10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009

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

SOVEREIGN BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o 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, 2009
Common Stock (no par value)	511,107,043 shares

FORWARD LOOKING STATEMENTS

SOVEREIGN BANCORP, 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 Sovereign Bancorp, Inc. (“Sovereign” or the “Company”). Sovereign may from time to time make forward-looking statements in Sovereign’s filings with the Securities and Exchange Commission (the “SEC” or the “Commission”) (including this Quarterly Report on Form 10-Q and the Exhibits hereto), in its reports to shareholders (including its Annual Report on Form 10-K for the fiscal year ended December 31, 2008) and in other communications by Sovereign, which are made in good faith by Sovereign, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Some of the statements made by Sovereign, 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 Sovereign’s vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business of Sovereign and are not historical facts. Although Sovereign 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 Sovereign’s control). Among the factors, which could cause Sovereign’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 Sovereign conducts operations, which may affect, among other things, the level of non-performing assets, charge-offs, and provision for credit losses;

• the effects of, or policies determined by the Federal Deposit Insurance Corporation, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

• inflation, interest rate, market and monetary fluctuations, which may, among other things reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;

• adverse movements and volatility in debt and equity capital markets;

• adverse changes in the securities markets, including those related to the financial condition of significant issuers in our investment portfolio;

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

• changing market conditions may force us to alter the implementation or continuation of cost savings or revenue enhancement strategies;

• Sovereign’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 Sovereign and its third party vendors to convert and maintain Sovereign’s data processing and related systems on a timely and acceptable basis and within projected cost estimates;

• the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles in the United States;

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

• technological changes;

1

FORWARD LOOKING STATEMENTS
(continued)

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

• 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 Sovereign as compared to what has been accrued or paid as of period end;

• Sovereign’s success in managing the risks involved in the foregoing;

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

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

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

If one or more of the factors affecting Sovereign’s forward-looking information and statements proves incorrect, then its actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, Sovereign cautions you not to place undue reliance on any forward-looking information and statements. The effect of these factors is difficult to predict. Factors other than these also could adversely affect our results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. New factors emerge from time to time and we cannot assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward looking statement. Any forward looking statements only speak as of the date of this document and Sovereign 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 Sovereign are expressly qualified by these cautionary statements.

2

INDEX

	Page
PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2009 and December 31, 2008		4
Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2009 and 2008		5-6
Consolidated Statement of Stockholders’ Equity for the six-month period ended June 30, 2009		7
Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2009 and 2008		8-9
Notes to Consolidated Financial Statements		10–33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34–57
Item 3. Quantitative and Qualitative Disclosures About Market Risk		58
Item 4. Controls and Procedures		58
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		59
Item 1A. Risk Factors		59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 6. Exhibits		60
SIGNATURES		61
EXHIBITS INDEX		62
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

3

PART I — FINANCIAL INFORMATION

Item 1. Condensed Financial Information

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited at June 30, 2009, audited at December 31, 2008)

	June 30,			December 31,
	2009			2008
	(in thousands, except share data)
ASSETS
Cash and amounts due from depository institutions	$	4,782,355		$	3,754,523
Investment securities:
Available-for-sale		10,040,559			9,301,339
Other investments		695,283			718,771
Loans held for investment		51,753,651			55,541,899
Allowance for loan losses		(1,441,155	)		(1,102,753	)
Net loans held for investment		50,312,496			54,439,146
Loans held for sale		1,118,919			327,332
Premises and equipment, net		521,607			550,150
Accrued interest receivable		237,991			251,612
Goodwill		3,431,481			3,431,481
Core deposit intangibles and other intangibles, net of accumulated amortization of $897,673 and $858,578 at June 30, 2009 and December 31, 2008, respectively		229,377			268,472
Bank owned life insurance		1,874,172			1,847,688
Other assets		1,930,757			2,203,154
TOTAL ASSETS	$	75,174,997		$	77,093,668
LIABILITIES
Deposits and other customer accounts	$	49,265,802		$	48,438,573
Borrowings and other debt obligations		17,178,420			20,964,185
Advance payments by borrowers for taxes and insurance		106,671			93,225
Other liabilities		1,875,092			2,000,971
TOTAL LIABILITIES		68,425,985			71,496,954
STOCKHOLDERS’ EQUITY
Preferred stock; no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 80,000 shares outstanding at June 30, 2009 and 8,000 shares outstanding at December 31, 2008		1,995,445			195,445
Common stock; no par value; 800,000,000 shares authorized; 503,907,043 shares issued at June 30, 2009 and 666,161,708 shares issued at December 31, 2008		7,807,670			7,718,771
Warrants and employee stock options issued		285,435			350,572
Treasury stock at cost; 0 shares at June 30, 2009 and 2,217,811 shares at December 31, 2008		—			(9,379	)
Accumulated other comprehensive loss		(698,067	)		(785,814	)
Retained deficit		(2,641,471	)		(1,872,881	)
TOTAL STOCKHOLDERS’ EQUITY		6,749,012			5,596,714
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	75,174,997		$	77,093,668

See accompanying notes to consolidated financial statements.

4

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three-Month Period					Six-Month Period
	Ended June 30,					Ended June 30,
	2009			2008		2009			2008
	(in thousands, except per share data)
INTEREST INCOME:
Interest on loans	$	649,647		$	837,988	$	1,325,343		$	1,733,264
Interest-earning deposits		3,647			997		5,432			3,961
Investment securities:
Available-for-sale		80,744			156,164		168,291			324,273
Other investments		588			6,671		822			16,491
TOTAL INTEREST INCOME		734,626			1,001,820		1,499,888			2,077,989
INTEREST EXPENSE:
Deposits and customer accounts		180,412			228,546		396,810			543,649
Borrowings and other debt obligations		228,605			272,354		468,401			556,450
TOTAL INTEREST EXPENSE		409,017			500,900		865,211			1,100,099
NET INTEREST INCOME		325,609			500,920		634,677			977,890
Provision for credit losses		237,000			132,000		742,000			267,000
NET INTEREST (EXPENSE)/INCOME AFTER PROVISION FOR CREDIT LOSSES		88,609			368,920		(107,323	)		710,890
NON-INTEREST INCOME:
Consumer banking fees		83,599			80,969		157,351			154,160
Commercial banking fees		47,733			53,747		93,826			108,200
Mortgage banking (losses)/income		19,075			37,897		(25,768	)		32,764
Capital markets revenue		4,742			7,209		1,452			17,602
Bank owned life insurance		15,991			19,065		30,918			38,489
Miscellaneous income		4,593			6,322		8,556			11,619
TOTAL FEES AND OTHER INCOME		175,733			205,209		266,335			362,834
Total other-than-temporary impairment losses		(16,882	)		—		(197,906	)		—
Portion of loss recognized in other comprehensive income (before taxes)		(7,125	)		—		94,234			—
Gains on the sale of investment securities		534			1,908		2,502			16,043
Net (loss)/gain on investment securities recognized in earnings		(23,473	)		1,908		(101,170	)		16,043
TOTAL NON-INTEREST INCOME		152,260			207,117		165,165			378,877
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits		157,233			191,754		341,271			376,346
Occupancy and equipment expenses		74,949			74,868		152,990			152,881
Technology expense		23,875			25,728		48,371			50,226
Outside services		14,635			15,542		29,563			31,172
Marketing expense		10,789			19,699		23,681			35,945
Other administrative expenses		37,028			44,006		72,811			74,598
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES		318,509			371,597		668,687			721,168

5

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(continued)

	Three-Month Period					Six-Month Period
	Ended June 30,					Ended June 30,
	2009			2008		2009			2008
	(in thousands, except per share data)
OTHER EXPENSES:
Amortization of intangibles	$	19,078		$	28,106	$	39,095		$	57,228
Deposit insurance premiums		54,468			9,260		76,110			18,433
Equity method investments		7,274			9,509		17,135			12,638
Merger, restructuring and other charges		70,513			1,006		303,821			1,526
TOTAL OTHER EXPENSES		151,333			47,881		436,161			89,825
(LOSS)/INCOME BEFORE INCOME TAXES		(228,973	)		156,559		(1,047,006	)		278,774
Income tax (benefit)/provision		(38,890	)		29,120		(39,632	)		51,200
NET (LOSS)/INCOME	$	(190,083	)	$	127,439	$	(1,007,374	)	$	227,574

See accompanying notes to consolidated financial statements.

6

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2009

(Unaudited)

(in thousands)

														Accumulated						Total
	Common							Warrants						Other			Retained			Stock-
	Shares			Preferred		Common		& Stock			Treasury			Comprehensive			Earnings			Holders’
	Outstanding			Stock		Stock		Options			Stock			Loss			(Deficit)			Equity
Balance, December 31, 2008		663,946		$	195,445	$	7,718,771	$	350,572		$	(9,379	)	$	(785,814	)	$	(1,872,881	)	$	5,596,714
Cumulative effect of adopting FSP
FAS 115-2 and FAS 124-2		—			—		—		—			—			(157,894	)		246,084			88,190
Balance at January 1, 2009		663,946			195,445		7,718,771		350,572			(9,379	)		(943,708	)		(1,626,797	)		5,684,904
Comprehensive income:
Net loss		—			—		—		—			—			—			(1,007,374	)		(1,007,374	)
Change in unrealized gain/loss, net of tax:
Investment securities available-for-sale		—			—		—		—			—			249,024			—			249,024
Pension liabilities		—			—		—		—			—			1,185			—			1,185
Cash flow hedges		—			—		—		—			—			(4,568	)		—			(4,568	)
Total comprehensive loss																					(673,543	)
Issuance of preferred stock to Santander		—			1,800,000		—		—			—			—			—			1,800,000
Stock issued in connection with employee benefit and incentive compensation plans		4			—		46,800		346			47			—			—			47,193
Vesting of employee share based awards		—			—		42,099		(65,483	)		9,342			—			—			(14,042	)
Dividends paid on preferred stock		—			—		—		—			—			—			(7,300	)		(7,300	)
Stock repurchased		(5	)		—		—		—			(10	)		—			—			(10	)
Shares cancelled by Santander		(160,038	)		—		—		—			—			—			—			—
Balance, June 30, 2009		503,907		$	1,995,445	$	7,807,670	$	285,435		$	—		$	(698,067	)	$	(2,641,471	)	$	6,749,012

See accompanying notes to consolidated financial statements.

7

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six-Month Period
	Ended June 30,
	2009			2008
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITES:
Net (loss)/income	$	(1,007,374	)	$	227,574
Adjustments to reconcile net income to net cash used in operating activities:
Provision for credit losses		742,000			267,000
Depreciation and amortization		121,507			119,531
Net amortization/accretion of investment securities and loan premiums and discounts		(19,547	)		18,286
Net (gain)/loss on sale of loans		(40,661	)		(26,766	)
Net (gain)/loss on investment securities		101,170			(16,043	)
Loss on debt extinguishments		68,733			—
Net loss on real estate owned and premises and equipment		4,387			6,165
Stock-based compensation		47,181			12,330
Origination and purchases of loans held for sale, net of repayments		(4,428,678	)		(3,793,753	)
Proceeds from sales of loans held for sale		3,677,147			3,933,343
Net change in:
Accrued interest receivable		13,621			51,793
Other assets and bank owned life insurance		401,485			72,023
Other liabilities		(263,195	)		(121,408	)
Net cash used by operating activities		(582,224	)		750,075
CASH FLOWS FROM INVESTING ACTIVITIES:
Adjustments to reconcile net cash used in investing activities:
Proceeds from sales of investment securities:
Available-for-sale		2,573,312			110,657
Proceeds from repayments and maturities of investment securities:
Available-for-sale		3,594,232			3,164,698
Net change in other investments		23,488			255,939
Purchases of available-for-sale investment securities		(6,766,122	)		(266,860	)
Proceeds from sales of loans held for investment		38,498			118,117
Purchase of loans		(132,518	)		(210,287	)
Net change in loans other than purchases and sales		4,347,073			(593,436	)
Proceeds from sales of premises and equipment		2,328			3,565
Purchases of premises and equipment		(12,374	)		(42,355	)
Proceeds from sales of real estate owned		25,026			18,763
Net cash provided by investing activities		3,692,943			2,558,801

8

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six-Month Period
	Ended June 30,
	2009			2008
	(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Adjustments to reconcile net cash provided by financing activities:
Net increase/(decrease) in deposits and other customer accounts	$	827,229		$	(2,623,680	)
Net increase/(decrease) in borrowings		(3,661,262	)		(4,397,955	)
Net proceeds from senior notes, subordinated notes and credit facility		—			495,320
Repayments of borrowings and other debt obligations		(1,055,000	)		(180,000	)
Net increase/(decrease) in advance payments by borrowers for taxes and insurance		13,446			18,464
Cash dividends paid to preferred stockholders		(7,300	)		(7,300	)
Proceeds from the issuance of common stock, net of transaction costs		—			1,398,933
Proceeds from issuance of preferred stock		1,800,000			—
Treasury stock repurchases, net of proceeds		—			(2,463	)
Net cash provided by / (used in) financing activities		(2,082,887	)		(5,298,681	)
Net change in cash and cash equivalents		1,027,832			(1,989,805	)
Cash and cash equivalents at beginning of period		3,754,523			3,130,770
Cash and cash equivalents at end of period	$	4,782,355		$	1,140,965

	Six-Month Period
	Ended June 30,
	2009			2008
	(in thousands)
Supplemental Disclosures:
Net income taxes paid / (refunded)	$	(31,698	)	$	(5,964	)
Interest paid	$	856,063		$	1,147,262

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

See accompanying notes to consolidated financial statements.

9

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS

(dollars in thousands, expect per share amounts)

(Unaudited)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements of Sovereign Bancorp, Inc. and Subsidiaries (“Sovereign” or the “Company”) include the accounts of Sovereign Bancorp, Inc. and its subsidiaries, including the following wholly-owned subsidiaries: Sovereign Bank (the “Bank”), Independence Community Bank Corp. (“Independence”), and Sovereign Delaware Investment Corporation. Sovereign Bancorp is a wholly owned subsidiary of Banco Santander, SA (“Santander”). All intercompany balances and transactions have been eliminated in consolidation.

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

The preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year. Certain amounts in the financials statements of prior periods have been reclassified to conform with the presentation used in the current period financial statements. These reclassifications had no effect on net income.

(2) ACQUISITION OF SOVEREIGN BY SANTANDER

On October 13, 2008, Sovereign and Santander entered into a transaction agreement pursuant to which Santander agreed to acquire all of Sovereign’s common stock that it did not already own (the “Transaction”). Prior to entering into the transaction agreement, Santander owned approximately 24.35% of Sovereign’s voting common stock. Both the Board of Directors of Sovereign and the Executive Committee of Santander unanimously approved the Transaction, and both companies’ shareholders voted in favor of the Transaction in January 2009. The Transaction closed on January 30, 2009. Upon adoption of the transaction agreement and the Transaction becoming effective, each share of Sovereign’s common stock was exchanged into the right to receive 0.3206 Santander American Depository Shares (“ADSs”), or at the election of the holders of Sovereign’s common stock, 0.3206 ordinary shares of Santander (subject to Santander’s discretion).

Sovereign will continue to apply its historical basis of accounting in its stand-alone financial statements after the Transaction. This is based on our determination under SFAS 141 (R), Business Combinations, that Santander is the acquiring entity and our determination under SEC Staff Accounting Bulletin (SAB) No. 54, codified as Topic 5J, Push Down Basis of Accounting Required In Certain Limited Circumstances, that while the push down of Santander’s basis in Sovereign is permissible, it was not required due to the existence at Sovereign of significant outstanding public debt securities.

SFAS 141 (R) provides that for each business combination, one of the combining entities shall be identified as the acquirer with the acquirer defined as the entity that obtains control. We determined that the Transaction resulted in Santander obtaining control of Sovereign as Santander acquired all the voting shares of Sovereign. In reaching our determination that our outstanding public debt securities are significant, we considered both the face amount and fair value of our outstanding public debt securities, as well as a number of provisions contained within those securities which we believe might impact Santander’s ability to control their form of ownership of Sovereign. If push down accounting had been applied to the separate stand-alone financial statements of Sovereign, the measurement amounts for assets and liabilities as of January 30, 2009 would be based on the guidance in SFAS 141 (R), and would have approximated the purchase price of approximately $1.9 billion, as compared to Sovereign’s equity as of December 31, 2008 of approximately $5.6 billion. Such adjustments to fair value, if recorded, would have the effect of significantly reducing our regulatory capital and would require a capital infusion in order to ensure Sovereign Bank would remain well-capitalized.

