interest income	$	949,727		$	(535,501	)	$	414,226		$	423,619
Provision for credit losses	(273,144		)	148,261			(124,883		)	(107,700		)
Total non-interest income	246,826			60,798			307,624			312,557
General and administrative expenses	(452,638		)	133,253			(319,385		)	(378,248		)
Other expenses	(46,301		)	1,091			(45,210		)	(33,192		)
Income before income taxes	424,470			(192,098		)	232,372			217,036
Income tax provision	(145,419		)	118,676			(26,743		)	(33,309		)
Net income	$	279,051		$	(73,422	)	$	205,629		$	183,727

	Six-Month Period Ended
	June 30, 2011									June 30, 2012
	SHUSA as reported (1)			Proforma adjustments (2)			Unaudited Pro-forma Balance (3)			SHUSA as reported (4)
	(in thousands)
Net interest income	$	1,932,154		$	(1,082,111	)	$	850,043		$	854,517
Provision for credit losses	(580,916		)	270,003			(310,913		)	(210,800		)
Total non-interest income	556,220			117,449			673,669			645,391
General and administrative expenses	(905,438		)	272,122			(633,316		)	(733,938		)
Other expenses	(83,773		)	2,209			(81,564		)	(70,676		)
Income before income taxes	918,247			(420,328		)	497,919			484,494
Income tax provision	(322,133		)	236,491			(85,642		)	(71,780		)
Net income	$	596,114		$	(183,837	)	$	412,277		$	412,714

(1) Amounts represent historical financial information from our Quarterly Report on Form 10-Q for the three-month and six-month periods ended June 30, 2011.

(2) Reflects the deconsolidation of SCUSA and adjustments relating to normal recurring intercompany transactions between SHUSA and SCUSA, which as a result of the deconsolidation would no longer be eliminated.

(3) Amounts represent a non-GAAP financial measure and is presented to assist in the evaluation of SHUSA's results.

(4) Amounts represent financial information from the Consolidated Statement of Comprehensive Income as reported in this Quarterly Report on Form 10-Q

The Company reported pre-tax income of $217.0 million and $484.5 million for the three-month and six-month periods ended June 30, 2012, compared to $424.5 million and $918.2 million for the three-month and six-month periods ended June 30, 2011. Results for the three-month and six-month periods ended June 30, 2012 compared to the three-month and six-month period ended June 30, 2011 were primarily impacted by the SCUSA Transaction.

74

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
THREE-MONTH PERIODS ENDED JUNE 30, 2012 AND 2011
	2012							2011
	Average Balance			Tax Equivalent Interest		Yield/ Rate		Average Balance			Tax Equivalent Interest		Yield/ Rate
	(in thousands)
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	19,325,414		$	109,824	2.27	%	$	17,299,485		$	110,815	2.56	%
LOANS(1):
Commercial loans	23,932,779			221,261		3.71	%	22,152,294			229,398		4.15	%
Multi-family	7,224,483			88,345		4.91	%	6,949,925			87,657		5.05	%
Consumer loans:
Residential mortgages	11,666,647			122,755		4.21	%	11,555,467			132,075		4.57	%
Home equity loans and lines of credit	6,810,167			62,932		3.72	%	6,936,976			67,200		3.89	%
Total consumer loans secured by real estate	18,476,814			185,687		4.03	%	18,492,443			199,275		4.31	%
Auto loans	651,975			10,989		6.78	%	16,121,878			636,003		15.82	%
Other	2,231,114			38,442		6.93	%	2,444,980			48,943		8.03	%
Total consumer	21,359,903			235,118		4.41	%	37,059,301			884,221		9.57	%
Total loans	52,517,165			544,724		4.16	%	66,161,520			1,201,276		7.28	%
Allowance for loan losses	(1,076,272		)	—		—		(2,229,928		)	—		—
NET LOANS	51,440,893			544,724		4.25	%	63,931,592			1,201,276		7.53	%
TOTAL EARNING ASSETS	70,766,307			654,548		3.71	%	81,231,077			1,312,091		6.47	%
Other assets	12,110,165							11,411,751
TOTAL ASSETS	$	82,876,472						$	92,642,828
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest bearing demand deposits	$	9,221,225		$	3,669	0.16	%	$	9,504,974		$	5,062	0.21	%
Savings	3,812,357			1,685		0.18	%	3,540,192			1,134		0.13	%
Money market	16,398,288			20,516		0.50	%	15,481,588			25,030		0.65	%
Certificates of deposit	11,835,506			32,166		1.09	%	11,403,584			33,262		1.17	%
TOTAL INTEREST BEARING DEPOSITS	41,267,376			58,036		0.57	%	39,930,338			64,488		0.65	%
BORROWED FUNDS:
FHLB advances	11,272,709			94,791		3.38	%	9,835,508			109,419		4.46	%
Federal funds and repurchase agreements	3,442,623			3,112		0.36	%	1,624,309			1,549		0.38	%
Other borrowings	3,740,767			62,675		6.74	%	19,627,062			175,182		3.58	%
TOTAL BORROWED FUNDS	18,456,099			160,578		3.49	%	31,086,879			286,150		3.69	%
TOTAL INTEREST BEARING FUNDING LIABILITIES	59,723,475			218,614		1.47	%	71,017,217			350,638		1.98	%
Noninterest bearing demand deposits	8,126,999							7,619,780
Other liabilities	2,016,761							2,241,875
TOTAL LIABILITIES	69,867,235							80,878,872
STOCKHOLDER’S EQUITY	13,009,237							11,763,956
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	82,876,472						$	92,642,828
TAXABLE EQUIVALENT NET INTEREST INCOME				$	435,934						$	961,453
NET INTEREST SPREAD (2)						2.24	%						4.50	%
NET INTEREST MARGIN (3)						2.47	%						4.74	%

75

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
SIX-MONTH PERIODS ENDED JUNE 30, 2012 AND 2011
	2012							2011
	Average Balance			Tax Equivalent Interest		Yield/ Rate		Average Balance			Tax Equivalent Interest		Yield/ Rate
	(in thousands)
EARNING ASSETS
INVESTMENTS AND INTEREST-EARNING DEPOSITS	$	19,041,109		$	220,389	2.32	%	$	16,504,606		$	236,267	2.86	%
LOANS(1):
Commercial loans	23,520,109			439,095		3.75	%	22,208,305			456,403		4.14	%
Multi-family	7,135,762			179,495		5.05	%	6,880,969			175,569		5.13	%
Consumer loans:
Residential mortgages	11,621,033			246,079		4.24	%	11,524,767			263,427		4.57	%
Home equity loans and lines of credit	6,825,799			127,128		3.75	%	6,954,019			134,292		3.89	%
Total consumer loans secured by real estate	18,446,832			373,207		4.05	%	18,478,786			397,719		4.32	%
Auto loans	761,874			26,254		6.93	%	16,669,820			1,274,875		15.42	%
Other	2,246,138			77,320		6.92	%	2,164,743			102,777		9.57	%
Total consumer	21,454,844			476,781		4.46	%	37,313,349			1,775,371		9.58	%
Total loans	52,110,715			1,095,371		4.22	%	66,402,623			2,407,343		7.30	%
Allowance for loan losses	(1,077,952		)	—		—	%	(2,216,443		)	—		—	%
NET LOANS	51,032,763			1,095,371		4.31	%	64,186,180			2,407,343		7.55	%
TOTAL EARNING ASSETS	70,073,872			1,315,760		3.77	%	80,690,786			2,643,610		6.59	%
Other assets	12,203,905							11,474,838
TOTAL ASSETS	82,277,777							92,165,624
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest bearing demand deposits	$	9,265,826		$	7,475	0.16	%	$	9,424,157		$	10,024	0.21	%
Savings	3,701,153			2,942		0.16	%	3,509,375			2,191		0.13	%
Money market	16,860,253			42,152		0.50	%	15,048,825			49,118		0.66	%
CDs	11,455,512			63,923		1.12	%	10,629,286			61,438		1.17	%
TOTAL INTEREST BEARING DEPOSITS	41,282,744			116,492		0.57	%	38,611,643			122,771		0.64	%
BORROWED FUNDS:
FHLB advances	10,828,700			187,568		3.48	%	10,207,005			220,968		4.36	%
Federal funds and repurchase agreements	3,505,096			5,652		0.32	%	2,409,274			4,948		0.41	%
Other borrowings	3,842,717			126,762		6.63	%	19,103,162			339,149		3.57	%
TOTAL BORROWED FUNDS	18,176,513			319,982		3.53	%	31,719,441			565,065		3.58	%
TOTAL INTEREST BEARING FUNDING LIABILITIES	59,459,257			436,474		1.47	%	70,331,084			687,836		1.97	%
Noninterest bearing demand deposits	7,903,322							7,385,927
Other liabilities	2,019,913							2,828,841
TOTAL LIABILITIES	69,382,492							80,545,852
STOCKHOLDER’S EQUITY	12,895,285							11,619,772
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	82,277,777						$	92,165,624
TAX EQUIVALENT BASIS INTEREST INCOME				879,286							1,955,774
NET INTEREST SPREAD (2)						2.30	%						4.63	%
NET INTEREST MARGIN (3)						2.52	%						4.88	%

(1) Interest on loans includes amortization of premiums and discounts on purchased loans and amortization of deferred loan fees, net of origination costs. Average loan balances includes non-accrual loans and loans held for sale.

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

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

76

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

NET INTEREST INCOME

Net interest income for the three-month and six-month periods ended June 30, 2012 was $423.6 million and $854.5 million compared to $949.7 million and $1.9 billion for the same period in 2011. The decrease was primarily due to the impact of the SCUSA Transaction.

Interest on investment securities and interest-earning deposits was $101.0 million and $202.5 million for the three-month and six-month periods ended June 30, 2012, compared to $101.9 million and $218.1 million for the same period in 2011. The average balance of investment securities and interest-earning deposits was $19.3 billion and $19.0 billion with an average tax equivalent yield of 2.27% and 2.32% for the three-month and six-month periods ended June 30, 2012 compared to an average balance of $17.3 billion and $16.5 billion with an average yield of 2.56% and 2.86% for the same period in 2011. The increase in the six-month average balance resulted in an increase in interest income of $285.5 million, while the decrease in the six-month average tax equivalent yield resulted in a decrease in interest income of $301.4 million. At June 30, 2012, the amount of US Government agency bonds increased to $5.7 billion from $4.0 billion at December 31, 2011. The portfolio of asset-backed securities decreased from $2.6 billion at December 31, 2011 to $1.8 billion at June 30, 2012. The portfolio is shifting to lower risk assets which provide a more stable source of liquidity.

Interest on loans was $0.5 billion and $1.1 billion for the three-month and six-month periods ended June 30, 2012, compared to $1.2 billion and $2.4 billion for the three-month and six-month periods in 2011. Average total loan balances, net of allowance for the three-month and six-month periods ended June 30, 2012decreased $12.5 billion and $13.2 billion from the same period in the corresponding year and average yields decreased3.28% and 3.24% for the three-month and six-month periods ended June 30, 2012 compared to the corresponding period in the prior year. The decrease is primarily due to the impact of the SCUSA Transaction. Net of the SCUSA Transaction, interest on loans has increased due to origination volume.

Interest on deposits and related customer accounts was $58.0 million and $116.5 million for the three-month and six-month periods ended June 30, 2012, compared to $64.5 million and $122.8 million for the same period in 2011. The average balance of deposits were $41.3 billion for three-month and six-month periods with an average cost of 0.57% for the three-month and six-month periods ended June 30, 2012 compared to an average balance of $39.9 billion and $38.6 billion with an average cost of 0.65% and 0.64% for the same period in 2011. The increase in the six-month average balance resulted in an increase in interest expense of $51.5 million, while the decrease in the six-month average cost resulted in a decrease in interest expense of $57.8 million.

Interest on borrowed funds was $160.6 million and $320.0 million for the three-month and six-month periods ended June 30, 2012, compared to $286.2 million and $565.1 million for the same period in 2011. The decrease is primarily due to the impact of the SCUSA Transaction. The average balance of total borrowings was $18.5 billion and $18.2 billion with an average cost of 3.49% and 3.53% for the three-month and six-month periods period ended June 30, 2012 compared to an average balance of $31.1 billion and $31.7 billion with an average cost of 3.69% and 3.58% for the same period in 2011. The change in the six-month average balance resulted in a decrease in interest expense of $229.4 million, while the change in the six-month average cost resulted in a decrease in interest expense of $15.7 million. The average balance of Bank borrowings was $15.8 billion and $15.5 billion with an average cost of 3.06% and 3.10% for the three-month and six-month periods ended June 30, 2012 compared to an average balance of $13.4 billion and $14.5 billion with an average cost of 4.42% and 4.13% for the same period in 2011. The average balance of holding company borrowings was $2.7 billion with an average cost of 5.98% and 5.96% for the three-month and six-month periods ended June 30, 2012 compared to an average balance of $3.1 billion with an average cost of 5.11% and 4.93% for the same period in 2011. Also included in the three-month and six-month periods ended June 30, 2011 were average borrowings totaling $14.6 billion and $14.1 billion with an average cost of 2.72% related to SCUSA.

77

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based upon credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the current loan portfolio. The provision for credit losses for the three-month and six-month periods ended June 30, 2012 was $107.7 million and $210.8 million, compared to $273.1 million and $580.9 million for the same periods in 2011. Excluding SCUSA, the provision for credit losses for the three-month and six-month periods ended June 30, 2011 was $124.9 million and $310.9 million. The decrease in provision can be attributed to an overall improvement in the credit quality of the loan portfolio with decreases in net charge-offs, delinquent loans and non-accrual loans compared to same period a year ago.

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

	Three-Month Period Ended June 30,					Six-Month Period Ended June 30,
	2012		2011			2012			2011
	(in thousands)
Allowance for loan losses, beginning of period	$	1,082,014	$	2,207,347		$	1,083,492		$	2,197,450
Allowance recorded as part of loans transferred from Santander	—		—			3,341			—
Charge-offs:
Commercial	88,893		143,340			184,108			255,679
Consumer secured by real estate	37,705		38,998			74,074			68,065
Consumer not secured by real estate	24,051		163,776			49,420			352,755
Total charge-offs	150,649		346,114			307,602			676,499
Recoveries:
Commercial	6,400		12,811			20,558			19,711
Consumer secured by real estate	1,215		1,268			4,355			2,411
Consumer not secured by real estate	8,821		67,514			19,072			143,206
Total recoveries	16,436		81,593			43,985			165,328
Charge-offs, net of recoveries	134,213		264,521			263,617			511,171
Provision for loan losses (1)	107,700		284,147			232,285			540,694
Allowance for loan losses, end of period	$	1,055,501	$	2,226,973		$	1,055,501		$	2,226,973
Reserve for unfunded lending commitments, beginning of period	$	235,000	$	351,846		$	256,485		$	300,621
Provision for unfunded lending commitments (1)	—		(11,003		)	(21,485		)	40,222
Reserve for unfunded lending commitments, end of period	$	235,000	$	340,843		$	235,000		$	340,843
Total allowance for credit losses, end of period	$	1,290,501	$	2,567,816		$	1,290,501		$	2,567,816

(1) The provision for credit losses on the Consolidated Statement of Comprehensive Income is the sum of the total provision for loan losses and provision for unfunded lending commitments.