10

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(3) INVESTMENT SECURITIES

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

	June 30, 2009
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
Investment Securities:
U.S. Treasury and government agency securities	$	52,419	$	19	$	31	$	52,407
Debentures of FHLB, FNMA, and FHLMC		3,531,372		1,266		3,038		3,529,600
Corporate debt and asset-backed securities		2,443,438		18,979		24,886		2,437,531
Equity securities (1)		26,427		6,837		1		33,263
State and municipal securities		1,838,198		586		140,531		1,698,253
Mortgage-backed securities:
U.S. government agencies		1,210		—		31		1,179
FHLMC and FNMA debt securities		334,557		4,095		444		338,208
Non-agency securities		2,588,343		—		638,225		1,950,118
Total investment securities available-for-sale	$	10,815,964	$	31,782	$	807,187	$	10,040,559

	December 31, 2008
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
Investment Securities:
U.S. Treasury and government agency securities	$	243,796	$	991	$	—	$	244,787
Debentures of FHLB, FNMA, and FHLMC		4,597,607		21,175		64		4,618,718
Corporate debt and asset-backed securities		164,648		9		18,861		145,796
Equity securities (1)		63,317		533		36,757		27,093
State and municipal securities		1,840,080		—		210,967		1,629,113
Mortgage-backed securities:
U.S. government agencies		13,329		78		164		13,243
FHLMC and FNMA debt securities		470,522		8,508		2,744		476,286
Non-agency securities (2)		2,698,673		1		552,371		2,146,303
Total investment securities available-for-sale	$	10,091,972	$	31,295	$	821,928	$	9,301,339

(1)	Equity securities consist principally of preferred stock of FHLMC and FNMA.
(2)	Unrealized loss and amortized cost at December 31, 2008 is prior to the adoption of FSP FAS 115-2 and FAS 124-2.

Investment securities available-for-sale with an estimated fair value of $4.7 billion and $8.2 billion were pledged as collateral for borrowings, standby letters of credit, interest rate agreements and certain public deposits at June 30, 2009 and December 31, 2008, respectively.

11

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(3) INVESTMENT SECURITIES (continued)

The following table discloses the aggregate amount of unrealized losses as of June 30, 2009 and December 31, 2008 on securities in Sovereign’s investment portfolio classified according to the amount of time that those securities have been in a continuous loss position:

	At June 30, 2009
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Investment Securities
U.S. Treasury and government agency securities	$	50,416	$	(31	)	$	—	$	—		$	50,416	$	(31	)
Debentures of FHLB, FNMA and FHLMC		2,710,128		(3,038	)		—		—			2,710,128		(3,038	)
Corporate debt and asset-backed securities		898,822		(7,250	)		44,453		(17,636	)		943,275		(24,886	)
Equity securities		—		—			253		(1	)		253		(1	)
State and municipal securities		95,820		(712	)		1,459,948		(139,819	)		1,555,768		(140,531	)
Mortgage-backed Securities:
U.S. government agencies		333		(3	)		819		(28	)		1,152		(31	)
FHLMC and FNMA debt securities		8,668		(48	)		21,565		(396	)		30,233		(444	)
Non-agency securities		105,422		(36,748	)		1,844,128		(601,477	)		1,949,550		(638,225	)
Total investment securities available-for-sale	$	3,869,609	$	(47,830	)	$	3,371,166	$	(759,357	)	$	7,240,775	$	(807,187	)

	At December 31, 2008
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Investment Securities
Debentures of FHLB, FNMA and FHLMC	$	99,762	$	(64	)	$	—	$	—		$	99,762	$	(64	)
Corporate debt and asset-backed securities		11		—			43,896		(18,861	)		43,907		(18,861	)
Equity securities		19,892		(36,756	)		253		(1	)		20,145		(36,757	)
State and municipal securities		259,702		(20,875	)		1,367,975		(190,092	)		1,627,677		(210,967	)
Mortgage-backed Securities:
U.S. government agencies		10,197		(142	)		879		(22	)		11,076		(164	)
FHLMC and FNMA debt securities		228,474		(2,196	)		13,970		(548	)		242,444		(2,744	)
Non-agency securities (1)		467,437		(139,985	)		1,331,833		(412,386	)		1,799,270		(552,371	)
Total investment securities available-for-sale	$	1,085,475	$	(200,018	)	$	2,758,806	$	(621,910	)	$	3,844,281	$	(821,928	)

(1) Unrealized loss at December 31, 2008 is prior to the adoption of FSP FAS 115-2 and FAS 124-2.

As of June 30, 2009, management has concluded that the unrealized losses above on its investment securities (which totaled 260 individual securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, the principal and interest on these securities are from investment grade issuers, the Company does not intend to sell these investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

12

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(3) INVESTMENT SECURITIES (continued)

Sovereign determined at March 31, 2009 that our Fannie Mae and Freddie Mac preferred stock unrealized loss of $36.9 million was other-than-temporary in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“FAS 115”) and the SEC’s Staff Accounting Bulletin No. 59, “Accounting for Non-Current Marketable Equity Securities”. The Company’s assessment considered the duration and severity of the unrealized loss, the financial condition and the near-term prospects of the issuers and the likelihood of the market value of these instruments increasing to our initial cost basis within a reasonable period of time. The remaining cost basis of our shares at June 30, 2009 was $10.4 million.

The unrealized losses on the Company’s state and municipal bond portfolio decreased to $140.5 million at June 30, 2009 from $211.0 million at December 31, 2008. This 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-. These bonds are insured with various companies and as such, carry additional credit protection. The Company has determined that the unrealized losses on the portfolio are due to an increase in credit spreads and liquidity issues in the marketplace and concerns with respect to the financial strength of third party insurers. However, even if it was assumed that the insurers could not honor their obligation, our underlying portfolio is still investment grade and the Company believes that we will collect all scheduled principal and interest. The Company has concluded these unrealized losses are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

The unrealized losses on the non-agency securities portfolio were $638.2 million at June 30, 2009. Other than what is described in the following two paragraphs, this portfolio consists primarily of highly rated non-agency mortgage-backed securities from a diverse group of issuers in the private-label market. The Company has determined that the unrealized losses on the portfolio are due to an increase in credit spreads and liquidity issues in the marketplace. The Company has concluded these unrealized losses are temporary in nature on the majority of this portfolio since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. Additionally, our investments are in subordinated positions that are not expected to incur current and expected cumulative losses.

For the three-month period ended December 31, 2008, it was concluded that the Company would not recover the full outstanding principal on five bonds in our non-agency mortgage backed portfolio with a book value of $654.3 million whose fair value was $346.4 million. Under SFAS No. 115 (prior to the issuance by the Financial Accounting Standards Board (FASB) of the final staff position (FSP) FAS 115-2 and FAS 124-2), in the event that it is concluded that all of the investment securities principal cash flows will not be collected, a charge to earnings was required to write-down the investment to its fair market value even if the entity expected to collect principal cash flows in excess of this amount. As a result, Sovereign recorded a $307.9 million other-than-temporary-impairment (“OTTI”) charge.

In April 2009, the FASB issued three FSP’s intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 115-2 and FAS 124-2 changes existing impairment guidance under FAS 115 in the following significant ways:

• For debt securities, the “ability and intent to hold” provision was eliminated, and impairment is now considered to be other-than-temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its cost, or (iii) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). This new framework does not apply to equity securities (i.e., impaired equity securities will continue to be evaluated under previously existing guidance).

The “probability” standard relating to the collectibility of cash flows was eliminated, and impairment is now considered to be other-than-temporary if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security (any such shortfall is referred to in FSP 115-2 as a “credit loss”).

• If an entity intends to sell an impaired debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the impairment is other-than-temporary and should be recognized currently in earnings in an amount equal to the entire difference between fair value and amortized cost.

13

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(3) INVESTMENT SECURITIES (continued)

• If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into (i) the estimated amount relating to credit loss, and (ii) the amount relating to all other factors. Only the estimated credit loss amount is recognized currently in earnings, with the remainder of the loss amount recognized in other comprehensive income.

Upon adoption of FSP FAS 115-2, a cumulative effect adjustment should be made to reclassify the non-credit portion of any other-than-temporary impairments previously recorded through earnings to accumulated other comprehensive income for investments held as of the beginning of the interim period of adoption. This adjustment should only be made if the entity does not intend to sell and more-likely-than-not will not be required to sell the security before recovery of its amortized cost basis (i.e., the impairment does not meet the new definition of other-than-temporary). The cumulative effect adjustment should be determined based on the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security as of the beginning of the interim period in which the FSP is adopted. The cumulative effect adjustment should include the related tax effects.

FSP FAS 115-2 and FAS 124-2 were adopted by the Company for the quarter ended March 31, 2009. Upon adoption, a cumulative effect adjustment was recorded in the amount of $246 million to increase retained earnings, with an increase to unrealized losses in other comprehensive income of $158 million and a reduction to our deferred tax valuation allowance of $88 million. The increase to retained earnings represented the non-credit related impairment charge related to the non-agency mortgage backed securities discussed above.

For the six months ended June 30, 2009, Sovereign updated its assessment of the unrealized losses in its non-agency mortgage backed security portfolio and whether the losses were temporary in nature. Upon completion of this review, it was concluded that additional credit losses are expected on the five bonds which Sovereign recorded an OTTI charge at December 31, 2008 in the amount of $38.6 million. It was also determined that the present value of the expected cash flows on four additional non-agency mortgage backed securities was less than their carrying value which resulted in an additional impairment of $28.2 million.

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

Beginning balance at December 31, 2008	$	62,834
Additions for amount related to credit loss for which an OTTI was not previously recognized		28,206
Reductions for securities sold during the period		—
Reductions for increases in cash flows expected to be collected and recognized over the remaining life of security		—
Additional increases to credit losses for previously recognized OTTI charges when there is no intent to sell the security		38,591
Ending balance at June 30, 2009	$	129,631

The nine bonds that have been determined to be other-than-temporarily impaired have a weighted average S&P credit rating of B+ at June 30, 2009. Each of these securities contains various levels of credit subordination. The underlying mortgage loans that comprise these investment securities were primarily originated in the years 2006 and 2007 and consist of 57.7% of jumbo mortgage loans and 70.9% of limited documentation loans. A summary of the key assumptions utilized to forecast future expected cash flows on the securities determined to have OTTI were as follows at June 30, 2009.

	June 30, 2009
Loss severity		48.06	%
Expected cumulative loss percentage		29.80	%
Cumulative loss percentage to date		2.07	%
Weighted average FICO		706
Weighted average LTV		71.6	%

14

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(4) LOANS

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

	June 30, 2009					December 31, 2008
	Amount		Percent			Amount		Percent
Commercial real estate loans (1)	$	12,974,027		25.1	%	$	13,181,624		23.7	%
Commercial and industrial loans		11,178,208		21.6			12,428,069		22.4
Multi-family loans		4,513,286		8.7			4,512,608		8.1
Other		1,483,420		2.9			1,650,824		3.0
Total commercial loans held for investment		30,148,941		58.3			31,773,125		57.2
Residential mortgages		10,142,122		19.6			11,103,279		20.0
Home equity loans and lines of credit		6,804,481		13.1			6,891,918		12.4
Total consumer loans secured by real estate		16,946,603		32.7			17,995,197		32.4
Auto loans		4,384,449		8.5			5,482,852		9.9
Other		273,658		0.5			290,725		0.5
Total consumer loans held for investment		21,604,710		41.7			23,768,774		42.8
Total loans held for investment (2)	$	51,753,651		100.0	%	$	55,541,899		100.0	%
Total loans held for investment with:
Fixed rate	$	26,785,302		51.8	%	$	29,559,229		53.2	%
Variable rate		24,968,349		48.2			25,982,670		46.8
Total loans held for investment (2)	$	51,753,651		100.0	%	$	55,541,899		100.0	%

(1)

Includes commercial construction loans of $2.8 billion and $2.7 billion at June 30, 2009 and December 31, 2008, respectively.

(2)

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 increase in loans of $126.1 million and $150.4 million at June 30, 2009 and December 31, 2008, respectively. Loans pledged as collateral totaled $40.3 billion and $42.7 billion at June 30, 2009 and December 31, 2008, respectively.

The following table presents the composition of the loan held for sale portfolio by type of loan. Our entire loans held for sale portfolio have fixed rates:

	June 30, 2009					December 31, 2008
	Amount		Percent			Amount		Percent
Multi-family loans	$	23,967		2.1	%	$	13,503		4.1	%
Residential mortgages		1,094,952		97.9			313,829		95.9
Total loans held for sale	$	1,118,919		100.0	%	$	327,332		100.0	%

15

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(4)  LOANS (continued)

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

	Six-Month Period Ended
	June 30,
	2009		2008
Allowance for loan losses, beginning of period	$	1,102,753	$	709,444
Charge-offs:
Commercial		151,707		53,988
Consumer secured by real estate		49,010		34,610
Consumer not secured by real estate		119,425		126,846
Total Charge-offs		320,142		215,444
Recoveries:
Commercial		5,121		5,639
Consumer secured by real estate		5,617		5,175
Consumer not secured by real estate		44,307		43,397
Total Recoveries		55,045		54,211
Charge-offs, net of recoveries		265,097		161,233
Provision for loan losses (1)		603,499		260,537
Allowance for loan losses, end of period		1,441,155		808,748
Reserve for unfunded lending commitments, beginning of period		65,162		28,301
Provision for unfunded lending commitments (1)		138,500		6,463
Reserve for unfunded lending commitments, end of period		203,662		34,764
Total allowance for credit losses, end of period	$	1,644,817	$	843,512

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

	June 30,		December 31,
	2009		2008
Non-accrual loans:
Consumer:
Residential mortgages	$	520,179	$	233,176
Home equity loans and lines of credit		90,207		69,247
Auto loans and other consumer loans		14,591		3,777
Total consumer loans		624,977		306,200
Commercial		448,311		244,847
Commercial real estate		695,805		319,565
Multi-family		288,731		42,795
Total non-accrual loans		2,057,824		913,407
Restructured loans		304		268
Total non-performing loans		2,058,128		913,675
Other real estate owned		36,324		49,900
Other repossessed assets		10,645		21,836
Total other real estate owned and other repossessed assets		46,969		71,736
Total non-performing assets	$	2,105,097	$	985,411

16

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(5) DEPOSIT PORTFOLIO COMPOSITION

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

	June 30, 2009								December 31, 2008
						Weighted								Weighted
						Average								Average
	Amount		Percent			Rate			Amount		Percent			Rate
Demand deposit accounts	$	7,418,080		15.1	%		—	%	$	6,684,232		13.8	%		—	%
NOW accounts		5,361,764		10.9			0.26			5,031,748		10.4			0.56
Money market accounts		11,923,196		24.2			0.97			10,483,151		21.6			2.39
Savings accounts		3,600,361		7.3			0.15			3,582,150		7.4			0.46
Certificates of deposit		13,264,949		26.9			2.99			13,559,146		28.0			3.37
Total retail and commercial deposits		41,568,350		84.4			1.28			39,340,427		81.2			1.91
Wholesale NOW accounts		17,445		0.0			0.82			67,213		0.2			2.27
Wholesale money market accounts		902,081		1.8			0.42			1,701,734		3.5			0.46
Wholesale certificates of deposit		3,686,257		7.5			2.13			3,004,958		6.2			3.54
Total wholesale deposits		4,605,783		9.3			1.79			4,773,905		9.9			2.43
Government deposits		1,512,080		3.1			0.49			2,633,859		5.4			1.01
Customer repurchase agreements		1,579,589		3.2			0.33			1,690,382		3.5			0.41
Total deposits	$	49,265,802		100.0	%		1.27	%	$	48,438,573		100.0	%		1.86	%

(6) BORROWINGS AND OTHER DEBT OBLIGATIONS

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

	June 30, 2009					December 31, 2008
			Effective					Effective
	Balance		Rate			Balance		Rate
Sovereign Bank borrowings and other debt obligations:
Fed funds purchased	$	1,000,000		0.25	%	$	2,000,000		0.60	%
FHLB advances		10,672,500		5.32			13,267,834		4.71
Reit preferred		148,459		14.05			147,961		14.10
Senior notes		1,345,529		3.92			1,344,702		3.92
Subordinated notes		1,658,527		5.86			1,653,684		5.87
Holding company borrowings and other debt obligations:
Senior notes		1,095,453		3.51			1,293,859		3.56
Junior subordinated debentures due to Capital Trust Entities		1,257,952		6.59			1,256,145		7.23
Total borrowings and other debt obligations	$	17,178,420		5.02	%	$	20,964,185		4.51	%

On March 1, 2009, $200 million of floating rate senior notes with an interest rate of three month Libor plus 28 basis points matured. Additionally, during the three-month period ended March 31, 2009, the Company retired $1.4 billion of advances from the Federal Home Loan Bank (“FHLB”) incurring prepayment penalties of $68.7 million. This decision was made to reduce interest expense in future periods since the advances were at above market interest rates due to the current low rate environment.