The credit quality of the loan portfolio has a significant impact on the Company’s operating results. The Company continues to experience overall credit quality improvement including signs of improvement in the commercial and consumer portfolios beginning in 2010 and continuing through 2012. The net charge-offs were $134.2 million and $263.6 million during the three-month and six-month periods ended June 30, 2012 compared to $264.5 million and $511.2 million during the corresponding period in the prior year. Excluding SCUSA , net charge-offs for the three-month and six-month periods ended June 30, 2011 were $185.3 million and $334.4 million. The Company's charge-offs decreased for the three-months ended June 30, 2012 compared to June 30, 2011 due to a decrease in commercial loan charge-offs.

78

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

NON-INTEREST INCOME

Total non-interest income was $312.6 million and $645.4 million for the three-month and six-month periods ended June 30, 2012, compared to $246.8 million and $556.2 million for the same periods in 2011. Non-interest income fluctuation was impact by the activity in the below components.

Income/(expense) from equity method investments was $106.6 million and $263.9 million for the three-month and six-month periods ended June 30, 2012 compared to $(3.3) million and $(6.1) million for the three-month and six-month periods ended June 30, 2011. The fluctuation was primarily caused by the impact of the SCUSA Transaction. See further discussion on the SCUSA Transaction in the Executive Summary section of this MD&A and Note 1 to the Consolidated Financial Statements.

Consumer fees were $61.4 million and $122.9 million for the three-month and six-month periods ended June 30, 2012, compared to $164.9 million and $337.8 million for the same periods in 2011. Excluding the consumer fees from SCUSA in 2011, consumer fees were $81.8 million and $154.5 million for the same periods in 2011. The decrease for the three-month and six-month periods ended June 30, 2012 is due to decreases in consumer deposit fees of $12.8 million and $21.8 million, respectively, which were primarily attributable to the impact of the Durbin amendment.

Commercial fees were $43.3 million and $89.7 million for the three-month and six-month periods ended June 30, 2012, compared to $41.7 million and $86.3 million for the same periods in 2011. The Company has been able to maintain the commercial fee levels in spite of declining commercial loan balances due to pricing changes on the commercial deposit and loan portfolios as well as higher syndication fees.

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

Net mortgage banking income was composed of the following components:

	Three-Month Period Ended June 30, 2012						Six-Month Period Ended June 30,
	2012			2011			2012			2011
	(in thousands)
Mortgage servicing fees	$	16,095		$	12,913		$	28,050		$	25,757
Sales of mortgage loans and related securities	$	9,373		$	393		$	24,865		$	6,074
Net losses from changes in fair value	(20,984		)	—			(19,158		)	—
Net gains on hedging activities	7,326			3,723			5,960			234
Amortization of mortgage servicing rights	(161		)	(9,651		)	(522		)	(20,811		)
Residential mortgage servicing rights impairments	—			(4,533		)	—			(2,851		)
Charges related to multi-family loans sold with recourse	(505		)	(474		)	(2,235		)	(923		)
Multi-family mortgage servicing rights recoveries	88			264			88			4,749
Total mortgage banking income, net	$	11,232		$	2,635		$	37,048		$	12,229

Sales of mortgage loans have increased for the three-month period June 30, 2012 compared to June 30, 2011. For the three-month and six-month periods ended June 30, 2012, the Company sold $821.7 million and $1.5 billion of loans at gains of $9.4 million and $24.9 million, compared to $186.7 million and $520.4 million of loans at gains of $0.4 million and $6.1 million for the corresponding periods in the prior year.

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

At June 30, 2012 and December 31, 2011 the Company serviced residential real estate loans for the benefit of others totaling $13.6 billion and $13.7 billion, respectively. The carrying value of the related mortgage servicing rights at June 30, 2012 and December 31, 2011 was $95.5 million and $91.3 million, respectively.

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

The Company previously sold multi-family loans in the secondary market to Fannie Mae while retaining servicing. In September 2009, the Bank elected to stop selling multi-family loans to Fannie Mae and since that time has retained all production for the loan portfolio. Under the terms of the multi-family sales program with Fannie Mae, the Company retained a portion of the credit risk associated with such loans. As a result of this agreement with Fannie Mae, the Company retains a 100% first loss position on each multi-family loan sold to Fannie Mae under such program until the earlier to occur of (i) the aggregate approved losses on the multi-family loans sold to Fannie Mae reaching the maximum loss exposure for the portfolio as a whole or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off.

The Company has established a liability related to the fair value of the retained credit exposure for multi-family loans sold to Fannie Mae. This liability represents the amount that the Company estimates that it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses that the portfolio is projected to incur based upon internal specific information and an industry-based default curve with a range of estimated losses. At June 30, 2012 and December 31, 2011, the Company had a $130.2 million and $135.5 million liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae under this sales program.

At June 30, 2012 and December 31, 2011, the Company serviced $8.5 billion and $9.3 billion, respectively, of multi-family loans for Fannie Mae that had been sold to Fannie Mae pursuant to this program with a credit loss exposure of $161.7 million and $167.4 million, respectively; losses, if any, resulting from representation and warranty impediments would be in addition to the credit loss exposure . As a result of this retained servicing on multi-family loans sold to Fannie Mae, the Company had a loan servicing assets of $0.4 million at December 31, 2011. This servicing asset has been completely amortized during the second quarter of 2012. During the three-month and six-month periods ended June 30, 2012, the Company recorded servicing asset amortization of $0.2 million and $0.5 million compared to $0.9 million and $3.1 million for the comparable periods in the prior year. During the three-month and six-month periods ended June 30, 2012, the Company recorded net servicing recoveries of $0.1 million. Additionally, during the three-month and six-month periods ended June 30, 2011, the Company recorded net servicing recoveries of $0.3 million and $4.7 million, respectively.

Bank owned life insurance ("BOLI") income represents fluctuations in the cash surrender value of life insurance policies for certain employees where the Bank is the beneficiary of the policies, as well as the receipt of insurance proceeds. The BOLI income was $16.5 million and $30.9 million for the three-month and six-month periods ended June 30, 2012, compared to $13.4 million and $27.3 million for the comparable periods in the prior year.

Net gains on investment securities were $61.0 million and $76.5 million for the three-month and six-month periods ended June 30, 2012, compared to net gains of $20.1 million and $81.9 million for the same periods in 2011. In May 2012, the Company sold $918.7 million of FHLMC and FNMA mortgage-backed debt securities for a gain of $40.0 million. There were no other-than-temporary impairment charges in earnings recognized in the three-month and six-month periods ended June 30, 2012. Other-than-temporary impairment charges of $325 thousand were recognized in three-month and six-month periods ended June 30, 2011.

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

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the three-month and six-month periods ended June 30, 2012 were $378.2 million and $733.9 million, compared to $452.6 million and $905.4 million for the same periods in 2011. The decrease in expenses is primarily due to the impact of the SCUSA Transaction in 2011. Excluding the impact of the SCUSA Transaction in 2011, general and administrative expenses increased by $58.9 million and $100.6 million. The increases were due primarily to increased compensation and benefit expenses, increased loan servicing expenses, increase in outside services fees, increase in occupancy and equipment expenses and expenses related to the IT transformation.

During the second quarter of 2012, the Company successfully launched a new proprietary technology platform and servicing portal, which impacted the majority of its customer accounts. This migration allows the Company to better compete and actively bring to market its capabilities. While considered highly successful, the conversion carries with it inherent operational and other risks which could give rise to certain losses. Accordingly, during the three months ended June 30, 2012, the Company established an $18.0 million reserve for contingent liabilities in connection with the conversion based on its experience from previous migrations.