17

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(7) DERIVATIVES

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

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

As part of its overall business strategy, Sovereign originates fixed rate residential mortgages. It sells a portion of this production to Federal Home Loan Mortgage Corporation (“FHLMC”), Fannie National Mortgage Association (“FNMA”), and private investors. The loans are exchanged for cash or marketable fixed rate mortgage-backed securities which are generally sold. This helps insulate Sovereign from the interest rate risk associated with these fixed rate assets. Sovereign 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, Sovereign enters into customer-related financial derivative transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers.

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

Fair Value Hedges. Sovereign has entered into pay-variable, receive-fixed interest rate swaps to hedge changes in fair values of certain brokered certificates of deposits and certain debt obligations. For the six-month periods ended June 30, 2009 and 2008, income of $2.0 million and expense of $3.2 million, respectively, were recorded in earnings associated with hedge ineffectiveness.

Cash Flow Hedges. Sovereign hedges exposures to changes in cash flows associated with forecasted interest payments on variable-rate liabilities, through the use of pay-fixed, receive variable interest rate swaps. The last of the hedges is scheduled to expire in January 2016. For the six months ended June 30, 2009 and 2008, no hedge ineffectiveness was required to be recognized in earnings associated with cash flow hedges. During the six months ended June 30, 2009 and 2008, $17.3 million and $6.5 million of losses deferred in accumulated other comprehensive income were recorded as interest expense as a result of discontinuance of cash flow hedges for which the forecasted transaction was probable of occurring. As of June 30, 2009, Sovereign expects approximately $117.9 million of the deferred net after-tax loss on derivative instruments included in accumulated other comprehensive income to be reclassified to earnings during the next twelve months. The effective portion of gains and losses on derivative instruments designated as cash flow hedges recorded in other comprehensive income and reclassified into earnings resulted in an increase of $68.3 million and $131.5 million to interest expense for the three-month and six-month period ended June 30, 2009. The effective portion of the unrealized gain recognized in other comprehensive income on cash flow hedges was $51.8 million and $81.4 million for the three-month and six-month period ended June 30, 2009.

Other Derivative Activities. Sovereign’s derivative portfolio also includes derivative instruments not designated in SFAS No. 133 hedge relationships.

Those derivatives include mortgage banking interest rate lock commitments and forward sale commitments used for risk management purposes and derivatives executed with commercial banking customers, primarily interest rate swaps and foreign currency contracts. The Company also enters into precious metals customer forward purchase arrangements and forward sale agreements.

18

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(7) DERIVATIVES (continued)

Shown below is a summary of the derivatives designated as hedges under SFAS No. 133 at June 30, 2009 and December 31, 2008:

	Notional						Receive			Pay			Life
	Amount		Asset		Liability		Rate			Rate			(Years)
June 30, 2009
Fair value hedges:
Receive fixed – pay variable interest rate swaps	$	640,000	$	7,344	$	49,908		6.10	%		4.01	%		7.7
Cash flow hedges:
Pay fixed – receive floating interest rate swaps		5,750,000		3,601		264,766		0.81	%		5.14	%		1.2
Total derivatives used in SFAS 133 hedging relationships	$	6,390,000	$	10,945	$	314,674		1.34	%		5.02	%		1.8
December 31, 2008
Fair value hedges:
Receive fixed – pay variable interest rate swaps	$	678,000	$	6,262	$	369		6.02	%		5.02	%		7.7
Cash flow hedges:
Pay fixed – receive floating interest rate swaps		6,800,000		4,154		357,969		2.45	%		5.13	%		1.5
Total derivatives used in SFAS 133 hedging relationships	$	7,478,000	$	10,416	$	358,338		2.77	%		5.12	%		2.1

Summary information regarding other derivative activities at June 30, 2009 and December 31, 2008 follows:

	June 30,			December 31,
	2009			2008
	Asset			Asset
	(Liability)			(Liability)
Mortgage banking derivatives:
Forward commitments to sell loans	$	11,999		$	(9,598	)
Interest rate lock commitments		3,739			8,573
Total mortgage banking risk management		15,738			(1,025	)
Swaps receive fixed		310,511			502,890
Swaps pay fixed		(298,535	)		(478,398	)
Market value hedge		—			(134	)
Net customer related interest rate hedges		11,976			24,358
Precious metals forward sale agreements		1,751			(1,227	)
Precious metals forward purchase arrangements		(1,726	)		1,227
Foreign exchange contracts		5,837			7,736
Total	$	33,576		$	31,069

19

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(7)  DERIVATIVES (continued)

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

	Balance Sheet Effect at	Income Statement Effect For The Six Months Ended
Derivative Activity	June 30, 2009	June 30, 2009
Fair value hedges:
Receive fixed-pay variable interest rate swaps	Increases to CDs, other assets, and other liabilities of $0.2 million, $7.3 million and $49.9 million, respectively.	Increase in net interest income of $1.2 million.
Cash flow hedges:
Pay fixed-receive floating interest rate swaps	Increases to other assets, other liabilities and deferred taxes of $3.6 million, $264.8 million and $95.3 million, respectively, and a decrease to stockholders’ equity of $165.8 million.	Decrease in net interest income of $112.7 million.
Other hedges:
Forward commitments to sell loans	Increase to other assets of $12.0 million.	Increase in mortgage banking revenues of $21.6 million.
Interest rate lock commitments	Increase to mortgage loans of $3.7 million.	Decrease in mortgage banking revenues of $4.8 million.
Net customer related hedges	Increase to other assets of $12.0 million.	Decrease in capital markets revenue of $12.4 million.
Forward commitments and forward settlement arrangements on precious metals	Increase to other assets of $24 thousand.	Increase in commercial banking fees of $24 thousand.
Foreign exchange	Increase to other assets of $5.8 million.	Decrease in commercial banking fees of $1.9 million.

The following financial statement line items were impacted by Sovereign’s derivative activity as of December 31, 2008 and for the six months ended June 30, 2008:

	Balance Sheet Effect at	Income Statement Effect For The Six Months Ended
Derivative Activity	December 31, 2008	June 30, 2008
Fair value hedges:
Receive fixed-pay variable interest rate swaps	Increases to borrowings, CDs, other assets, and other liabilities of $6.1 million, $1.4 million, $6.3 million and $0.4 million, respectively.	Increase in net interest income of $6.7 million.
Cash flow hedges:
Pay fixed-receive floating interest rate swaps	Increases to other assets, other liabilities, and deferred taxes of $4.2 million, $358.0 million, and $129.1 million, respectively and a net decrease to stockholders’ equity of $224.7 million.	Decrease in net interest income of $60.3 million.
Other hedges:
Forward commitments to sell loans	Increase to other liabilities of $9.6 million.	Increase in mortgage banking revenues of $7.1 million.
Interest rate lock commitments	Increase to mortgage loans of $8.6 million.	Decrease in mortgage banking revenues of $1.0 million.
Net customer related hedges	Increase to other assets of $24.4 million.	Increase in capital markets revenue of $4.1 million.
Forward commitments and forward settlement arrangements on precious metals	Increase to other liabilities of $0 million.	Increase in commercial banking fees of $1.0 million.
Foreign exchange	Increase to other assets of $7.7 million.	Increase in commercial banking fees of $3.4 million.

20

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(8) COMPREHENSIVE (LOSS)/INCOME

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

	Three-Month Period						Six-Month Period
	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Net income	$	(190,083	)	$	127,439		$	(1,007,374	)	$	227,574
Adoption of FSP 115-2 and FAS 124-2		—			—			88,190			—
Change in accumulated losses/(gains) on cash flow hedge derivative financial instruments, net of tax		(46,342	)		124,925			(15,583	)		883
Change in unrealized gains/(losses) on investment securities available-for-sale, net of tax		193,183			(93,634	)		184,680			(385,978	)
Less reclassification adjustment, net of tax:
Derivative instruments		(5,499	)		(2,194	)		(11,015	)		(4,219	)
Pensions		(389	)		(124	)		(1,185	)		(249	)
Investments available-for-sale		(14,929	)		4,088			(64,344	)		13,276
Comprehensive income	$	(22,425	)	$	156,960		$	(673,543	)	$	(166,329	)

Accumulated other comprehensive (loss)/income, net of related tax, consisted of net unrealized losses on securities of $414.8 million (which includes $94.2 million on securities for which OTTI charges have been previously recognized in earnings), net accumulated losses on unfunded pension liabilities of $19.8 million and net accumulated losses on derivatives of $263.4 million at June 30, 2009 and net unrealized losses on securities of $506.0 million, net accumulated losses on unfunded pension liabilities of $21.0 million and net accumulated losses on derivatives of $258.8 million at December 31, 2008.

(9) MORTGAGE SERVICING RIGHTS

At June 30, 2009 and December 31, 2008, Sovereign serviced residential real estate loans for the benefit of others totaling $14.0 billion and $13.1 billion, respectively. The fair value of the servicing portfolio at June 30, 2009 and December 31, 2008 was $128.3 million and $113.2 million, respectively. For the three months ended June 30, 2009, Sovereign recorded a $15.0 million recovery on our mortgage servicing rights due to slower expected prepayments on our mortgages thus increasing the value of our servicing rights due to an increase in market interest rates since March 31, 2009. The $15.0 million recovery for the three months ending June 30, 2009 offset the impairment of $14.1 million recorded for the three months ending March 31, 2009 resulting in a net recovery of $0.9 million on our mortgage servicing rights for the six months ended June 30, 2009. The following table presents a summary of the activity of the asset established for Sovereign’s residential mortgage servicing rights.

Gross balance as of December 31, 2008	$	161,288
Mortgage servicing assets recognized		45,484
Amortization		(31,122	)
Gross balance at June 30, 2009		175,650
Valuation allowance		(47,888	)
Balance as June 30, 2009	$	127,762

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

21

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(9) MORTGAGE SERVICING RIGHTS (continued)

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

	June 30, 2009			March 31, 2009			December 31, 2008			June 30, 2008
CPR speed		24.44	%		32.44	%		29.65	%		12.19	%
Escrow credit spread		3.70	%		4.01	%		4.35	%		4.74	%

A valuation allowance is established for the excess of the cost of each residential mortgage servicing asset stratum over its estimated fair value. Activity in the valuation allowance for mortgage servicing rights for the six months ended June 30, 2009 consisted of the following:

Balance as of December 31, 2008	$	48,815
Net decrease in valuation allowance for mortgage servicing rights		(927	)
Balance as June 30, 2009	$	47,888

Sovereign also originates and sells multi-family loans in the secondary market to Fannie Mae while retaining servicing. At June 30, 2009 and December 31, 2008, Sovereign serviced $13.1 billion and $13.0 billion of loans for Fannie Mae and as a result has recorded servicing assets of $9.7 million and $14.7 million, respectively. Sovereign recorded servicing asset amortization of $2.2 million and $4.4 million related to the multi-family loans sold to Fannie Mae for the three-months and six-months ended June 30, 2009. Sovereign recognized servicing assets of $1.6 million during the first six months of 2009. Sovereign recorded a multi-family servicing right recovery of $1.3 million for the three-month period ended June 30, 2009 and a net impairment of $2.3 million for the six-month period ended June 30, 2009 compared to a net recovery of $0.6 million and a net impairment of $4.2 million for the corresponding periods in the prior year.

Sovereign had (losses)/gains on the sale of mortgage loans, multi-family loans and home equity loans of $9.1 million and $(29.4) million for the three-month and six-month periods ended June 30, 2009, compared with $14.7 million and $27.9 million for the corresponding periods ended June 30, 2008. The three-month and six-month periods ended June 30, 2009 included charges of $21.9 million and $70.0 million to increase our recourse reserves associated with the sales of multifamily loans to Fannie Mae. This increase was due to higher loss rate assumptions due to the deteriorating economic environment and as a result, Sovereign now has recourse reserves of $102.2 million associated with multi-family loans sold to Fannie Mae.

22

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(10) BUSINESS SEGMENT INFORMATION

Segment results are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of our segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The provision for credit losses recorded by each segment is based on the net charge-offs of each line of business and the difference between the provision for credit losses recognized by the Company on a consolidated basis and the provision recorded by the business line at the time of charge-off is allocated to each business line based on the risk profile of their loan portfolio. Other income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct expenses as well as certain allocated corporate expenses are accounted for within each segment’s financial results. Where practical, the results are adjusted to present consistent methodologies for the segments. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. In connection with the acquisition of Sovereign by Santander in the first quarter of 2009, certain changes to our executive management team were announced. These events impacted how our executive management team measured and assessed our business performance.

As a result of these changes, we now have four reportable segments. The Company’s segments are focused principally around the customers Sovereign serves. The Retail Banking Division is primarily comprised of our branch locations and our residential mortgage business. Our branches offer a wide range of products and services to customers and each attracts deposits by offering a variety of deposit instruments including demand and NOW accounts, money market and savings accounts, certificates of deposits and retirement savings plans. Our branches also offer certain consumer loans such as home equity loans and other consumer loan products. It also provides business banking loans and small business loans to individuals. Finally our residential mortgage business reports into our head of Retail Banking. Our specialized business segment is primarily comprised of leases to commercial customers, our New York multi-family and national commercial real estate lending group, our automobile dealer floor plan lending group and our indirect automobile lending group. The Middle Market segment provides the majority of Sovereign’s commercial lending platforms such as commercial real estate loans and commercial industrial loans and also contains the Company’s related commercial deposits. The Other segment includes earnings from the investment portfolio, interest expense on Sovereign’s borrowings and other debt obligations, minority interest expense, amortization of intangible assets and certain unallocated corporate income and expenses.

23

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(10) BUSINESS SEGMENT INFORMATION (continued)

The following tables present certain information regarding the Company’s segments. Prior periods have been reclassified to conform to the current presentation.

For the three-month period ended				Specialized			Middle
June 30, 2009	Retail			Business(1)			Market			Other(3)			Total
Net interest income/(expense)	$	203,922		$	92,554		$	81,448		$	(52,315	)	$	325,609
Fees and other income		138,010			997			18,110			18,616			175,733
Provision for credit losses		71,433			94,350			71,217			—			237,000
General and administrative expenses		248,437			24,550			23,603			21,919			318,509
Depreciation/amortization		27,286			2,548			542			30,808			61,184
Income/(loss) before income taxes(1)		(27,060	)		(26,397	)		(1,934	)		(173,582	)		(228,973	)
Intersegment revenue/(expense) (2)		82,123			(171,717	)		(26,932	)		116,526			—
Total average assets	$	22,175,715		$	20,996,648		$	12,035,992		$	21,633,399		$	76,841,754

For the six-month period ended				Specialized			Middle
June 30, 2009	Retail			Business(1)			Market			Other(3)			Total
Net interest income/(expense)	$	396,193		$	184,471		$	159,937		$	(105,924	)	$	634,677
Fees and other income		239,028			(37,273	)		34,901			29,679			266,335
Provision for credit losses		211,389			314,752			215,859			—			742,000
General and administrative expenses		527,295			50,899			51,921			38,572			668,687
Depreciation/amortization		52,683			4,981			1,176			62,667			121,507
Income/(loss) before income taxes(1)		(173,982	)		(218,529	)		(80,880	)		(573,615	)		(1,047,006	)
Intersegment revenue/(expense) (2)		166,720			(352,442	)		(56,132	)		241,854			—
Total average assets	$	22,516,992		$	21,818,193		$	12,240,477		$	19,936,197		$	76,511,859

For the three-month period ended			Specialized			Middle
June 30, 2008	Retail		Business			Market			Other		Total
Net interest income/(expense)	$	241,735	$	88,755		$	103,615		$	66,815	$	500,920
Fees and other income		128,591		34,970			16,437			25,211		205,209
Provision for credit losses		29,594		74,547			27,859			—		132,000
General and administrative expenses		296,234		27,331			38,047			9,985		371,597
Depreciation/amortization		20,285		2,187			897			37,309		60,678
Income/(loss) before income taxes(1)		37,246		17,658			53,077			48,578		156,559
Intersegment revenue/(expense) (2)		96,899		(237,177	)		(53,348	)		193,626		—
Total average assets	$	23,604,982	$	24,925,302		$	13,161,963		$	18,109,503	$	79,801,750

For the six-month period ended			Specialized			Middle
June 30, 2008	Retail		Business			Market			Other		Total
Net interest income/(expense)	$	478,742	$	176,210		$	214,746		$	108,192	$	977,890
Fees and other income		209,628		66,488			36,421			50,297		362,834
Provision for credit losses		61,500		146,649			58,851			—		267,000
General and administrative expenses		591,035		55,321			67,916			6,896		721,168
Depreciation/amortization		37,927		4,133			1,835			75,636		119,531
Income/(loss) before income taxes(1)		21,481		28,211			122,278			106,804		278,774
Intersegment revenue/(expense) (2)		232,405		(493,127	)		(112,313	)		373,035		—
Total average assets	$	23,811,216	$	24,886,278		$	12,933,009		$	18,735,716	$	80,366,219

(1)	Included in fees and other income in the Specialized Business Group are charges of $21.9 million and $70.0 million for the three months and six months ended June 30, 2009 associated with increasing multi-family recourse reserves for loans sold to Fannie Mae.
(2)	Intersegment revenue/(expense) represent charges or credits for funds used or provided by each of the segments and are included in net interest income.
(3)	Included in Other for the three months and six months ended June 30, 2009 were OTTI charges of $24.0 and $103.7 million on FNMA and FHLMC preferred stock and non-agency mortgage backed securities. Results also included net merger, restructuring, severance and debt extinguishment charges of $70.5 million and $303.8 million for the three months and six months ended June 30, 2009, respectively.

24

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(11) INCOME TAXES

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

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

SFAS No. 109 suggests that additional scrutiny should be given to deferred tax assets of an entity with cumulative pre-tax losses during the three most recent years and is widely considered significant negative evidence that is objective and verifiable and therefore, difficult to overcome. During the three years ended December 31, 2008, we had cumulative pre-tax losses and considered this factor in our analysis of deferred tax assets at year-end. Additionally, based on the continued economic uncertainty that existed at that time, it was determined that it was probable that the Company would not generate significant pre-tax income in the near term on a stand-alone basis (i.e. Management did not consider the potential economic benefits associated with our transaction with Santander in accordance with U.S. generally accepted accounting principles). As a result of these facts, Sovereign recorded a $1.43 billion valuation allowance against its deferred tax assets for the year-ended December 31, 2008.

During the six-month period ended June 30, 2009, Sovereign reported a pretax loss of $1.0 billion, due to an elevated provision for credit losses, as well as significant restructuring and transaction costs associated with the acquisition of Sovereign by Santander which closed on January 30, 2009. Given the significant loss incurred for the six months ended June 30, 2009, as well as in prior years, Sovereign did not record a tax benefit on its pretax loss that was incurred. As of June 30, 2009 the Company’s valuation allowance is $1.6 billion. The Company will continue to evaluate the need for its valuation allowance against deferred taxes in future periods. Sovereign did recognize a tax benefit of $39.6 million for the six months ending June 30, 2009 primarily related to the favorable resolution of certain tax items with the IRS that enabled us to realize a deferred tax asset that previously had a valuation allowance assigned to it.

At June 30, 2009, Sovereign had net unrecognized tax benefit reserves related to uncertain tax positions of $85.8 million, which represents the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Gross unrecognized tax benefits at December 31, 2008	$	105,705
Additions based on tax positions related to the current year		1,126
Additions based on tax positions related to prior years		759
Settlements		(900	)
Reductions based on tax positions related to prior years		(2,477	)
Gross unrecognized tax benefits at June 30, 2009		104,213
Less: Federal, state and local income tax benefits		18,449
Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of June 30, 2009	$	85,764

Sovereign recognizes penalties and interest accrued related to unrecognized tax benefits within income tax expense on the Consolidated Statement of Operations. During the three-month and six-month periods ended June 30, 2009, Sovereign recognized an increase of approximately $0.8 million and a decrease of approximately $0.1 million in interest and penalties compared to increases of $4.6 million and $5.9 million for the corresponding periods in the prior year. Included in gross unrecognized tax benefits at June 30, 2009 was approximately $14.8 million for the potential payment of interest and penalties.

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

25

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(11) INCOME TAXES (continued)

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. Sovereign reviews its tax balances quarterly and as new information becomes available, the balances are adjusted, as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions. In late 2008, the Internal Revenue Service (the “IRS”) completed its examination of the Company’s federal income tax returns for the years 2002 through 2005. Included in this examination cycle are two separate financing transactions with an international bank totaling $1.2 billion. As a result of these transactions, Sovereign was subject to foreign taxes of $154.0 million during the years 2003 through 2005 and claimed a corresponding foreign tax credit for foreign taxes paid during those years. In 2006 and 2007, Sovereign was subject to an additional $87.6 million and $22.5 million, respectively, of foreign taxes related to these financing transactions and claimed a corresponding foreign tax credit. The IRS issued a notification of adjustment disallowing the foreign tax credits taken in 2003-2005 in the amount of $154.0 million related to these transactions; disallowing deductions for issuance costs and interest expense related to the transaction which would result in an additional tax liability of $24.9 million and assessed interest and potential penalties, the combined amount of which totaled approximately $71.0 million. Sovereign has paid the additional tax due resulting from the IRS’ adjustments, as well as the assessed interest and penalties and has filed a lawsuit seeking the refund of those amounts in Federal District Court. In addition, the IRS has commenced its audit for the years 2006 and 2007. We expect that in the future the IRS will propose to disallow the foreign tax credits and deductions taken in 2006 and 2007 of $87.6 million and $22.5 million, respectively; disallow deductions for issuance costs and interest expense which would result in an additional tax liability of $37.1 million; and to assess interest and penalties. Sovereign continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe it is entitled to tax deductions for the related issuance costs and interest deductions. Sovereign also believes that its recorded tax reserves for its position of $57.6 million adequately provides for any potential exposure to the IRS related to these items. However, as the Company continues to go through the litigation process, we will continue to evaluate the appropriate tax reserve levels for this position and any changes made to the tax reserves may materially affect Sovereign’s income tax provision, net income and regulatory capital in future periods.

(12) RELATED PARTY TRANSACTIONS

The Company is engaged in certain activities with a mortgage broker due to its acquisition of Independence. This broker is deemed to be a “related party” of the Company as such term is defined in SFAS No. 57 since Sovereign has a 35% minority equity investment in it. This mortgage broker refers and receives fees from borrowers seeking financing of their multi-family and/or commercial real estate loans to Sovereign as well as to numerous other financial institutions. Additionally, substantially all of Sovereign’s multi-family loan originations are obtained via our relationship with this broker. Sovereign recognized losses on the sales of multi-family loans of $17.9 million and $68.1 million for the three-month and six-month periods ended June 30, 2009 due to the previously mentioned increases to recourse reserves on loans sold to Fannie Mae, compared to gains of $9.7 million and $18.9 million for the corresponding periods in the prior year.

In June 2009, Sovereign entered into a three year contract with Santander Consumer USA Inc. and Subsidiaries (“SCUSA”) to service Sovereign’s indirect auto portfolio. SCUSA is a specialized consumer finance company engaged in the purchase, securitization and servicing of retail installment contracts originated by automobile dealers. Sovereign paid an upfront fee of $2.1 million which is being deferred over the life of the contract. Sovereign also pays monthly fees to SCUSA to service the portfolio fees paid to SCUSA for the three month period ended June 30, 2009 were $3.0 million.

In March 2009, Sovereign Bancorp, parent company of Sovereign Bank, issued to Santander, parent company of Sovereign Bancorp, 72,000 shares of Sovereign’s Series D Non-Cumulative Perpetual Convertible Preferred Stock, without par value (the “Series D Preferred Stock”), having a liquidation amount per share equal to $25,000, for a total price of $1.8 billion. The Series D Preferred Stock pays non-cumulative dividends at a rate of 10% per year. Sovereign may not redeem the Series D Preferred Stock during the first five years. The Series D Preferred Stock is generally non-voting. Each share of Series D Preferred Stock is convertible into 100 shares of common stock, without par value, of Sovereign. Sovereign contributed the proceeds from this offering to Sovereign Bank in order to increase the Bank’s regulatory capital ratios. On July 20, 2009, Santander converted all of its investment in Sovereign’s Series D preferred stock of $1.8 billion into 7.2 million shares of Sovereign common stock. This action further demonstrates the support of our Parent Company to Sovereign and reduces the cash obligations of Sovereign Bancorp with respect to Series D 10% preferred stock dividend.

Sovereign has $2.03 billion of public securities that consists of various senior note obligations, trust preferred security obligations and preferred stock issuances. Santander has purchased approximately 26% of these securities in the open market as of June 30, 2009.

26

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(12) RELATED PARTY TRANSACTIONS (continued)

In 2006, Santander extended a total of $425 million in unsecured lines of credit to Sovereign Bank for federal funds and Eurodollar borrowings and for the confirmation of standby letters of credit issued by Sovereign Bank. This line is at a market rate and in the ordinary course of business and can be cancelled by either Sovereign or Santander at any time and can be replaced by Sovereign at any time. In the first quarter of 2009, this line was increased to $2.5 billion. During the six months ended June 30, 2009 and 2008, respectively, the average balance outstanding under these commitments was $225.4 million and $203.4 million. As of June 30, 2009, there was no outstanding balance on the unsecured lines of credit for federal funds and Eurodollar borrowings. Sovereign Bank paid approximately $2.2 million in fees to Santander in the six month period ended June 30, 2009 in connection with these commitments compared to $0.6 million in fees in the corresponding period in the prior year.

(13) FAIR VALUE

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

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

Sovereign’s residential loan held for sale portfolio had an aggregate fair value of $1.095 billion at June 30, 2009. The contractual principal amount of these loans totaled $1.081 billion. The difference in fair value compared to the principal balance was $14.2 million which was recorded in mortgage banking revenues during the six-month period ended June 30, 2009. 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. The fair value of these loans is estimated based upon the anticipated exit prices for these loans in the secondary market to agency buyers such as Fannie Mae and Freddie Mac. Practically all of our residential loans held for sale portfolio is sold to these two agencies.

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

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

27

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(13) FAIR VALUE (continued)

To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement of its derivatives. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that the majority of its derivative valuations are classified in Level 2 of the fair value hierarchy.

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

The following table presents the assets that are measured at fair value on a recurring basis by level within the fair value hierarchy as reported on the consolidated balance sheet at June 30, 2009. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Fair Value Measurements at Reporting Date Using:
	Quoted Prices in
	Active Markets for		Significant Other			Significant
	Identical Assets		Observable Inputs			Unobservable Inputs		Balance at
	(Level 1)		(Level 2)			(Level 3)		June 30, 2009
Assets:
US Treasury and government agency securities	$	—	$	52,407		$	—	$	52,407
Debentures of FHLB, FNMA and FHLMC		—		3,529,600			—		3,529,600
Corporate debt and asset-backed securities		—		2,393,268			44,263		2,437,531
Equity securities		—		22,460			10,803		33,263
State and municipal securities		—		1,698,253			—		1,698,253
Mortgage backed securities		—		629,728			1,659,777		2,289,505
Total investment securities available-for-sale		—		8,325,716			1,714,843		10,040,559
Loans held for sale		—		1,118,919			—		1,118,919
Derivatives		—		(273,891	)		3,739		(270,152	)
Mortgage servicing rights		—		—			137,874		137,874
Other assets		—		—			—		—
Total	$	—	$	9,170,744		$	1,856,456	$	11,027,200

Sovereign’s Level 3 assets are primarily comprised of certain non-agency mortgage backed securities. During 2009, the trading levels of certain non-agency mortgage backed securities declined significantly and as a result Sovereign reclassified $901.3 million of securities that had been classified as level 2 securities at year-end to level 3 securities at June 30, 2009. These investments are thinly traded and, in certain instances, Sovereign is the sole investor in these securities. Sovereign evaluates prices from a third party pricing service, third party broker quotes for certain securities and from another independent third party valuation source to determine their estimated fair value. These quotes are benchmarked against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances. Due to the continued illiquidity and credit risk of certain securities, the market value of these securities is highly sensitive to assumption changes and market volatility.

28

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(13) FAIR VALUE (continued)

The table below presents the changes in our Level 3 balances since year-end.

	Investments			Mortgage						Other
	Available-for-Sale			Servicing Rights			Derivatives			Assets			Total
Balance at December 31, 2008	$	1,190,868		$	127,811		$	8,573		$	3,474		$	1,330,726
Gains/(losses) in other comprehensive income		170,626			—			—			—			170,626
Gains/(losses) in earnings		(101,218	)		(4,834	)		(4,834	)		—			(107,379	)
Reclassification from Level 2		901,284			—			—			—			901,284
Reclassification to Level 2		(161,862	)		—			—			—			(161,862	)
Additions		25			47,124			—			—			47,149
Repayments		(284,880	)		—			—			(3,474	)		(288,354	)
Sales/Amortization		—			(35,734	)		—			—			(35,734	)
Balance at June 30, 2009	$	1,714,843		$	137,874		$	3,739			—		$	1,856,456

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents disclosures about the fair value of financial instruments as defined by SFAS No. 107, “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 Sovereign:

	June 30, 2009						December 31, 2008
	Carrying						Carrying
	Value			Fair Value			Value			Fair Value
Financial Assets:
Cash and amounts due from depository institutions	$	4,782,355		$	4,782,355		$	3,754,523		$	3,754,523
Investment securities:
Available-for-sale		10,040,559			10,040,559			9,301,339			9,301,339
Other investments		695,283			695,283			718,711			718,711
Loans held for investment, net		50,324,496			47,673,810			54,439,146			51,832,061
Loans held for sale		1,118,919			1,118,919			327,332			327,332
Mortgage servicing rights		137,873			139,178			127,811			128,558
Mortgage banking forward commitments		11,999			11,999			(9,598	)		(9,598	)
Mortgage interest rate lock commitments		3,739			3,739			8,573			8,573
Financial Liabilities:
Deposits		49,265,802			48,730,389			48,438,573			48,906,511
Borrowings and other debt obligations		17,178,420			17,539,770			20,816,224			21,005,248
Interest rate derivative instruments		285,915			285,915			307,137			307,137
Precious metal forward sale agreements		(1,726	)		(1,726	)		(1,227	)		(1,227	)
Precious metal forward settlement arrangements		1,751			1,751			1,227			1,227
Unrecognized Financial Instruments:(1)
Commitments to extend credit		98,696			98,617			113,175			113,085

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

29

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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

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

Investment securities available-for-sale. Generally, the fair value of investment securities available-for-sale is based on a third party pricing service which utilizes matrix pricing on securities that actively trade in the marketplace. For investment securities that do not actively trade in the marketplace (primarily our preferred stock in FNMA and FHLMC), fair value is obtained from third party broker quotes. For certain non-agency mortgage backed securities, Sovereign evaluates prices from a third party pricing service, third party broker quotes for certain securities and from another independent third party valuation source to determine their estimated fair value. These quotes are benchmarked against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” changes in fair value are reflected in the carrying value of the asset and are shown as a separate component of stockholders’ equity.

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

Mortgage servicing rights. The fair value of mortgage servicing rights is estimated using internal cash flow models. For additional discussion see Note 9.

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

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

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

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

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

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

30

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(15) RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141R”). The new pronouncement requires the acquiring entity in a business combination to recognize only the assets acquired and liabilities assumed in a transaction (for example, acquisition costs must be expensed when incurred), establishes the fair value at the date of acquisition as the initial measurement for all assets acquired and liabilities assumed, including contingent consideration, and requires expanded disclosures. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. Early adoption was prohibited. As discussed in Note 2, Sovereign has continued to apply its historical basis of accounting in these stand-alone financial statements after being acquired by Santander. Therefore this pronouncement had no impact on Sovereign’s financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities–an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced disclosures about an entity’s derivative and hedging activities intended to improve the transparency of financial reporting. Under SFAS 161, entities will be required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial statements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Sovereign adopted SFAS 161 effective January 1, 2009, and the disclosures required by this pronouncement are included in Note 7.