OTHER EXPENSES

Other expenses consist primarily of amortization of intangibles, deposit insurance expense, merger related and integration charges, and other restructuring and proxy and related professional fees. Other expenses were $33.2 million and $70.7 million for the three-month and six-month periods ended June 30, 2012, compared to $46.3 million and $83.8 million for the same periods in 2011. Other expenses included lower intangible amortization expense offset by loss on debt extinguishment.

The Company recorded intangible amortization expense of $9.4 million and $20.1 million for the three-month and six-month periods ended June 30, 2012, compared to $16.1 million and $29.9 million for the corresponding periods in the prior year. The decrease in the current year period is due primarily to decreased core deposit intangible amortization expense on previous acquisitions and assets that become fully amortized during the year.

INCOME TAX PROVISION/ (BENEFIT)

An income tax provision of $33.3 million and 71.8 million was recorded for the three-month and six-month periods ended June 30, 2012, compared to $145.4 million and 322.1 million for the same period in 2011, resulting in an effective tax rate of 15.3% and 14.8% for the three-month and six-month periods ended June 30, 2012 compared to 34.3% and 35.1% for the comparable periods in 2011. The decrease is primarily due to the impact of the SCUSA Transaction and the tax benefit from investment tax credits related to a direct-financing lease transaction during the quarter.

The Company's effective tax rate in future periods will be affected by the results of operations allocated to the various tax jurisdictions within which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company's interpretations by any of various tax authorities that may examine tax returns filed by the Company or any of its subsidiaries.

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

LINE OF BUSINESS RESULTS

During the second quarter of 2011, the multi-family and large corporate commercial specialty groups were merged into the Corporate banking segment from the Specialized Business segment. Since the Specialized Business segment had no goodwill allocated to it, this reporting structure change had no impact on the amount of goodwill assigned to other segments. Prior period results were recast to conform to current methodologies for the segments.

During the first quarter of 2012, the allocation of the provision for credit losses to each segment was refined. First, the provision for credit losses recorded for each segment is now based on the net charge-offs of each business and changes in total reserves allocated to each business, instead of changes in specific reserves only. Second, the Company refined the determination of specific reserves related to mortgage TDRs. For management purposes, provisions for TDRs in the Retail segment reflect changes in those specific reserves for each period presented under a consistent methodology. As a result of these changes, provision expense was appropriately allocated across segments. Prior period results were recast to conform to current methodologies for the segments.

During the first quarter of 2012, the methodology to allocate general and administrative expenses to each segment was modified. Previously, all general and administrative expenses, including corporate overhead costs, were allocated to the segments for profitability reporting. Only expenses directly related to each segment are allocated to each segment, and indirect expenses remain in the Other category. This change provides a more accurate representation of each segment's performance. In addition, general and administrative expenses and other expenses were combined to present total expenses which is representative of how expenses are reviewed by management for each segment. Prior period results were recast to conform to current methodologies for the segments.

During the first quarter of 2012, the Company's funds transfer pricing (FTP) methodology was modified to better represent the actual costs of funds of the Company, which included adding a liquidity premium to compute an appropriate market participant spread for commercial loans and deposits by analyzing the mix of borrowings available to the Company with comparable maturity periods. Therefore, interest income increased for segments with a surplus of interest and non interest earning deposits and interest expense increased for those segments with a deficit of interest and non interest earning deposits. Prior period results have been recast based on our best estimate to conform to current methodologies for the segments.

The Retail banking segment net interest income increased$3.8 million and decreased $3.1 million to $218.2 million and $426.1 million for the three-month and six-month periods ended June 30, 2012 compared to the corresponding periods in the preceding year. The net spread on a match funded basis for this segment was 1.28% and 1.26% for the three-month and six-month periods ended June 30, 2012 compared to 1.32% and 1.35% for the same periods in the prior year. The average balance of the Retail banking segment's loans was $24.4 billion and $24.4 billion for the three-month and six-month periods ended June 30, 2012 compared to $24.2 billion and $24.2 billion for the same period in the preceding year. The average balance of deposits was $37.7 billion and $37.4 billion for the three-month and six-month periods ended June 30, 2012 compared to $36.4 billion and $35.8 billion during the same period in the preceding year. Average assets for the three-month and six-month periods ended June 30, 2012 were $25.3 billion and $25.4 billion compared to $24.7 billion and $24.5 billion for the same periods in the preceding year. The provision for credit losses increased$22.7 million and decreased $7.9 million to $70.7 million and $136.6 million for the three-month and six-month periods ended June 30, 2012 compared to the corresponding periods in the preceding year. Total expenses were $225.0 million and $439.2 million for the three-month and six-month periods ended June 30, 2012, compared to $213.2 million and $414.4 million for the three-month and six-month periods ended June 30, 2011. The increase in total expenses is due to increased assets, as well as increased compensation and benefit expense within the Retail banking segment resulting from a higher headcount.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

The Corporate banking segment net interest income increased$4.7 million and $17.3 million to $108.5 million and $219.1 million for the three-month and six-month periods ended June 30, 2012 compared to the corresponding periods in the preceding year. The net spread on a match funded basis for this segment was 1.79% and 1.80% for the three-month and six-month periods ended June 30, 2012 compared to 1.76% and 1.74% for the same periods in the prior year. The average balance of loans for the three-month and six-month periods ended June 30, 2012 was $21.6 billion and $21.5 billion compared to $21.1 billion and $21.2 billion for the corresponding period in the prior year. The average balance of deposits for the three-month and six-month periods ended June 30, 2012 was $7.4 billion and 7.5 billion compared to $7.0 billion and $6.8 billion for the same periods in 2011. The provision for credit losses decreased$32.6 million and $88.6 million to $26.7 million and $10.7 million for the three-month and six-month periods ended June 30, 2012 compared to the same periods in the preceding year. Total expenses were $32.5 million and $62.4 million for the three-month and six-month periods ended June 30, 2012 compared to $27.1 million and $54.5 million for the corresponding periods in the prior year. Income before taxes increased $33.0 million and $92.3 million to $68.1 million and $180.9 million for the three-month and six-month periods ended June 30, 2012 compared to the same periods in 2011.

The Global Banking segment net interest income increased$13.6 million and $26.8 million to $25.4 million and $47.3 million for the three-month and six-month periods ended June 30, 2012 compared to the corresponding periods in the preceding year. The net spread on a match funded basis for this segment was 2.54% and 2.42% for the three-month and six-month periods ended June 30, 2012 compared to 1.65% and 1.69% for the same periods in the prior year. The average balance of loans for the three-month and six-month periods ended June 30, 2012 was $4.8 billion and $4.3 billion compared to $2.6 billion and $2.3 billion for the corresponding period in the prior year. Average assets for the Global Banking segment were $5.7 billion_ and $5.2 billion during the the three-month and six-month periods ended June 30, 2012 compared to $3.3 billion and $3.1 billion for the same periods in 2011. Average assets and loans increased in Global Banking due to the growth of the business, specifically after the conversion to a national bank in the first quarter of 2012, and the transfer of $374.0 million of commercial loans to the Company from Santander in the first quarter of 2012. Total expenses were $11.0 million and $21.4 million for the three-month and six-month periods ended June 30, 2012 compared to $2.5 million and $5.0 million for the corresponding periods in the prior year.