In April 2009, the FASB issued three final Staff Positions (FSPs) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2), FSP FAS 107-1 and ABP 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and ABP 28-1), and FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly” (FSP FAS 157-4).

FSP FAS 115-2 and FAS 124-2, is intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains at fair value. The FSP also requires increased and more timely disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Sovereign elected to early adopt this FSP on January 1, 2009 and the impact of its adoption and the disclosures required by the FSP are contained in Note 3.

FSP FAS 107-1 and ABP 28-1, relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The disclosures required by this statement are contained in Note 14.

Finally FSP FAS 157-4, relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what Statement 157 states is the objective of fair value measurement which is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The adoption of this statement had no impact on Sovereign’s financial position or results from operations.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). This pronouncement establishes principles and requirements for subsequent events. SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements and the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet in its financial statements. It also discusses the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. We have evaluated subsequent events through August 7, 2009, the date our consolidated financial statements were available to be issued, for this Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

31

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(15) RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — An Amendment of FASB Statement No. 140” (“SFAS 166”). This pronouncement eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We will adopt SFAS 166 on January 1, 2010 and are evaluating the impact it will have to our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which amends the consolidation guidance applicable to variable interest entities. The amendments to the consolidation guidance affect all entities currently within the scope of FIN 46(R), as well as qualifying special-purpose entities that are currently excluded from the scope of FIN 46(R). SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company is evaluating the impact that SFAS 167 would have to our consolidated financial statements.

On June 29, 2009 the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the primary source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC are also sources of authoritative GAAP for SEC registrants. SFAS 168 and the Codification become effective on September 30, 2009. When effective, the Codification will supersede all existing non-SEC accounting and reporting standards and the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the basis for conclusions on the change(s) in the Codification. The adoption of SFAS 168 and the Codification on September 30, 2009 will not have a material effect on our consolidated financial statements.

(16) MERGER, RESTRUCTURING AND OTHER CHARGES, NET

Sovereign recorded charges against its earnings for the three-month and six-month period ending June 30, 2009 for merger, restructuring and other expenses of $70.5 million and $303.8 million pre-tax, which were comprised of the following:

	Three-Month Period Ended		Six-Month Period Ended
	June 30,2009		June 30,2009
Severance	$	64,666	$	137,360
Debt extinguishment		—		68,733
Restricted stock acceleration charges		—		45,037
Miscellaneous deal costs and other		5,847		52,691
Transaction related and integration charges	$	70,513	$	303,821

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

	Severance			Other			Total
Reserve balance at December 31, 2008	$	17,416		$	23,229		$	40,645
Charge recorded in earnings		137,360			48,541			185,901
Payments		(92,675	)		(49,407	)		(142,082	)
Reserve balance at June 30, 2009	$	62,101		$	22,363		$	84,464

32

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINIANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(17) SUBSEQUENT EVENT

On July 9, 2009, Santander filed a preliminary prospectus with the SEC whereby Santander Financial Exchange Limited, a wholly-owned finance subsidiary of Banco Santander, S.A., would offer to exchange up to 6.4 million Santander Finance Preferred, 10.5% Non-Cumulative Series Guaranteed Preferred Securities, each with a par value of $25 per security which would be fully and unconditionally guaranteed by Santander plus a cash exchange incentive payment of up to $20 million for any or all of Sovereign’s Series C preferred stock. If the exchange were to be carried out on the terms described in the preliminary prospectus and all of the Series C preferred stock were tendered, Sovereign’s holding company obligations would be reduced by $14.6 million which represents the annual cash dividends of our Series C preferred stock obligation.

On July 24, 2009, SCUSA, a majority owned subsidiary of Santander was contributed by Santander into Sovereign Bancorp. SCUSA had $6.0 billion in assets at December 31, 2008 and reported pretax income of $261.6 million for the year ended December 31, 2008. In the third quarter our financial results will be adjusted to reflect this transaction as if it had actually occurred on January 1, 2009. The following unaudited proforma information reflects the consolidated balance sheet and income statement as if the transaction took place at the beginning of 2009.

	Sovereign			SCUSA		Combined
Total assets	$	75,174,997		$	6,680,576	$	81,855,573
Total loans, net		51,431,415			6,208,194		57,639,609
Total borrowings		17,178,420			5,741,549		22,919,969
Total liabilities		68,425,985			6,091,200		74,517,185
Total equity		6,749,012			589,376		7,338,388
Net interest income	$	634,677		$	743,128	$	1,377,805
Provision for credit losses		742,000			513,742		1,255,742
Non-interest income		165,165			15,969		181,134
Total expenses		1,104,848			86,526		1,191,374
Pretax (loss)/income		(1,047,006	)		158,829		(888,177	)

On July 29, 2009, Santander converted all of its investment in Sovereign’s Series D preferred stock of $1.8 billion into 7.2 million shares of Sovereign common stock. This action further demonstrates the support of our Parent Company to Sovereign and reduces the cash obligations of Sovereign Bancorp with respect to Series D 10% preferred stock dividend.

In late July 2009, a customer in our commercial loan portfolio declared bankruptcy. Sovereign’s total exposure to this entity is approximately $35 million. Our exposure is collateralized by all of the customer’s assets including equipment, inventory, receivables and other items and has the personal guaranties of the customer’s owners. Sovereign is in the process of gathering more facts about this situation and this case is currently in the U.S Bankruptcy Court. Accordingly, at this point the loss severity, if any, on this loan cannot be determined. However, to the extent that this matter is not resolved favorably, Sovereign’s third quarter results could include a significant charge-off related to this one loan.

33

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

EXECUTIVE SUMMARY

Sovereign is a $75 billion financial institution as of June 30, 2009 with community banking offices, operations and team members located principally in Pennsylvania, Massachusetts, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, and Maryland. Sovereign gathers substantially all of its deposits in these market areas. We use these deposits, as well as other financing sources, to fund our loan and investment portfolios. We earn interest income on our loans and investments. In addition, we generate non-interest income from a number of sources including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance. Our principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. Our volumes, and accordingly our financial results, are affected by the economic environment, including interest rates, consumer and business confidence and spending, as well as the competitive conditions within our geographic footprint. On January 30, 2009, Sovereign was acquired by Banco Santander, N.A. (“Santander”). We believe that the acquisition of the Company by Santander will further strengthen our financial position and enable us to continue to execute our strategy of focusing on our core retail and commercial customers in our geographic footprint.

Our customers select Sovereign for banking and other financial services based on our ability to assist customers by understanding and anticipating their individual financial needs and providing customized solutions. Our major strengths include a strong franchise value in terms of market share and demographics and diversified loan portfolio and products. Our weaknesses have included operating returns and capital ratios that are lower than certain of our peers. We have also not achieved our growth targets with respect to low cost core deposits.

Following the acquisition by Santander, Sovereign is focused on four objectives:

1)	stabilizing our financial condition with respect to liquidity and capital;
2)	improving risk management and collections;
3)	improving our margins and efficiency; and
4)	reorganizing to align to Santander business models with a strong commercial focus.

In order to enhance the Company’s capital position, on March 25, 2009, Sovereign issued 72,000 shares of preferred stock to Santander to raise proceeds of $1.8 billion. The Series D preferred stock pays non-cumulative dividends of 10% per year. Each share of Series D preferred stock is convertible into 100 shares of Sovereign common stock. Sovereign contributed the proceeds from this issuance to Sovereign Bank in order to strengthen the Bank’s regulatory capital ratios. On July 29, 2009, the outstanding Series D preferred stock was converted into common shares of Sovereign Bancorp by Santander. This action further illustrates the commitment our Parent Company has made to Sovereign and eliminates the cash obligation of Sovereign Bancorp with respect to the 10% Series D preferred stock dividend. As a result of the preferred stock issuance and conversion, our capital ratios have improved since year-end even though Sovereign reported a net loss of $1.0 billion during the six-month period ended June 30, 2009.

Our Tier 1 leverage ratio for Sovereign Bancorp was 7.35% at June 30, 2009 compared to 5.73% at December 31, 2008, respectively. The Bank’s total risk based capital ratio was 12.40% compared to 10.20% at December 31, 2008 and 11.41% a year ago. Our capital levels and ratios are in excess of the levels required to be considered well-capitalized. We continue to strengthen our balance sheet and position the Company for any further weakening in economic conditions by increasing the amount of loan loss reserves on our balance sheet. Reserves for credit losses as a percentage of total loans held for investment have increased to 3.18% at June 30, 2009 from 2.10% at December 31, 2008.

In order to further improve our operating returns, we continue to focus on acquiring and retaining customers by demonstrating convenience through our locations, technology and business approach while offering innovative and easy-to-use products and services. In the first quarter of 2009, Sovereign formed a new management team which is comprised of several executives from Santander and certain legacy Sovereign executives. The new management team is in the process of reviewing Sovereign’s operating procedures and cost structure. During the second quarter of 2009, management implemented certain pricing and fee assessment changes to our deposit portfolio and also initiated a reduction in workforce which eliminated approximately 1,000 positions to reduce our cost structure. Many of the reductions came from consolidating certain back office functions or eliminating certain middle to senior management positions which were deemed redundant. As a result of these actions, a severance charge of $64.7 million was recorded during the three-month period ended June 30, 2009.

34

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

In order to improve our risk management and collection efforts the Company has more than doubled its collection department headcount and certain additional senior management personnel have been placed at Sovereign from its Parent Company. Additionally, it has now formed certain specialized teams within its commercial workout area to focus on certain loan products. Finally, the servicing and collection activities related to our indirect auto portfolio have been transferred to Santander Consumer USA Inc. and Subsidiaries (“SCUSA”). SCUSA focuses entirely on the sub prime automobile market and management anticipates that their collection practices will increase the recovery and payment rates on our auto loan portfolio.

During the second quarter, the Company incorporated various elements of the Santander business model into its reporting structure. These included establishing a centralized and independent risk management function and the restructuring of our risk management function to more closely following our business lines. During the second quarter, the Company established a commercial credit group and has staffed this group with existing officers of the Company.

RECENT INDUSTRY CONSOLIDATION IN OUR GEOGRAPHIC FOOTPRINT

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

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 Sovereign’s earnings. Sovereign currently is in a mildly asset sensitive interest rate risk position. During the first six months of 2009, our net interest margin decreased to 1.99% from 2.93% in the six months ended June 30, 2008. Our net interest margin has been impacted by decreases in interest rates which resulted in the yields decreasing on our variable rate commercial loans and a lower overall yield on our investment portfolio. However our funding costs have not decreased by a similar amount due to the growth in fixed rate time deposits and money market accounts that we experienced in the fourth quarter of 2008. Management plans on letting certain high cost time deposits that were originated in this time period (that generally have terms of one year or less) run-off. Net interest margin in future periods will be impacted by several factors such as but not limited to, our ability to grow and retain core deposits, the future interest rate environment, loan and investment prepayment rates, and changes in non-accrual loans. See our discussion of Asset and Liability Management practices in a later section of this MD&A, including the estimated impact of changes in interest rates on Sovereign’s net interest income.

CREDIT RISK ENVIRONMENT

The credit quality of our loan portfolio has a significant impact on our operating results. We have experienced significant deterioration in certain key credit quality performance indicators in recent periods which has continued in the second quarter of 2009. We had charge-offs of $109.4 million and $265.1 million during the three months and six months ended June 30, 2009 compared to $86.9 million and $161.2 million during the corresponding periods in the prior year. Our provision for credit losses was $237.0 million and $742.0 million during the three months and six months ended June 30, 2009 compared to $132.0 million and $267.0 million during the corresponding periods in the prior year. The increases were driven by deterioration across all of our loan portfolios.

During 2007, Sovereign expanded its indirect auto loan portfolio into the Southeastern and Southwestern United States (“out-of-market loans”). Sovereign originated $2.8 billion of out-of-market loans in 2007 at a weighted average yield of 8.04%. Effective January 31, 2008, Sovereign ceased originating new auto loans in these markets. We also strengthened our underwriting standards in the second half of 2007 on our entire auto loan portfolio. However, losses remained elevated on these portfolios in 2008 as the newly originated loans continue to season and the US economy entered into a recession. Sovereign decided to exit its in footprint indirect auto portfolio and ceased originating these loans in January 2009. For the six-month period ended June 30, 2009, net losses on our auto loan portfolio were $68.1 million compared to $79.4 million for the six months ended June 30, 2008. Continued deterioration in the economy in the regions where we extended these loans could have a significant adverse impact on the amount of credit losses we experience in future periods. At June 30, 2009, our total auto loan portfolio was $4.4 billion of which $1.5 billion consisted of loans originated in the Southeast and Southwest production offices. At June 30, 2009 our total allowance for loan losses for the auto portfolio was $123.2 million. On June 1, 2009 Sovereign transferred servicing of its indirect auto portfolio to SCUSA. See Note 12 for details.

35

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Conditions in the housing market have significantly impacted areas of our business. Certain segments of our consumer and commercial loan portfolios have exposure to the housing market. Sovereign had residential real estate loans totaling $11.2 billion at June 30, 2009 of which $2.4 billion is comprised of Alt-A (also known as limited documentation) residential loans. Although losses have been increasing since the first quarter of 2008, actual credit losses on these loans have been modest and totaled $5.1 million and $10.8 million during the three-month and six-month periods ended June 30, 2009 compared to $4.6 million and $9.5 million for the corresponding periods in the prior year. However, non-performing assets and past due loans have been increasing particularly for the Alt-A portion of the residential portfolio. The increased loss experience and asset quality trends led us to increase our allowances for our residential portfolio. Future performance of our residential loan portfolio will continue to be significantly influenced by home prices in the residential real estate market, unemployment and general economic conditions. Sovereign holds allowances of $164.7 million on its residential loan portfolio.

The homebuilder industry also has been impacted by a decline in new home sales and a reduction in the value of residential real estate which has decreased the profitability and liquidity of these companies. Declines in real estate prices have been the most pronounced in certain states where previous increases were the largest, such as California, Florida and Nevada. Additionally, foreclosures have increased sharply in various other areas due to increasing levels of unemployment. Sovereign provided financing to various homebuilder companies which is included in our commercial loan portfolio. The Company has been working on reducing its exposure to this loan portfolio which has resulted in it declining to $701.2 million at June 30, 2009 compared to $907.0 million a year ago. Approximately eighty five percent of these loans at June 30, 2009 are to builders in our geographic footprint which generally have had more stable economic conditions on a relative basis compared to the national economy. We continue to monitor the credit quality of this portfolio.

Sovereign also has $6.5 billion of home equity loans and lines of credit (excluding our correspondent home equity loans). Net charge-offs on these loans for the three-month and six-month periods ended June 30, 2009 were $7.7 million and $17.5 million compared to $4.4 million and $9.8 million for the corresponding periods in the prior year. This portfolio consists of loans with an average FICO at origination of 778 and an average loan to value of 56.4%. We have total allowances of $68.4 million for this loan portfolio at June 30, 2009.

We have continued to experience increases in non-performing assets in our commercial lending, commercial real estate and multi-family loan portfolios as a result of worsening credit and economic conditions. Non-performing assets for these portfolios increased to $448.3 million, $695.8 million and $288.7 million at June 30, 2009 from $244.8 million, $319.6 million and $42.8 million at December 31, 2008. Net charge-offs on these portfolios for the six-month period ended June 30, 2009 were $129.1 million, $11.9 million and $5.6 million compared to $37.0 million, $11.1 million and $0.2 for the corresponding period in the prior year. Given these changes, we increased our allowance for loan losses for the commercial real estate and multi-family portfolios by approximately $69.0 million and $102.1 million, respectively, compared to December 31, 2008. We expect that the difficult housing environment as well as deteriorating economic conditions will continue to impact our commercial lending and commercial real estate portfolios which may result in elevated levels of provisions for credit losses in future periods.

RESULTS OF OPERATIONS

General

Sovereign reported a net loss of $(190.1) million and $(1.0) billion for the three-month and six-month periods ended June 30, 2009 as compared to net income of $127.4 million and $227.6 million for the three-month and six-month periods ended June 30, 2008. Results for 2009 include a higher provision for credit losses compared with the corresponding period in the prior year due to the slowing economic conditions and the deterioration in most categories of our loan portfolios as discussed above. The provision for credit losses has increased to $237.0 million and $742.0 million in the three-month and six-month periods ended June 30, 2009 compared to $132.0 million and $267.0 million for the three-month and six-month periods ended June 30, 2008.

36

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

In connection with the acquisition by Santander, Sovereign incurred merger-related and restructuring charges of $233.3 million during the three months ended March 31, 2009. The majority of these costs related to change in control payments to certain executives and severance charges of $72.7 million, debt extinguishment charges of $68.7 million as well as restricted stock acceleration charges of $45.0 million. The Company also incurred fees of approximately $26 million to third parties to successfully close the transaction.

Subsequent to the acquisition, the Company decided to prepay $1.4 billion of higher cost FHLB advances to lower funding costs in future periods and as a result incurred a debt extinguishment charge of $68.7 million. First quarter 2009 results also included investment security impairment charges of $79.7 million on our FNMA/FHLMC preferred stock portfolio and certain non-agency mortgage backed securities. See Note 3 for further details.

Second quarter 2009 results were negatively impacted by an additional reduction in workforce which resulted in severance charges of $64.7 million. Additionally, the FDIC charged all insured depository institutions a special deposit premium assessment to help replenish its deposit insurance reserve fund that will be payable on September 30, 2009 based off of deposit asset balances at June 30, 2009. As a result of this, Sovereign incurred additional deposit premium assessments of $35.3 million in the second quarter of 2009. We believe it is likely that a similar assessment will be made by FDIC in the fourth quarter of 2009. Our three month and six month results for the period ended June 30, 2009 were also negatively impacted by increases to our multi-family recourse reserves of $21.9 million and $70.0 million due to a deterioration in credit quality in loans sold to Fannie Mae in which Sovereign retains a limited amount of credit risk.

37

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
SIX-MONTH PERIOD ENDED JUNE 30, 2009 AND 2008
(in thousands)

	2009								2008
				Tax								Tax
	Average			Equivalent		Yield/			Average			Equivalent		Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
EARNING ASSETS
INVESTMENTS	$	13,706,912		$	196,476		2.87	%	$	12,571,679		$	384,816		6.13	%
LOANS:
Commercial loans		26,503,974			566,638		4.30	%		27,461,417			810,910		5.93	%
Multi-Family		4,559,602			128,897		5.67	%		4,411,480			132,890		6.03	%
Consumer loans
Residential mortgages		11,466,274			304,330		5.31	%		12,935,327			366,113		5.66	%
Home equity loans and lines of credit		6,889,958			154,216		4.51	%		6,303,688			184,741		5.89	%
Total consumer loans secured by real estate		18,356,232			458,546		5.01	%		19,239,015			550,854		5.74	%
Auto loans		4,918,893			168,421		6.90	%		6,963,279			234,243		6.76	%
Other		283,056			9,915		7.06	%		310,151			11,996		7.78	%
Total consumer		23,558,181			636,882		5.43	%		26,512,445			797,093		6.03	%
Total loans		54,621,757			1,332,417		4.90	%		58,385,342			1,740,893		5.98	%
Allowance for loan losses		(1,267,533	)		—		—			(753,763	)		—		—
NET LOANS		53,354,224			1,332,417		5.02	%		57,631,579			1,740,893		6.06	%
TOTAL EARNING ASSETS		67,061,136			1,528,893		4.58	%		70,203,258			2,125,709		6.07	%
Other assets		9,450,723			—		—			10,162,961			—		—
TOTAL ASSETS	$	76,511,859		$	1,528,893		4.01	%	$	80,366,219		$	2,125,709		5.31	%
FUNDING LIABILITIES
Deposits and other customer related accounts:
Retail and commercial deposits	$	33,852,339		$	334,632		1.99	%	$	31,977,082		$	420,002		2.64	%
Wholesale deposits		5,003,611			49,815		2.01	%		3,583,218			49,035		2.75	%
Government deposits		2,329,340			9,466		0.82	%		3,538,526			49,870		2.83	%
Customer repurchase agreements		1,590,574			2,897		0.37	%		2,655,607			24,742		1.87	%
TOTAL DEPOSITS		42,775,864			396,810		1.87	%		41,754,433			543,649		2.62	%
BORROWED FUNDS:
FHLB advances		11,513,463			312,219		5.44	%		18,307,665			419,306		4.59	%
Fed funds and repurchase agreements		1,619,420			2,546		0.32	%		1,131,420			16,125		2.87	%
Other borrowings		5,565,792			153,636		5.52	%		3,857,015			121,019		6.28	%
TOTAL BORROWED FUNDS		18,698,675			468,401		5.02	%		23,296,100			556,450		4.79	%
TOTAL FUNDING LIABILITIES		61,474,539			865,211		2.83	%		65,050,533			1,100,099		3.40	%
Demand deposit accounts		6,600,771			—		—			6,537,456			—		—
Other liabilities		2,140,181			—		—			1,511,228			—		—
TOTAL LIABILITIES		70,215,491			865,211		2.48	%		73,099,217			1,100,099		3.02	%
STOCKHOLDERS’ EQUITY		6,296,368			—		—			7,267,002			—		—
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	76,511,859			865,211		2.27	%	$	80,366,219			1,100,099		2.75	%
NET INTEREST INCOME				$	663,682							$	1,025,610
NET INTEREST SPREAD (1)							1.75	%							2.68	%
NET INTEREST MARGIN (2)							1.99	%							2.93	%

(1)	Represents the difference between the yield on total earning assets and the cost of total funding liabilities.
(2)	Represents annualized, taxable equivalent net interest income divided by average interest-earning assets.

38

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Net Interest Income

Net interest income for the three-month and six-month periods ended June 30, 2009 was $325.6 million and $634.7 million compared to $500.9 million and $977.9 million for the same periods in 2008. The decrease in net interest income was due to a decline in net interest margin for the three-month and six-month periods ended June 30, 2009 to 2.01% and 1.99% compared to the corresponding periods in the prior year of 3.02% and 2.93%. The reason for the decrease has been due to an investment restructuring in the third quarter of 2008 where we shortened the duration of the investment portfolio which lowered yields, a rise in non-performing assets, and the elimination of dividends received on our FNMA/FHLMC preferred stock and FHLB stock. Additionally, our variable rate loans yield have decreased with drops in interest rates. However our borrowing costs are largely fixed and have not decreased. Finally deposit growth has been in higher cost CD and money market categories. Management expects to reprice its money market portfolio and its higher cost CDs will mature over the next couple of quarters which should help improve the Company’s net interest margin.

Interest on investment securities and interest earning deposits was $85.0 million and $174.5 million for the three-month and six-month periods ended June 30, 2009, compared to $163.8 million and $344.7 million for the same periods in 2008. The average balance of investment securities was $13.7 billion with an average tax equivalent yield of 2.87% for the six-month period ended June 30, 2009 compared to an average balance of $12.6 billion with an average yield of 6.13% for the same period in 2008. The elimination of dividends on our Fannie Mae and Freddie Mac perpetual preferred stock and on FHLB stock has negatively impacted investment yields. Additionally, during the third quarter of 2008, we shortened the duration of our investment portfolio in order to mitigate the impact of interest rate changes on the market value of our balance sheet. Sovereign sold $4.2 billion of longer duration mortgage backed securities and $0.5 billion of longer duration municipal securities for a gain of $29.5 million. We reinvested $3.5 billion of these securities in shorter duration agency securities.

At the end of the third quarter of 2008 (prior to the acquisition of the Company by Santander) several large US financial institutions failed (Washington Mutual, Lehman Brothers, Inc., Wachovia forced sale to Wells Fargo, etc). Sovereign experienced a significant amount of deposit outflows which strained our liquidity levels. Sovereign reacted by offering high yielding 9 to 18 month CD terms as well as high cost promotional money market campaigns. The Company also enhanced its liquidity levels by working on making more of its loan portfolio collateral eligible for borrowing purposes. Subsequent to the acquisition of Sovereign by Santander, our deposit portfolio has been stabilized. We continue to hold high levels of liquidity in our investment portfolio but anticipate that it will be invested in longer duration investments over the next couple of quarters which should increase earnings on our investment portfolio.

Interest on loans was $649.6 million and $1.3 billion for the three-month and six-month periods ended June 30, 2009, compared to $838.0 million and $1.7 billion for the three-month and six-month periods in 2008. The average balance of loans was $54.6 billion with an average yield of 4.90% for the six-month period ended June 30, 2009 compared to an average balance of $58.4 billion with an average yield of 5.98% for the same period in 2008. Commercial loan yields have decreased 163 basis points due to the decline in short-term interest rates which has decreased the yields on our variable rate loan products. Average residential mortgages decreased $1.5 billion due to our desire to sell more production to reduce our on balance sheet portfolio. Average balances of auto loans decreased to $4.9 billion from $7.0 billion due to our decision to cease originating this loan product in the prior year due to higher than anticipated credit losses.

Interest on deposits and related customer accounts was $180.4 million and $396.8 million for the three-month and six-month periods ended June 30, 2009, compared to $228.5 million and $543.6 million for the same periods in 2008. The average balance of deposits was $42.8 billion with an average cost of 1.87% for the six-month period ended June 30, 2009 compared to an average balance of $41.8 billion with an average cost of 2.62% for the same period in 2008. The average balance of non-interest bearing demand deposits increased from $6.5 billion in 2008 to $6.6 billion in 2009.

Interest on borrowed funds was $228.6 million and $468.4 million for the three-month and six-month periods ended June 30, 2009, compared to $272.4 million and $556.5 million for the same periods in 2008. The average balance of borrowings was $18.7 billion with an average cost of 5.02% for the six-month period ended June 30, 2009 compared to an average balance of $23.3 billion with an average cost of 4.79% for the same periods in 2008.

39

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

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, 2009 was $237.0 million and $742.0 million, compared to $132.0 million and $267.0 million for the same periods in 2008. The significant increase in provision for credit losses was driven by an increase in non-accrual loans which increased $1.6 billion from $490.3 million in the second quarter of 2008.

As a result of the deterioration in the credit quality of our loan portfolio, Sovereign has significantly increased its reserve levels on its loan portfolios. Our reserve for credit losses as a percentage of total loans has increased to 3.18% from 2.10% at December 31, 2008. Although, we believe current levels of reserves are adequate to cover the inherent losses for these loans, future changes in housing values, interest rates and economic conditions could impact the provision for credit losses for these loans in future periods.

Weakening credit conditions increased charge-offs for the three-month and six-month periods ended June 30, 2009 to $109.4 million and $265.1 million, compared to $86.9 million and $161.2 million for the corresponding periods in the prior year. This equates to annualized net loan charge-off to average loan ratios of 0.82% and 0.97% for the three-month and six-month periods ended June 30, 2009 compared to 0.60% and 0.55% for the comparable periods in the prior year.

Non-performing assets were $2.1 billion or 2.80% of total assets at June 30, 2009, compared to $985.4 million or 1.28% of total assets at December 31, 2008 and $553.9 million or 0.70% of total assets at June 30, 2008. The increase since year-end was primarily driven by our residential, commercial real estate, multi-family and commercial and industrial loan portfolios. We factored in these increases when establishing our loan loss reserves at June 30, 2009 and it was one of the factors that caused our provision for credit losses to be elevated over the past few quarters. Management regularly evaluates Sovereign’s loan portfolios, and its allowance for loan losses, and adjusts the loan loss allowance as deemed necessary.

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

	Six-Month Period Ended
	June 30,
	2009		2008
Allowance for loan losses, beginning of period	$	1,102,753	$	709,444
Charge-offs:
Commercial		151,707		53,988
Consumer secured by real estate		49,010		34,610
Consumer not secured by real estate		119,425		126,846
Total Charge-offs		320,142		215,444
Recoveries:
Commercial		5,121		5,639
Consumer secured by real estate		5,617		5,175
Consumer not secured by real estate		44,307		43,397
Total Recoveries		55,045		54,211
Charge-offs, net of recoveries		265,097		161,233
Provision for loan losses (1)		603,499		260,537
Allowance for loan losses, end of period		1,441,155		808,748
Reserve for unfunded lending commitments, beginning of period		65,162		28,301
Provision for unfunded lending commitments (1)		138,500		6,463
Reserve for unfunded lending commitments, end of period		203,662		34,764
Total allowance for credit losses, end of period	$	1,644,817	$	843,512

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

40

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Non-Interest (Loss)/Income

Total non-interest income was $152.3 million and $165.2 million for the three-month and six-month periods ended June 30, 2009, compared to $207.1 million and $378.9 million for the same periods in 2008. The six-month period ended June 30, 2009 includes an OTTI charge of $36.9 million on FNMA and FHLMC preferred stock, a $66.8 million OTTI charge on our non-agency mortgage backed securities and an increase to recourse reserves on multifamily loans sales of $70.0 million.

Consumer banking fees were $83.6 million and $157.4 million for the three-month and six-month periods ended June 30, 2009, compared to $81.0 million and $154.2 million for the same periods in 2008, representing a 3.2% and 2.1% increase, respectively. The increase for the six-month period ended June 30, 2009 is due primarily to growth in deposit fees to $124.7 million, compared to $117.7 million for the corresponding period in the prior year due to certain pricing changes on deposit products.

Commercial banking fees were $47.7 million and $93.8 million for the three-month and six-month periods ended June 30, 2009, compared to $53.7 million and $108.2 million for the same periods in 2008, representing decreases of 11.2% and 13.3%, respectively. Commercial banking fees for the six-month period ended June 30, 2009 include charges of $6.4 million to increase reserves associated with customer swap receivables from our capital markets group. Additionally, the Company has experienced a decline of $13.0 million on precious metal fees due to our decision to deemphasize this business to focus on relationships within our core markets.

Net mortgage banking income was composed of the following components:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Sales of mortgage loans and related securities	$	27,080		$	4,999		$	38,717		$	8,977
Net (losses)/gains on hedging activities		(343	)		1,602			14,575			2,972
Mortgage servicing fees		12,676			12,182			25,884			24,098
Amortization of mortgage servicing rights		(18,716	)		(11,034	)		(35,533	)		(19,103	)
Residential mortgage servicing rights recoveries/(impairments)		15,041			19,837			927			1,134
Sales and changes to recourse reserves of multi-family loans		(17,941	)		9,676			(68,084	)		18,906
Recoveries from/(Impairments to) multi-family mortgage servicing rights		1,278			635			(2,254	)		(4,220	)
Total mortgage banking income	$	19,075		$	37,897		$	(25,768	)	$	32,764

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

Sales of mortgage loans increased significantly for the three and six month periods ended June 30, 2009 compared to 2008. The increase was driven by low market interest rates which enabled Sovereign to reduce mortgage rates that it offered to its customers. These lower rates result in a significant increase in our mortgage refinancings. Sovereign continued to sell most of this increased mortgage production to Fannie Mae and Freddie Mac. For the three and six month periods ended June 30, 2009, Sovereign sold $2.1 billion and $3.2 billion of loans at a gain of $27.1 million and $38.7 million compared to $1.1 billion and $2.0 billion of loans at a gain of $5.0 million and $9.0 million in the prior year.

41

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

At June 30, 2009, Sovereign serviced approximately $14.0 billion of residential mortgage loans for others and our net mortgage servicing asset was $127.8 million, compared to $13.1 billion of loans serviced for others and a net mortgage servicing asset of $112.5 million at December 31, 2008. For the three months ended June 30, 2009, Sovereign recorded a $15.0 million recovery on our mortgage servicing rights valuation allowance due to lower expected prepayments on our mortgages from higher market interest rates since March 31, 2009. The $15.0 million recovery for the three months ending June 30, 2009 offset the impairment of $14.1 million recorded for the three months ending March 31, 2009 resulting in a net recovery of $0.9 million on our mortgage servicing rights for the six months ended June 30, 2009. The most important assumptions in the valuation of mortgage servicing rights are anticipated loan prepayment rates (CPR speed) and the positive spread we receive on holding escrow related balances. Increases in prepayment speeds (which are generally driven by lower long term interest rates) result in lower valuations of mortgage servicing rights, while lower prepayment speeds result in higher valuations. The escrow related credit spread is the estimated reinvestment yield earned on the serviced loan escrow deposits. Increases in escrow related credit spreads result in higher valuations of mortgage servicing rights while lower spreads result in lower valuations. For each of these items, Sovereign must make market assumptions based on future expectations. All of the assumptions are based on standards that we believe would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources. Additionally, an independent appraisal of the fair value of our mortgage servicing rights is obtained at least annually and is used by management to evaluate the reasonableness of our discounted cash flow model. Future changes to prepayment speeds may cause significant future charges or recoveries of previous impairments in future periods.