The Specialized Business segment net interest income decreased$6.7 million and $14.2 million to $10.2 million and $21.2 million for the three-month and six-month periods ended June 30, 2012 compared to the corresponding periods in the preceding year. The net spread on a match funded basis for this segment was 2.57% and 2.62% for the three-month and six-month periods ended June 30, 2012 compared to 2.76% and 2.73% for the same periods in the prior year. The average balance of loans for the three-month and six-month periods ended June 30, 2012 was $1.7 billion and $1.8 billion compared to $2.9 billion and $3.1 billion for the corresponding period in the prior year. The average balance of deposits was $189.2 million and $127.4 million for the three-month and period ended June 30, 2012 compared to $114.7 million and $118.3 million for the same period in 2011. The balances within this segment have been steadily decreasing due the segment primarily being comprised of portfolios in a run-off position. The provision for credit losses decreased$39.5 million and $82.0 million to a release of the provision of $17.8 million and $14.9 million for the three-month and six-month periods ended June 30, 2012. Total expenses were $6.6 million and $13.5 million for the three-month and six-month periods ended June 30, 2012, compared to $6.4 million and $13.9 million for the three-month and six-month periods ended June 30, 2011. Average assets for Specialized Business was $1.6 billion and $1.7 billion for the three-month and six-month periods ended June 30, 2012 and $2.7 billion and $2.9 billion for the same periods in 2011. Income before taxes increased $31.7 million and $67.3 million to $24.8 million and $30.9 million for the three-month and six-month periods ended June 30, 2012 compared to the same periods in 2011.

Loss before income taxes for Other decreased$26.1 million and $123.4 million to a $32.4 million and $106.5 million loss for the three-month and six-month periods ended June 30, 2012 compared to the corresponding periods in the preceding year. Net interest income decreased $6.0 million and $22.2 million to $61.3 million and $140.8 million for the three-month and six-month periods ended June 30, 2012 compared to the corresponding periods in the preceding year, due to the decreasing interest rate environment. Average assets for Other were $29.0 billion and $28.9 billion for the three-month and six-month periods ended June 30, 2012 and $25.4 billion and $24.8 billion for the same periods in 2011

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

On December 31, 2011, SCUSA increased its share capital through the issuance of shares to third party investors and certain members of its management for approximately $1.16 billion. Also on December 31, 2011, SCUSA's investors entered into a shareholder agreement providing each of its investors with certain board representation, governance, registration and other rights with respect to their ownership interests in SCUSA thereby requiring each of its investors to jointly manage SCUSA and share control over it. As a result, the Company's ownership interest was reduced to approximately 65% and its power to direct the activities that most significantly impact SCUSA's economic performance was reduced so that the Company no longer has a controlling interest in  SCUSA.  Accordingly, SCUSA was deconsolidated on December 31, 2011, and is accounted for as an equity method investment as of June 30, 2012. The Company's investment balance in SCUSA as of June 30, 2012 was $2.7 billion.

FINANCIAL CONDITION

LOAN PORTFOLIO

Total loans excluding the allowance and including loans held for sale was $52.9 billion at June 30, 2012 compared to $51.7 billion at December 31, 2011.

At June 30, 2012, commercial loans (excluding multi-family loans) totaled $24.6 billion representing 46.5% of the Company’s loan portfolio, compared to $22.8 billion, or 44.1% of the loan portfolio at December 31, 2011 and $22.2 billion, or 33.6% of the loan portfolio at June 30, 2011. At June 30, 2012 and December 31, 2011, only 19% and18%, respectively, of the total commercial portfolio was unsecured.

At June 30, 2012, multi-family loans totaled $7.2 billion representing 13.5% of the Company’s loan portfolio, compared to $7.1 billion, or 13.7% of the loan portfolio at December 31, 2011 and $7.0 billion or 10.6% of the loan portfolio at June 30, 2011.

The consumer loan portfolio (including held for sale) secured by real estate, consisting of home equity loans and lines of credit and residential loans, totaled $18.4 billion at June 30, 2012, representing 34.8% of the Company’s loan portfolio, compared to $18.5 billion, or 35.8%, of the loan portfolio at December 31, 2011 and $18.5 billion or 28.0% of the loan portfolio at June 30, 2011.

The consumer loan portfolio not secured by real estate, consisting of automobile loans and other consumer loans, totaled $2.8 billion at June 30, 2012, representing 5.2% of the Company’s loan portfolio, compared to $3.3 billion, or 6.4%, of the loan portfolio at December 31, 2011 and $18.4 billion or 27.8% of the loan portfolio at June 30, 2011. Excluding SCUSA from June 30, 2011, auto loans have declined to $506.7 million at June 30, 2012 compared to $1.4 billion at June 30, 2011 due to run-off in the Bank’s indirect auto loan portfolio. The Bank ceased originating all indirect auto loans as of January 2009.

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

NON-PERFORMING ASSETS

Non-performing assets were $1.2 billion or 1.47% of total assets at June 30, 2012, compared to $1.5 billion or 1.83% of total assets at December 31, 2011.

The Company places all commercial and residential mortgage loans on non-performing status at 90 days delinquent or sooner if management believes the loan has become impaired unless return to current status is expected imminently. A loan is considered to be impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g. less than 90 days) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

For the majority of auto loans, the accrual of interest is discontinued and reversed once an account becomes past due 90 days or more. All other consumer loans, excluding credit cards, continue to accrue interest until they are 90 days delinquent, at which point they are either charged-off or placed on non-accrual status and anticipated losses are reserved. Credit cards remain accruing interest until they are 180 days delinquent, at which point they are charged-off and all interest is removed from interest income. At 180 days delinquent, anticipated losses on residential real estate loans are charged off.

Generally, loans that have been classified as non-accrual remain classified as non-accrual until the loan is able to sustain a period of repayment which makes the loan less than 90 days delinquent for a monthly amortizing loan at which time, accrual of interest resumes.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

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

	June 30, 2012			December 31, 2011
	(in thousands)
Non-accrual loans:
Commercial:
Commercial real estate	$	335,959		$	459,692
Commercial and industrial	174,215			213,617
Multi-family	52,247			126,738
Total commercial loans	562,421			800,047
Consumer:
Residential mortgages	439,624			438,461
Consumer loans secured by real estate	107,818			108,075
Consumer not secured by real estate	14,370			12,883
Total consumer loans	561,812			559,419
Total non-accrual loans	1,124,233			1,359,466
Other real estate owned	87,550			103,026
Other repossessed assets	3,779			5,671
Total other real estate owned and other repossessed assets	91,329			108,697
Total non-performing assets	$	1,215,562		$	1,468,163
Past due 90 days or more as to interest or principal and accruing interest	$	—		$	1,211
Annualized net loan charge-offs to average loans (2)	1.02		%	1.92		%
Non-performing assets as a percentage of total assets	1.47		%	1.83		%
Non-performing loans as a percentage of total loans	2.12		%	2.63		%
Non-performing assets as a percentage of total loans, real estate owned and repossessed assets	2.29		%	2.84		%
Allowance for credit losses as a percentage of total non-performing assets (1)	106.2		%	91.3		%
Allowance for credit losses as a percentage of total non-performing loans (1)	114.8		%	98.6		%

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

(2) Annualized net loan charge-offs to average loans is calculated as annualized net loan charge-off as of six-month period ended June 30, 2012 divided the six-month average loan balance.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

The Company’s allowance for credit losses as a percentage of total loans has decreased to 2.44% at June 30, 2012 compared to 2.59% at December 31, 2011. The Company has seen improvements from December 31, 2011 levels in the three-month period ended June 30, 2012. The decrease in the allowance as a percentage of total loans from June 30, 2012 compared to December 31, 2011 is due to the increase in the total loans of $1.3 billion. The allowance for loan losses decreased $28.0 million when comparing June 30, 2012 to December 31, 2011. Excluding loans that are classified as non-accrual, loans past due have decreased from $575.1 million at year end to $514.7 million at June 30, 2012.

No commercial loans were ninety (90) days or more past due and still accruing interest as of June 30, 2012 versus $1.2 million as of December 31, 2011. Potential problem commercial loans, or commercial loans past due 30 or more days but less than 90 days and not currently classified as non-performing, totaled approximately $92.4 million and $88.1 million at June 30, 2012 and December 31, 2011, respectively.