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

	June 30, 2009			March 31, 2009			December 31, 2008			June 30, 2008
CPR speed		24.44	%		32.44	%		29.65	%		12.19	%
Escrow credit spread		3.70	%		4.01	%		4.35	%		4.74	%

Sovereign originates and sells multi-family loans in the secondary market to Fannie Mae while retaining servicing. Under the terms of the sales program with Fannie Mae, we retain a portion of the credit risk associated with such loans. As a result of this agreement with Fannie Mae, Sovereign retains a 100% first loss position on each multi-family loan sold to Fannie Mae under such program until the earlier to occur of (i) the aggregate losses on the multi-family loans sold to Fannie Mae reaching the maximum loss exposure for the portfolio as a whole ($252.3 million as of June 30, 2009) or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off. The maximum loss exposure is available to satisfy any losses on loans sold in the program subject to the foregoing limitations.

The Company has established a liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae. This liability represents the amount that the Company estimates that it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses that the portfolio is projected to incur based upon an industry-based default curve with a range of estimated losses. At June 30, 2009 and December 31, 2008, Sovereign had a $102.2 million and $38.3 million liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae under this sales program. The increase in our recourse reserve levels is due to weakening economic conditions.

At June 30, 2009 and December 31, 2008, Sovereign serviced $13.1 billion and $13.0 billion of loans of loans for Fannie Mae sold to it pursuant to this program with a maximum potential loss exposure of $252.3 million and $249.8 million, respectively. As a result of this retained servicing on multi-family loans sold to Fannie Mae, the Company had loan servicing assets of $9.7 million and $14.7 million at June 30, 2009 and December 31, 2008, respectively. During the six-month period ended June 30, 2009 and the corresponding period in the prior year, Sovereign recorded servicing asset amortization of $4.4 million and $5.2 million, respectively. Additionally, during the first half of 2009, Sovereign recorded a net servicing right asset impairment charge of $2.3 million from lower escrow rate reinvestment yield assumptions due to recent interest rate cuts by the Federal Reserve.

In the second quarter of 2009, Sovereign recorded (losses)/gains on the sale of multi-family loans of $(17.9) million on $272.8 million of multi-family loans compared to gains of $9.7 million on the sale of $885.9 million of loans for the corresponding period in the prior year. The loss on the sale of multi-family loans for the second quarter of 2009 includes a charge of $21.9 million related to increasing recourse reserves on multi-family loans sold to Fannie Mae.

For the six months ending June 30, 2009, Sovereign recorded a loss of $68.1 million for sales and changes to recourse reserve of multi-family loans due to increases in recourse reserves on multi-family loans of $70.0 million.

42

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Capital markets revenues decreased to $4.7 million and $1.5 million for the three-month and six-month periods ended June 30, 2009, compared to $7.2 million and $17.6 million for the same periods in 2008. During the first quarter of 2009, Sovereign recorded charges of $6.4 million to increase reserves for uncollectible swap receivables from customers due to deterioration in the credit worthiness of these companies.

Bank owned life insurance (BOLI) income represents the increase in the cash surrender value of life insurance policies for certain employees where the Bank is the beneficiary of the policies, as well as the receipt of insurance proceeds. The decrease in BOLI income to $16.0 million and $30.9 million for the three-month and six-month periods ended June 30, 2009, compared to $19.1 million and $38.5 million for the comparable periods in the prior year is primarily due to decreased death benefits as well as lower returns on certain polices.

Net losses on investment securities were $23.5 million and $101.2 million for the three-month and six-month periods ended June 30, 2009, compared to gains of $1.9 million and $16.0 million for the same periods in 2008. Second quarter 2009 results included an OTTI charge of $24.0 million on certain non-agency mortgage backed securities. First quarter 2009 results included an OTTI charge of $36.9 million on FNMA and FHLMC preferred stock and a $42.8 million OTTI charge on certain non-agency mortgage backed securities. In the first quarter of 2008, we recorded net cash proceeds of $14.1 million on the mandatory redemption of approximately half of our Visa Initial Public Offering (IPO) shares. Our remaining Visa shares are required to be held for 3 years pending settlement of other possible litigation that Visa and its member banks are exposed to. These shares are required to be valued at their historical cost of $0. In March 2011, we will no longer have any restrictions on these shares.

General and Administrative Expenses

General and administrative expenses for the three-month and six-month periods ended June 30, 2009 were $318.5 million and $668.7 million, compared to $371.6 million and $721.2 million for the same periods in 2008. The reduction in general administrative expenses have been due primarily from restructuring efforts over the past couple of quarters. Sovereign has reduced its employee base by approximately 20% since November 2008 as the Company has exited certain business lines, combined certain back office functions and transferred certain servicing operations to subsidiaries of Santander. Additionally, the Company has significantly reduced certain discretionary expenses during this same period. Finally, the Company has initiated a pay freeze and eliminated its 401(k) match.

Other Expenses

Other expenses consist primarily of amortization of intangibles, minority interest expense, deposit insurance expense, merger related and integration charges, equity method investment expense and other restructuring and proxy and related professional fees. Other expenses were $151.3 million and $436.2 million for the three-month and six-month periods ended June 30, 2009, compared to $47.9 million and $89.8 million for the same periods in 2008. The reasons for the variances are discussed below.

The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC insured limits. The FDIC Board of Directors has established a reserve ratio target percentage of 1.25%. This means that their “target” balance for the reserves is 1.25% of estimated insured deposits. Due to recent bank failures, the reserve ratio is currently below its target balance. In December 2008, the FDIC published a final rule that raised the current deposit assessment rates uniformly for all institutions by 7 basis points, effective in the first quarter of 2009. The FDIC also has announced that in the second quarter of 2009, additional fees will be assessed to institutions who have secured borrowings in excess of 15% of their deposits. The FDIC approved a special assessment charge of 5 cents per $100 of an institution’s assets minus its Tier 1 capital on June 30, 2009 to help bolster the reserve fund, which is payable on September 30, 2009. This resulted in a $35.3 million charge in our results for the three-month period ended June 30, 2009. As a result of these two events, Sovereign’s deposit insurance expense increased to $54.5 million and $76.1 million for the three-month and six-month periods ended June 30, 2009 compared to $9.3 million and $18.4 million for the corresponding periods in the prior year.

Sovereign recorded charges of $70.5 million and $303.8 million for the three-month and six-month periods ended June 30, 2009 associated with merger-related and restructuring charges and costs associated with the Santander acquisition. The majority of these costs related to change in control payments to certain executives and severance charges of $137.4 million as well as restricted stock acceleration charges of $45.0 million. Sovereign also incurred fees of approximately $26.0 million to third parties to successfully close the transaction. Finally, during the first quarter of 2009, Sovereign redeemed $1.4 billion of high cost FHLB advances incurring a debt extinguishment charge of $68.7 million. This decision was made to reduce interest expense in future periods since the advances were at above market interest rates due to the current low rate environment.

43

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Sovereign recorded intangible amortization expense of $19.1 million and $39.1 million for the three-month and six-month periods ended June 30, 2009, compared to $28.1 million and $57.2 million for the corresponding periods in the prior year. The decreases in the current year periods are due primarily to decreased core deposit intangible amortization expense on previous acquisitions.

Income Tax (Benefit)/Provision

An income tax benefit of $(38.9) million and $(39.6) million was recorded for the three-month and six-month periods ended June 30, 2009, compared to a tax provision of $29.1 million and $51.2 million for the same periods in 2008. Given the significant loss incurred for the six months ended June 30, 2009, as well as in prior years, Sovereign did not record a tax benefit on its pretax loss that was incurred. Sovereign did recognize a tax benefit of $39.6 million for the six months ending June 30, 2009 related primarily to the favorable resolution of certain tax items with the IRS that enabled us to realize a deferred tax asset that previously had a valuation allowance assigned to it.

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

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. Sovereign reviews its tax balances quarterly and as new information becomes available, the balances are adjusted, as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions. In 2008, the Internal Revenue Service (the “IRS”) completed an examination of the Company’s federal income tax returns for the years 2002 through 2005. Included in this examination cycle were two separate financing transactions with an international bank totaling $1.2 billion. As a result of these transactions, Sovereign was subject to foreign taxes of $154.0 million during the years 2003 through 2005 and claimed a corresponding foreign tax credit for foreign taxes paid during those years. In 2006 and 2007, Sovereign was subject to an additional $87.6 million and $22.5 million, respectively, of foreign taxes related to these financing transactions and claimed a corresponding foreign tax credit. The IRS issued a notification of adjustment disallowing the foreign tax credits taken in 2003-2005 in the amount of $154.0 million related to these transactions; disallowing deductions for issuance costs and interest expense related to the transaction which would result in an additional tax liability of $24.9 million and assessed interest and potential penalties, the combined amount of which totaled approximately $71.0 million. Sovereign has paid the additional tax due resulting from the IRS adjustments, as well as the assessed interest and penalties and has filed a lawsuit seeking the refund of those amounts in Federal District Court. In addition, the IRS has commenced its audit for the years 2006 and 2007. We expect that in the future the IRS will propose to disallow the foreign tax credits and deductions taken in 2006 and 2007 of $87.6 million and $22.5 million, respectively; disallowing deductions for issuance costs and interest expense which would result in an additional tax liability of $37.1 million; and to assess interest and penalties. Sovereign expects that it will need to litigate this matter with the IRS. Sovereign continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe it is entitled to tax deductions for the related issuance costs and interest deductions. Sovereign also believes that its recorded tax reserves for its position of $57.6 million adequately provides for any potential exposure to the IRS related to these items. However, as the Company continues to go through the litigation process, we will continue to evaluate the appropriate tax reserve levels for this position, and any changes made to the tax reserves may materially affect Sovereign’s income tax provision, net income and regulatory capital in future periods.

44

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Line of Business Results

Segment results are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of our segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The provision for credit losses recorded by each segment is based on the net charge-offs of each line of business and the difference between the provision for credit losses recognized by the Company on a consolidated basis and the provision recorded by the business line at the time of charge-off is allocated to each business line based on the risk profile of their loan portfolio. Other income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct expenses as well as certain allocated corporate expenses are accounted for within each segment’s financial results. Where practical, the results are adjusted to present consistent methodologies for the segments. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. In connection with the acquisition of Sovereign by Santander in the first quarter of 2009, certain changes to our executive management team were announced. These events impacted how our executive management team measured and assessed our business performance.

As a result of these changes, we now have four reportable segments. The Company’s segments are focused principally around the customers Sovereign serves. The Retail Banking Division is primarily comprised of our branch locations and our residential mortgage business. Our branches offer a wide range of products and services to customers and each attracts deposits by offering a variety of deposit instruments including demand and NOW accounts, money market and savings accounts, certificates of deposits and retirement savings plans. Our branches also offer certain consumer loans such as home equity loans and other consumer loan products. It also provides business banking loans and small business loans to individuals. Finally our residential mortgage business reports into our head of Retail Banking. Our specialized business segment is primarily comprised of leases to commercial customers, our New York multi-family and national commercial real estate lending group, our automobile dealer floor plan lending group and our indirect automobile lending group. The Middle Market segment provides the majority of Sovereign’s commercial lending platforms such as commercial real estate loans and commercial industrial loans and also contains the Company’s related commercial deposits. The Other segment includes earnings from the investment portfolio, interest expense on Sovereign’s borrowings and other debt obligations, minority interest expense, amortization of intangible assets and certain unallocated corporate income and expenses.

The Retail Banking segment net interest income decreased $37.8 million and $82.5 million to $203.9 million and $396.2 million for the three-month and six-month periods ended June 30, 2009 compared to the corresponding periods in the preceding year. The decrease in net interest income was due to margin compression on a matched funded basis due to the recent Federal Reserve interest rate cuts which have reduced the spreads that our Retail Banking Division receives on their deposits. The average balance of loans was $22.4 billion for the six months ended June 30, 2009 compared to an average balance of $23.4 billion for the corresponding period in the preceding year and the net spread on the loan portfolio for the six month period ended June 30, 2009 was 1.67% compared to 1.49% for the corresponding period in the prior year. The average balance of deposits was $38.8 billion for the six months ended June 30, 2009, compared to $37.7 billion for the same period a year ago. The net spreads on our retail deposit portfolio were 1.13% for the six-month period ended June 30, 2009 compared to 1.69% for the corresponding period in the prior year. In addition to the Federal Reserve rate cuts which negatively impacted spreads, Sovereign originated a high level of promotional money market and time deposit balances in late September and early October prior to being acquired by Santander. These deposits helped stabilize our liquidity levels but were at above market rate costs and as a result have hurt the Retail Banking segments deposit spreads. Sovereign intends to reprice these deposits to market based terms when the promotional periods expire which should improve deposit spreads in future periods. The provision for credit losses increased $41.8 million and $149.9 million for the three months and six months ended June 30, 2009, and is driven by increased allowance allocations for division’s loan portfolio. General and administrative expenses totaled $248.4 million and $527.3 million for the three months and six months ended June 30, 2009, compared to $296.2 million and $591.0 million for the three months and six months ended June 30, 2008. The decrease in general and administrative expenses is due to tighter cost controls and a lower headcount within our retail banking division.

45

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

The Specialized Business segment net interest income increased $3.8 million and $8.3 million to $92.6 million and $184.5 million for the three-month and six-month periods ended June 30, 2009 compared to the corresponding periods in the preceding year. The net spread on a match funded basis for this segment was 1.90% for the first six months of 2009 compared to 1.86% for the same period in the prior year. The average balance of loans for the six-month period ended June 30, 2009 was $19.3 billion compared with $21.5 billion for the corresponding period in the prior year. Fees and other income were $1.0 million and $(37.3) million for the three-month and six-month periods ended June 30, 2009 compared to $35.0 million and $66.5 million for the corresponding periods in the prior year. The current year results included a charge of $70.0 million to increase our recourse reserves associated with the sales of multi-family loans to Fannie Mae. The provision for credit losses increased $19.8 million and $168.1 million to $94.4 million and $314.8 million at June 30, 2009 due to a higher level of allowances on our multi-family loan portfolio. Charge-offs on this portfolio increased to $5.6 million during the first six months of 2009 compared to $0 during the first six months of 2008. General and administrative expenses totaled $24.6 million and $50.9 million for the three months and six months ended June 30, 2009, compared to $27.3 million and $55.3 million for the three months ended June 30, 2008.

The Middle Market segment net interest income decreased $22.2 million and $54.8 million to $81.4 million and $159.9 million for the three-month and six-month periods ended June 30, 2009 compared to the corresponding periods in the preceding year due to a decrease in our commercial loan portfolios from reduced demand for these loan products due to the current economic environment. The net spread on a match funded basis for this segment was 1.83% for the first six months of 2009 compared to 2.20% for the same period in the prior year. The average balance of loans for the six months ended June 30, 2009 was $12.8 billion compared with $13.3 billion for the corresponding period in the prior year. The provision for credit losses increased $43.4 million and $157.0 million to $71.2 million and $215.9 million for the three months and six months ended June 30, 2009 due to higher reserve allocations on certain segments within our commercial loan portfolio, particularly those related to the residential real estate industry. General and administrative expenses (including allocated corporate and direct support costs) were $23.6 million and $51.9 million for the three months and six months ended June 30, 2009 compared with $38.0 million and $67.9 million for the corresponding periods in the prior year.

The net income/(loss) before income taxes for Other decreased $222.2 million and $680.4 million to a net loss of $173.6 million and $573.6 million for the three months and six months ended June 30, 2009 compared to the corresponding periods in the preceding year. Results for the six months ended June 30, 2009 included charges of $36.9 million and $66.8 million related to the OTTI charge on FNMA and FHLMC preferred stock and the non-agency mortgage backed securities portfolio, respectively. Results for the three months and six months ended June 30, 2009 included charges of $70.5 million and $303.8 million related to certain restructuring and merger charges, respectively. Net interest income/(expense) decreased $119.1 million and $214.1 million to $(52.3) million and $(105.9) million for the three months and six months ended June 30, 2009 compared to the corresponding periods in the preceding year due primarily to investment yields decreasing 326 basis points for the six-month period ended June 30, 2009. Average borrowings for the six-month period ended June 30, 2009 and 2008 were $18.7 billion and $23.3 billion, respectively, with an average cost of 5.02% and 4.79%. Average investments for the six-month period ended June 30, 2009 and 2008 was $13.7 billion and $12.6 billion respectively, at an average yield of 2.87% and 6.13%.