TROUBLED DEBT RESTRUCTURINGS

Troubled debt restructurings (“TDRs”) are loans that have been modified whereby the Company has agreed to make certain concessions to customers to both meet the needs of the customers and to maximize the ultimate recovery of a loan. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.

The following table summarizes TDRs at the dates indicated:

	June 30, 2012		December 31, 2011
	(in thousands)
Performing
Commercial	$	119,145	$	102,934
Residential mortgage	419,173		385,863
Other consumer	50,301		38,849
Total performing	588,619		527,646
Non-performing
Commercial	142,434		93,420
Residential mortgage	124,141		105,476
Other consumer	19,894		18,359
Total non-performing	286,469		217,255
Total	$	875,088	$	744,901

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

ALLOWANCE FOR CREDIT LOSSES

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

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

	June 30, 2012				December 31, 2011
	Amount		% of Loans to Total Loans		Amount		% of Loans to Total Loans
	(in thousands)
Allocated allowance:
Commercial loans	$	656,883	60	%	$	766,865	58	%
Consumer loans	357,543		40	%	292,816		42	%
Unallocated allowance	41,075		n/a		23,811		n/a
Total allowance for loan losses	$	1,055,501	100	%	$	1,083,492	100	%
Reserve for unfunded lending commitments	235,000				256,485
Total allowance for credit losses	$	1,290,501			$	1,339,977

Allowance for Loan Losses

The Company maintains an allowance for loan losses that management believes is sufficient to absorb inherent losses in the loan portfolio. The adequacy of the Company’s allowance for loan losses is regularly evaluated. In addition to past loss experience, management’s evaluation of the adequacy of the allowance to absorb loan losses takes into consideration the risks inherent in the loan portfolio, specific loans which have loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. Management also considers loan quality, changes in the size and character of the loan portfolio, amount of non-performing loans, and industry trends. At June 30, 2012, the Company’s total allowance for loan losses was $1.1 billion.

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

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

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

For the commercial loan portfolios excluding small business loans (businesses with sales of up to $3.0 million), the Company has specialized credit officers, a monitoring unit and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For the commercial loan portfolios, risk ratings are assigned to each individual loan to differentiate risk within the portfolio and are reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrowers’ current risk profiles and the related collateral positions. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower’s risk rating on not less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Monitoring group to ensure consistency and accuracy in risk rating as well as appropriate frequency of risk rating review by the Bank’s credit officers. The Company’s Internal Audit group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded beyond a certain level, the Company’s workout department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more Credit Committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management’s strategies for the customer relationship going forward.

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

When the Bank determines that the value of an impaired loan is less than its carrying amount, the Bank recognizes impairment through a provision estimate or a charge-off to the allowance. Management performs these assessments on at least a quarterly basis. For commercial loans, a charge-off is recorded when a loan, or portion thereof, is considered uncollectable and of such little value that its continuance on the Bank’s books as an asset is not warranted, as outlined in accounting and regulatory guidance. Charge-offs are recorded on a monthly basis and partially charged-off loans continue to be evaluated on not less than a quarterly basis, with additional charge-offs or loan loss provisions taken on the remaining loan balance, if warranted, utilizing the same criteria.

The portion of the allowance for loan losses related to the commercial portfolio decreased from $766.9 million at December 31, 2011 (2.57% of commercial loans) to $656.9 million at June 30, 2012 (2.07% of commercial loans).

The consumer loan and small business loan portfolios are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, loan to value, and credit scores. Management evaluates the consumer portfolios throughout their life cycle on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. Management documents the collateral type, date of the most recent valuation, and whether any liens exist, to determine the value to compare against the committed loan amount.

The Company places residential mortgage loans on non-performing status at 90 days delinquent or sooner if management believes the loan has become impaired unless return to current status is expected imminently. A loan is considered to be impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g. less than 90 days) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

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

Consumer loans (excluding auto loans and credit cards) and any portion of a consumer loan secured by real estate mortgage loans not adequately secured are generally charged-off when deemed to be uncollectible or delinquent 180 days or more (120 days for closed-end consumer loans not secured by real estate), whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment include; a loan that is secured by collateral and is in the process of collection; a loan supported by a valid guarantee or insurance; or a loan supported by a valid claim against a solvent estate. Auto loans are charged off when an account becomes 121 days delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. Credit cards that are 180 days delinquent are charged-off and all interest is removed from interest income.

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

The allowance for the consumer loans was $357.5 million and $292.8 million at June 30, 2012 and December 31, 2011, respectively. The allowance as a percentage of consumer loans was 1.69% at June 30, 2012 and 1.35% at December 31, 2011.

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

Regardless of the extent of the Company’s analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures. The unallocated allowance for loan losses was $41.1 million at June 30, 2012 and $23.8 million at December 31, 2011. Management continuously evaluates its allowance methodology; however the unallocated allowance is subject to changes each reporting period due to certain inherent but undetected losses; which are probable of being realized within the loan portfolio.

Reserve for Unfunded Lending Commitments

In addition to the allowance for loan losses, the Bank also estimates probable losses related to unfunded lending commitments. Unfunded lending commitments are subject to individual credit reviews, except for the home equity line of credit (HELOC) portfolio, which is exception managed. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions and performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses and this reserve is classified within other liabilities on the Company's Consolidated Balance Sheet.

The reserve for unfunded lending commitments has decreased to $235.0 million at June 30, 2012 from $256.5 million at December 31, 2011. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the allowance for loan losses.

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

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

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

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

INVESTMENT SECURITIES

Investment securities consist primarily of mortgage-backed securities, tax-free municipal securities, U.S. Treasury and government agency securities, corporate debt securities, asset backed securities and stock in the Federal Home Loan Bank of Pittsburgh (“FHLB”). Mortgage-backed securities consist of pass-through, collateralized mortgage obligations, and adjustable rate mortgages issued by federal agencies. The Company’s mortgage-backed securities are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by Standard and Poor’s and Moody’s at the date of issuance. The Company purchases classes which are senior positions backed by subordinate classes. The subordinate classes absorb the losses and must be completely eliminated before any losses flow through the senior positions. The average life of the available-for-sale investment portfolio at June 30, 2012 is approximately 4.16 years compared to 4.24 years at December 31, 2011.

Total investment securities available-for-sale decreased to $15.4 billion at June 30, 2012, compared to $15.6 billion at December 31, 2011. The decrease was primarily due to management's continued focus to sell FNMA and asset backed securities offset by the purchase of GNMA's, covered bonds and collateralized loan obligations. In May 2012, the Company sold $918.7 million of FHLMC and FNMA mortgage-backed debt securities for a gain of $40.0 million. For additional information with respect to the Company’s investment securities, see Note 3 in the Notes to the Consolidated Financial Statements.

Other investments, which consists of FHLB stock and Federal Reserve Board stock, increased from $0.6 billion at December 31, 2011 to $1.0 billion at June 30, 2012 due to the purchase of $378.9 million of Federal Reserve Bank stock in the first quarter of 2012 as part of the Bank's charter conversion.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $3.4 billion at June 30, 2012 and December 31, 2011. There were no additions or impairments to goodwill in 2012 or 2011. Other intangibles, net of accumulated amortization, was $79.1 million million at June 30, 2012 and $99.2 million at December 31, 2011. The decrease of $20.1 million is due to year-to-date amortization expense.

Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but are subject to periodic impairment testing. This testing is required annually, or more frequently if events or circumstances indicate there may be impairment. No impairment indicators were noted since the annual review on December 31, 2011 and as such, no impairment test has been performed. The Company will perform its next annual goodwill impairment test at December 31, 2012.

DEPOSITS AND OTHER CUSTOMER ACCOUNTS

The Bank attracts deposits within its primary market area by offering a variety of deposit instruments, including demand and interest bearing demand deposit accounts, money market accounts, savings accounts, customer repurchase agreements, certificates of deposit and retirement savings plans. The Bank also issues wholesale deposit products such as brokered deposits and government deposits on a periodic basis which serve as an additional source of liquidity for the Company.

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

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

	June 30, 2012				December 31, 2011
	Balance		Percent of total deposits		Balance		Percent
	(dollars in thousands)
Interest-bearing demand deposits	$	8,923,679	18.3	%	$	9,345,803	19.6	%
Noninterest-bearing demand deposits	7,861,942		16.1		7,822,892		16.4
Savings	3,862,397		7.9		3,495,902		7.3
Money market	16,092,934		33.0		17,237,730		36.1
Certificates of deposit	11,977,463		24.7		9,895,188		20.6
Total Deposits	$	48,718,415	100.0	%	$	47,797,515	100.0	%

Total deposits and other customer accounts at June 30, 2012 were $48.7 billion compared to $47.8 billion at December 31, 2011. The increase in deposits from December 31, 2011 to June 30, 2012 was primarily due to certificates of deposits which increased $2.1 billion or 21.0% due to the expansion of broker deposits, savings which increased $366.5 million or 10.5% due to a steady growth in retail savings offset by a decrease in money markets of $1.1 billion or 6.6% mainly due to the loss of commercial money market accounts and a decrease in interest-bearing demand deposits of $422.1 million or 4.5% due to a decline in government deposits.

BORROWINGS AND OTHER DEBT OBLIGATIONS

The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and its asset/liability management. Collateralized advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB”) provided certain standards related to creditworthiness have been met. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. SHUSA also has term loans and lines of credit with Santander. Total borrowings and other debt obligations at June 30, 2012 were $19.2 billion compared to $18.3 billion at December 31, 2011. Total borrowings increased approximately $1.0 billion primarily due to the $1.3 billion increase in FHLB advances, increase of $2.2 billion in repurchase agreements, and execution of a $160 million term loan offset by the repayment of a $1.3 billion and $250 million senior note, and decrease of $1.1 billion in overnight federal funds.

The Company's debt agreements impose certain limitations on dividends, other payments and transactions. The Company is currently in compliance with these limitations.

Periodically, as part of the Company's wholesale funding management, the Company opportunistically repurchases outstanding borrowings in the open market. In 2011 the Company repurchased $274.2 million of outstanding borrowings. During the first six months of 2012, the Company repurchased $17.0 million of outstanding borrowings.

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

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

	June 30, 2012				December 31, 2011
	Balance		Effective Rate		Balance		Effective Rate
	(dollars in thousands)
Sovereign Bank borrowings and other debt obligations:
Overnight federal funds purchased(1)	$	93,100	0.15	%	$	1,166,000	0.08	%
Federal Home Loan Bank (FHLB) advances, maturing through August 2018	12,328,077		3.02		11,076,773		3.40
Securities sold under repurchase agreements(1)	3,271,938		0.42		1,030,300		0.38
REIT preferred, due May 2020	149,698		13.95		148,966		14.08
2.75% senior notes, due January 2012	—		—		1,349,920		3.92
5.125% subordinated debentures, due March 2013	262,043		5.17		260,277		5.21
8.750% subordinated debentures, due May 2018	496,759		8.81		496,554		8.81
Term loan, due February 2019(2)	160,000		4.38		—		—
Total Sovereign Bank borrowings and other debt obligations	$	16,761,615	2.81	%	$	15,528,790	3.30	%

(1) Overnight federal funds and securities sold under repurchase agreements are short-term in nature and due within one year.

(2) Please refer to Note 8 for discussion on the Term loan executed during the second quarter of 2012. .

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

	June 30, 2012				December 31, 2011
	Balance		Effective Rate		Balance		Effective Rate
	(dollars in thousands)
Holding company borrowings and other debt obligations:
Commercial paper(1)	$	998	0.55	%	$	18,082	0.87	%
Subordinated notes, due March 2020	753,970		5.96		753,072		5.96
2.50% senior notes, due June 2012	—		—		249,786		3.73
4.625% senior notes, due April 2016	483,222		4.65		496,761		4.66
Junior subordinate debentures - Capital Trust IV, due March 2034 (2)	824,742		7.41		824,742		7.41
Junior subordinate debentures - Capital Trust VI, due June 2036	249,560		7.91		252,560		7.91
Junior subordinate debentures - Capital Trust IX, due July 2036	154,640		2.22		154,640		2.15
Total holding company borrowings and other debt obligations	$	2,467,132	6.15	%	$	2,749,643	5.89	%

(1) Commercial papers are short-term in nature and due within one year

(2) Please refer to Note 13 for discussion on the Complaint from Trustee for the Trust PIERS.

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

OFF BALANCE SHEET ARRANGEMENTS

See further discussion on the Company's off-balance sheet arrangements in Note 5 and Note 12 to the Consolidated Financial Statements.

BANK REGULATORY CAPITAL

The minimum U.S. regulatory capital ratios for banks under Basel I are 4% for Tier 1 Risk-Based Capital Ratio and 4% for Tier 1 Leverage Capital Ratio. To qualify as “well-capitalized”, regulators require banks to maintain capital ratios of at least 6% for Tier 1 Risk-Based Capital Ratio, 10% for Total Risk-based Capital Ratio, and 5% for Tier 1 Leverage Capital Ratio. At June 30, 2012 and December 31, 2011, the Bank met the well-capitalized capital ratio requirements.

As a bank holding company, SHUSA is required to maintain Tier 1 Risk-Based Capital Ratios of at least 4%, Total Risk-Based Capital Ratios of 8%, and Tier 1 Leverage Capital Ratios of at least 4%. The Company's capital levels exceeded the ratios required for bank holding companies.

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution's capital tier depends upon its capital levels in relation to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized or adequately-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.

Federal banking laws, regulations and policies also limit the Bank's ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank's total distributions to the holding company within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) if the Bank is not adequately capitalized at the time. In addition, OCC prior approval would be required if the Bank's examination or CRA ratings fall below certain levels or the Bank is notified by the OCC that it is a problem association or an association in troubled condition. During the three years following the period-ended September 30, 2010, the Bank must obtain the written non-objection of the OCC to declare a dividend or make any other capital distribution.

Any dividends declared and paid have the effect of reducing the Bank's Tier 1 leverage capital to tangible assets and Tier 1 risk-based capital ratios. In December 2011, the Bank declared and paid a $150.0 million dividend to SHUSA. In April 2012, the Bank declared and paid a $50.0 million dividend to SHUSA. In July 2012, the Bank declared and paid an additional dividend of $55.0 million to SHUSA.

The following schedule summarizes the actual capital balances of the Bank and SHUSA at June 30, 2012:

	Sovereign Bank
	June 30, 2012		Well-capitalized Requirement		Minimum Requirement
Tier 1 leverage capital ratio	10.56	%	5.00	%	4.00	%
Tier 1 risk-based capital ratio	12.94	%	6.00	%	4.00	%
Total risk-based capital ratio	15.01	%	10.00	%	8.00	%
Tier 1 common capital ratio(1)	12.94	%	n/a		n/a

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

	SHUSA
	June 30, 2012
Tier 1 leverage capital ratio	11.15	%
Tier 1 risk-based capital ratio	13.54	%
Total risk-based capital ratio	16.05	%
Tier 1 common capital ratio(1)	12.63	%

⁽¹⁾ Ratio presented due to regulators emphasizing the Tier 1 common capital ratio in their evaluation of bank and bank holding company capital levels, although this metric is not provided for in the regulations.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity represents the ability of the Company to obtain cost effective funding to meet the needs of customers, as well as the Company's financial obligations. Factors that impact the liquidity position of the Company include loan origination volumes, loan prepayment rates, maturity structure of existing loans, core deposit growth levels, certificate of deposit maturity structure and retention, the Company's credit ratings, investment portfolio cash flows, maturity structure of wholesale funding, etc. These risks are monitored and centrally managed. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times.

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

The Company has the following major sources of funding to meet its liquidity requirements: dividends and returns of investment from its subsidiaries, short-term investments held by non-bank affiliates and access to the capital markets. During December 2011, the Company issued 3.2 million shares of common stock to Santander resulting in payment of $800.0 million and at the same time, declared dividends of $800.0 million in 2011 to Santander. This transaction was reported as a non-cash transaction. There were no significant stock issuance for the first six months of 2012.

In April 2012, SCUSA declared and paid a $214.4 million dividend to the Company.

The Bank may pay dividends to its parent subject to approval. In December 2011, the Bank issued a $150.0 million dividend to SHUSA. In April 2012, the Bank paid a $50.0 million dividend to SHUSA. In July 2012, the Bank paid an additional dividend of $55 million to SHUSA. At June 30, 2012, the holding company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.

As of June 30, 2012, SHUSA, through the Bank, had over $26.3 billion in committed liquidity from the FHLB and the Federal Reserve Bank. Of this amount, $14.0 billion is unused and therefore provides additional borrowing capacity and liquidity for the Company. At June 30, 2012, liquid assets (defined as cash and cash equivalents, loans held for sale, and securities available for sale exclusive of securities pledged as collateral) totaled approximately $12.3 billion or 25.2% of total deposits. This compares to $14.9 billion, or 31.2%, of total deposits, at December 31, 2011. In addition to the liquid assets, the Company also has available liquidity from unencumbered security collateral and federal funds of $9.2 billion. Management believes that the Company has ample liquidity to fund its operations.

Net cash provided by operating activities was $712.6 million for the six-months ended June 30, 2012. Net cash used by investing activities for the same period was $2.1 billion due primarily to the purchases of $4.1 billion of investments and $2.1 billion of loan purchases and activity, offset by $4.8 billion of investment sales, maturities and repayments. Net cash provided by financing activities for the six-months ended June 30, 2012 was $1.9 billion, which consisted primarily of a $0.9 billion increase in deposits and a net increase in borrowings of $0.9 billion. See the Consolidated Statement of Cash Flows for further details on our sources and uses of cash.

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

As of June 30, 2012 the Company had $3.2 billion billion of cash on hand compared to $2.6 billion at December 31, 2011. During the first half of 2012, cash was impacted by an increase in deposits, increase in borrowings, investment and loan sales, offset by borrowings repayments, loan portfolio acquisitions and an investment in a wind farm facility.

CONTRACTUAL OBLIGATIONS

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

	Payments Due by Period
	Total		Less than 1 year		Over 1 yr to 3 yrs		Over 3 yrs to 5 yrs		Over 5 yrs
	(in thousands)
FHLB advances (1)	$	13,561,459	$	3,880,474	$	4,191,175	$	4,045,332	$	1,444,478
Federal funds purchased (1)	93,100		93,100		—		—		—
Commercial paper and repurchase agreements	3,275,234		3,275,234		—		—		—
Other debt obligations (1) (2)	3,020,485		416,387		1,026,623		651,556		925,919
Junior subordinated debentures due to capital trust entities (1) (2)	1,919,060		236,274		161,532		391,357		1,129,897
Certificates of deposit (1)	12,189,633		9,066,516		1,646,913		1,470,846		5,358
Investment partnership commitments (3)	154		74		26		26		28
Operating leases(4)	650,686		103,291		179,270		142,272		225,853
Total contractual cash obligations	$	34,709,811	$	17,071,350	$	7,205,539	$	6,701,389	$	3,731,533

(1) Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based upon interest rates in effect at June 30, 2012. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.

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

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

(4) Does not include future expected sublease income

Excluded from the above table are deposits of $36.7 billion that are due on demand by customers. Additionally, $109.4 million of tax liabilities associated with unrecognized tax benefits have been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations.

The Company is a party to financial instruments and other arrangements with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage its exposure to fluctuations in interest rates. See further discussion on these risks in Note 9 to the Consolidated Financial Statements.

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

ASSET AND LIABILITY MANAGEMENT

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

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

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

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

If interest rates changed in parallel by the amounts below at June 30, 2012	The following estimated percentage increase/(decrease) to net interest income would result
Up 100 basis points	4.19	%
Up 200 basis points	7.63	%
Down 100 basis points	(5.86	)%

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

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

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

Management looks at the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk and also highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at June 30, 2012 and December 31, 2011. All dollar balances are in thousands:

	The following estimated percentage increase/(decrease) to MVE would result
If interest rates changed in parallel by	June 30, 2012			December 31, 2011
Base	$	10,727		$	8,777
Up 200 basis points	(3.51		)%	(5.91		)%
Up 100 basis points	(0.84		)%	(1.85		)%

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

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

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

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

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

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of June 30, 2012. Based on that evaluation, the Company's Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2012.

Changes in Internal Control over Financial Reporting

During the second quarter of 2012, the Company successfully launched a new proprietary technology platform and servicing portal, which impacted the majority of its customer accounts. This migration allows the Company to better compete and aggressively bring to market its capabilities. The implementation of the new platform was determined to have a material impact to the Company's internal control over financial reporting. Please refer to the General and Administrative Expenses section of MD&A for further discussion on the reserve recorded during the second quarter of 2012 related to the IT transformation.

Other than the changes mentioned above, no other changes in the Company's internal control over financial reporting occurred during 2012 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

Reference should be made to Note 10 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service and Note 12 to the Consolidated Financial Statements for SHUSA’s litigation disclosure which is incorporated herein by reference.

Item 1A — Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A Risk Factors, in the Company's 2011 Annual Report on Form 10-K.

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

No shares of the Company’s common stock were repurchased during the six-month period ended June 30, 2012.

Item 3 — Defaults upon Senior Securities

None.

Item 4 — Mine Safety Disclosures

None.

Item 5 — Other Information

None.

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Item 6 — Exhibits

(a) Exhibits

(3.1	)	Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 30, 2009)
(3.2	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to SHUSA's Current Report on Form 8-K filed March 27, 2009)
(3.3	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed February 5, 2010).
(3.4	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.2 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed June 21, 2011).
(3.5	)	Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed June 21, 2011)
(4.1	)	Santander Holdings USA, Inc. has certain debt obligations outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of Santander Holdings USA, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Quarterly Report on Form 10-Q. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request.
(31.1	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32.1	)	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2	)	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

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

		SANTANDER HOLDINGS USA, INC. (Registrant)
Date:	August 9, 2012	/s/ Jorge Morán
		Jorge Morán
		President and Chief Executive Officer (Authorized Officer)
Date:	August 9, 2012	/s/ Guillermo Sabater
		Guillermo Sabater
		Chief Financial Officer and Executive Vice President (Principal Financial Officer)

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EXHIBITS INDEX

(3.1	)	Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 30, 2009)
(3.2	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to SHUSA's Current Report on Form 8-K filed March 27, 2009)
(3.3	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed February 5, 2010)
(3.4	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.2 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed June 21, 2011)
(3.5	)	Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed June 21, 2011)
(4.1	)	Santander Holdings USA, Inc. has certain debt obligations outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of Santander Holdings USA, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Quarterly Report on Form 10-Q. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request.
(31.1	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32.1	)	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2	)	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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