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the December 31, 2008 consolidated financial statements filed on 2008 Form 10-K. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. We have identified accounting for the allowance for loan losses, derivatives, income taxes and goodwill as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis and the December 31, 2008 Management’s Discussion and Analysis filed in our 2008 Form 10-K.

A discussion of the impact of new accounting standards issued by the FASB and other standard setters are included in Note 15 to the consolidated financial statements.

46

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

FINANCIAL CONDITION

Loan Portfolio

At June 30, 2009, commercial loans totaled $25.6 billion representing 48.5% of Sovereign’s loan portfolio, compared to $27.3 billion, or 48.8% of the loan portfolio, at December 31, 2008 and $27.8 billion, or 48.2% of the loan portfolio, at June 30, 2008. At both June 30, 2009 and December 31, 2008, only 7% and 8%, respectively, of our total commercial portfolio was unsecured. The decrease in commercial loans since December 31, 2008 has been driven by reduced demand for these loan products due to the current recessionary environment. Sovereign is focused on limiting its balance sheet growth given the difficult economic and credit conditions.

At June 30, 2009, multi-family loans totaled $4.5 billion representing 8.6% of Sovereign’s loan portfolio, compared to $4.5 billion, or 8.1% of the loan portfolio, at December 31, 2008 and $4.7 billion or 8.1% of the loan portfolio at June 30, 2008.

The consumer loan portfolio secured by real estate (consisting of home equity loans and lines of credit of $6.8 billion and residential loans of $11.2 billion) totaled $18.0 billion at June 30, 2009, representing 34.1% of Sovereign’s loan portfolio, compared to $18.3 billion, or 32.8%, of the loan portfolio at December 31, 2008 and $18.4 billion or 31.9% of the loan portfolio at June 30, 2008.

The consumer loan portfolio not secured by real estate (consisting of automobile loans of $4.4 billion and other consumer loans of $273.7 million) totaled $4.7 billion at June 30, 2009, representing 8.8% of Sovereign’s loan portfolio, compared to $5.8 billion, or 10.3%, of the loan portfolio at December 31, 2008 and $6.8 billion or 11.8% of the loan portfolio at June 30, 2008. Sovereign ceased originating auto loan production within its geographic footprint in the fourth quarter of 2008 and stopped originating out of footprint auto loans on January 31, 2008. The remaining auto portfolio will liquidate over its remaining estimated life of approximately two and a half to three years.

Non-Performing Assets

At June 30, 2009, Sovereign’s non-performing assets increased by $1.1 billion to $2.1 billion compared to $985.4 million at December 31, 2008. This increase is primarily related to residential mortgages, commercial real estate loans, multi-family loans and commercial and industrial loans. Non-performing assets as a percentage of total loans, real estate owned and repossessed assets increased to 3.98% at June 30, 2009 from 1.77% at December 31, 2008. In response to these increases, Sovereign increased its allowance for credit losses on our loan portfolio to $1.6 billion or 3.11% of total loans at June 30, 2009 from $1.2 billion or 2.09% at December 31, 2008. Sovereign generally places all commercial and residential loans on non-performing status at 90 days delinquent or sooner, if management believes the loan has become impaired (unless return to current status is expected imminently). All other consumer loans continue to accrue interest until they are 120 days delinquent, at which point they are either charged-off or placed on non-accrual status and anticipated losses are reserved for. At 180 days delinquent, anticipated losses on residential real estate loans are fully reserved for or charged off.

Sovereign has been building its reserve levels over the past several quarters due to the deepening U.S. recession which has negatively impacted the credit quality of our loan portfolio. Our allowance for credit losses as a percentage of total loans has now increased to 3.18% at June 30, 2009 compared to 2.10% at December 31, 2008 and 1.47% at June 30, 2008. Although non-performing assets have increased significantly during this time period, we have seen a stabilization in our early stage delinquencies. Excluding loans that are classified as non-accrual, our loans past due have declined from $1.4 billion at year end to $1.1 billion at June 30, 2009. Although we expect that our non-performing loan levels will continue to increase in future periods, the Company has considered this fact in the calculation of the allowance for loan loss at June 30, 2009. If the recent trends experienced in our early stage delinquency levels do not continue however, this may lead to higher than anticipated levels of non-performing assets and have a significant impact on future reserves for credit losses.

47

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

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

	June 30,			December 31,
	2009			2008
Non-accrual loans:
Consumer:
Residential mortgages	$	520,179		$	233,176
Home equity loans and lines of credit		90,207			69,247
Auto loans and other consumer loans		14,591			3,777
Total consumer loans		624,977			306,200
Commercial		448,311			244,847
Commercial real estate		695,805			319,565
Multi-family		288,731			42,795
Total non-accrual loans		2,057,824			913,407
Restructured loans		304			268
Total non-performing loans		2,058,128			913,675
Other real estate owned		36,324			49,900
Other repossessed assets		10,645			21,836
Total other real estate owned and other repossessed assets		46,969			71,736
Total non-performing assets	$	2,105,097		$	985,411
Past due 90 days or more as to interest or principal and accruing interest	$	46,528		$	123,301
Annualized net loan charge-offs to average loans		.97	%		.83	%
Non-performing assets as a percentage of total assets		2.80	%		1.28	%
Non-performing loans as a percentage of total loans		3.89	%		1.64	%
Non-performing assets as a percentage of total loans, real estate owned and repossessed assets		3.98	%		1.77	%
Allowance for credit losses as a percentage of total non-performing assets (1)		78.1	%		118.5	%
Allowance for credit losses as a percentage of total non-performing loans (1)		79.9	%		127.8	%

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

Loans ninety (90) days or more past due and still accruing interest decreased by $76.8 million from December 31, 2008 to June 30, 2009, as more loans were moved to non-accrual status during the first quarter. Potential problem loans (commercial loans delinquent more than 30 days but less than 90 days, although not currently classified as non-performing loans) amounted to approximately $491.3 million and $557.8 million at June 30, 2009 and December 31, 2008, respectively. This increase has been factored into our allowance for loan losses for our commercial loan portfolio.

48

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Allowance for Credit Losses

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

	June 30, 2009					December 31, 2008
			% of					% of
			Loans to					Loans to
			Total					Total
	Amount		Loans			Amount		Loans
Allocated allowance:
Commercial loans	$	913,950		57	%	$	752,835		57	%
Consumer loans secured by real estate		295,825		34			193,430		33
Consumer loans not secured by real estate		220,299		9			149,099		10
Unallocated allowance		11,081		n/a			7,389		n/a
Total allowance for loan losses	$	1,441,155		100	%	$	1,102,753		100	%
Reserve for unfunded lending commitments		203,662					65,162
Total allowance for credit losses	$	1,644,817				$	1,167,915

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

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

The specific allowance element is calculated in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118 “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosure” and is based on a regular analysis of criticized commercial loans where internal credit ratings are below a predetermined quality level. This analysis is performed by the Managed Assets Division, and periodically reviewed by other parties, including the Commercial Asset Review Department. The specific allowance established for these criticized loans is based on a careful analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.

The allowance for each loan category is evaluated at least quarterly and is the result of detailed analysis to estimate loan losses. The loss analysis is based on actual historical loss experience and anticipated loss experience by considering: levels and trends in delinquencies and charge-offs, loss given default expectations and the anticipated severity of these projected defaults, trends in loan volume and terms, changes in risk composition and underwriting standards, experience and ability of staff, economic and industry conditions, and effects of any credit concentrations.

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.

49

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

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

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

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

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

Commercial Portfolio. The portion of the allowance for loan losses related to the commercial portfolio has increased from $752.8 million at December 31, 2008 (2.37% of commercial loans) to $914.0 million at June 30, 2009 (3.03% of commercial loans). This is a result of an increase in non-performing assets and other criticized assets at June 30, 2009. A large portion of this increase was related to our multi-family loans and small business lending loans and higher allowances were assigned to these loan categories.

Consumer Secured by Real Estate Portfolio. The allowance for the consumer loans secured by real estate portfolio increased to $295.8 million at June 30, 2009 from $193.4 million at December 31, 2008. The increase is primarily due to continued weaknesses in residential real estate prices. Non-performing assets and past due loans for our residential portfolios, particularly in our $2.4 billion Alt-A portfolio, continue to increase. Additionally, our in market home equity portfolio losses have been steadily increasing. As a result of this trend, Sovereign provided additional reserves to this portfolio during the first quarter of 2009. As a result of these increased reserves, the percentage of consumer loans secured by real estate allowance to the loans was 1.64% at June 30, 2009 compared with 1.06% at December 31, 2008. We expect that the difficult housing environment as well as general economic conditions will continue to impact our residential and home equity portfolios which may result in higher loss levels. In response, during the first six months of 2009, we increased the reserve for consumer loans secured by real estate by $102.4 million.

Sovereign entered into a credit default swap in 2006 on a portion of its residential real estate loan portfolio through a synthetic securitization structure. Under the terms of the credit default swap, Sovereign is responsible for the first $2.8 million of losses on the remaining loans in the structure which totaled $2.6 billion at June 30, 2009. Sovereign is reimbursed for the next $52.4 million of losses under the terms of the credit default swap. Losses above $55.3 million are borne by Sovereign. This credit default swap term is equal to the term of the loan portfolio.

Consumer Not Secured by Real Estate Portfolio. The allowance for the consumer not secured by real estate portfolio increased from $149.1 million at December 31, 2008 to $220.3 million at June 30, 2009 primarily due to higher reserve allocations for this portfolio due to continued deterioration in the portfolio. The allowance as a percentage of consumer loans not secured by real estate was 4.73% at June 30, 2009 and 2.65% at December 31, 2008.

Unallocated Allowance. The unallocated allowance for loan losses was $11.1 million at June 30, 2009 and $7.4 million at December 31, 2008. Management continuously evaluates its allowance methodology; however the unallocated allowance is subject to changes each reporting period due to a level of imprecision in management’s estimation process.

Reserve for unfunded lending commitments. The reserve for unfunded lending commitments has increased from $65.2 million at December 31, 2008 to $203.7 million at June 30, 2009 due to credit downgrades on our commercial letters and line of credit portfolios.

50

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Investment Securities

Investment securities consist primarily of mortgage-backed securities, tax-free municipal securities, U.S. Treasury and government agency securities, corporate debt securities and stock in the Federal Home Loan Bank of Pittsburgh (“FHLB”). Mortgage-backed securities consist of pass-throughs and collateralized mortgage obligations issued by federal agencies or private label issuers. Sovereign’s mortgage-backed securities are generally either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by Standard and Poor’s and Moody’s at the date of issuance. Sovereign 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, 2009 was 5.79 years compared to 4.62 years at December 31, 2008.

Total investment securities available-for-sale was $10.0 billion at June 30, 2009 and $9.3 billion at December 31, 2008. For additional information with respect to Sovereign’s investment securities, see Note 3 in the Notes to Consolidated Financial Statements.

Sovereign recorded an OTTI charge of $36.9 million on FNMA and FHLMC preferred stock and a $66.8 million OTTI charge on our non-agency mortgage backed securities in the first half of 2009.

Other investments, which consists of FHLB stock and repurchase agreements, remained constant at $0.7 billion at June 30, 2009 and December 31, 2008.

Goodwill and Other Intangible Assets

Goodwill was $3.4 billion at both June 30, 2009 and December 31, 2008. Other intangibles decreased by $39.1 million at June 30, 2009 compared to December 31, 2008 due to year-to-date amortization expense.

The Company follows SFAS No. 142, “Goodwill and Other Intangible Assets,” to account for its goodwill. This statement provides that goodwill and other indefinite lived intangible assets will not be amortized on a recurring basis, but rather will be subject to periodic impairment testing. This testing is required annually, or more frequently if events or circumstances indicate there may be impairment. Impairment testing is performed at the reporting unit level, and not on an individual acquisition basis and is a two step process. The first step is to compare the fair value of the reporting unit to its carrying value (including its allocated goodwill). If the fair value of the reporting unit is in excess of its carrying value then no impairment charge is recorded. If the carrying value of a reporting unit is in excess of its fair value then a second step needs to be performed. The second step entails calculating the implied fair value of goodwill as if a reporting unit is purchased at its step 1 fair value. This is determined in the same manner as goodwill in a business combination. If the implied fair value of goodwill is in excess of the reporting units allocated goodwill amount then no impairment charge is required. We evaluated our goodwill at March 31, 2009 and determined that it was not impaired. No impairment indicators were noted during the three-month period ended June 30, 2009 and as such no impairment test was performed at June 30, 2009. The Company will perform its annual goodwill impairment test at December 31, 2009 unless indicators of impairment are noted during the third quarter.

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

	Calendar				Remaining
	Year		Recorded		Amount
Year	Amount		To Date		To Record
2009	$	71,341	$	37,622	$	33,719
2010		56,617		—		56,617
2011		44,963		—		44,963
2012		33,108		—		33,108
2013		23,630		—		23,630

51

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Deposits and Other Customer Accounts

Sovereign attracts deposits within its primary market area with an offering of deposit instruments including demand accounts, NOW accounts, money market accounts, savings accounts, certificates of deposit and retirement savings plans. Total deposits and other customer accounts at June 30, 2009 were $49.3 billion compared to $48.4 billion at December 31, 2008.

Borrowings and Other Debt Obligations

Sovereign utilizes borrowings and other debt obligations as a source of funds for its asset growth and its asset/liability management. Collateralized advances are available from the FHLB provided certain standards related to creditworthiness have been met. In the third quarter of 2008, Sovereign began to borrow from the Federal Reserve discount window through the pledging of certain assets. Sovereign also utilizes reverse repurchase agreements, which are short-term obligations collateralized by securities fully guaranteed as to principal and interest by the U.S. Government or an agency thereof, and federal funds lines with other financial institutions. Total borrowings at June 30, 2009 and December 31, 2008 were $17.2 billion and $21.0 billion, respectively. The reason for this decline is due to our decision to terminate $1.4 billion of higher cost FHLB advances as well the reduction in the size of our auto and commercial and industrial loan portfolios as proceeds were utilized to pay down FHLB advances. Note 6 for further discussion and details on our borrowings and other debt obligations.

Off Balance Sheet Arrangements

Securitization transactions contribute to Sovereign’s overall funding and regulatory capital management. These transactions involve periodic transfers of loans or other financial assets to special purpose entities (“SPEs”). The SPEs are either consolidated in or excluded from Sovereign’s consolidated financial statements depending on whether the transactions qualify as a sale of assets in accordance with SFAS No. 140, “Transfers of Financial Assets and Liabilities” (“SFAS No. 140”).

In certain transactions, Sovereign has transferred assets to SPEs qualifying for non-consolidation (“QSPE”) and has accounted for the transaction as a sale in accordance with SFAS No. 140. Sovereign also has interests that continue to be held in the QSPEs. Off-balance sheet QSPEs had $1.0 billion of assets that Sovereign sold to the QSPEs which are not included in Sovereign’s Consolidated Balance Sheet at June 30, 2009. Sovereign’s interests that continue to be held and servicing assets in such QSPEs was $1.9 million at June 30, 2009 and this amount represents Sovereign’s maximum exposure to credit losses related to these unconsolidated securitizations. Sovereign does not provide contractual legal recourse to third party investors that purchase debt or equity securities issued by the QSPEs beyond the credit enhancement inherent in Sovereign’s subordinated interests in the QSPEs. At June 30, 2009, there are no known events or uncertainties that would result in or are reasonably likely to result in the termination or material reduction in availability to Sovereign’s access to off-balance sheet markets.

Sovereign enters into partnerships, which are variable interest entities under FIN 46, with real estate developers for the construction and development of low-income housing. The partnerships are structured with the real estate developer as the general partner and Sovereign as the limited partner. Sovereign is not the primary beneficiary of these variable interest entities. The Company’s risk of loss is limited to its investment in the partnerships, which totaled $144.6 million at June 30, 2009 and any future cash obligations that Sovereign has committed to the partnerships. Future cash obligations related to these partnerships totaled $8.6 million at June 30, 2009. Sovereign investments in these partnerships are accounted for under the equity method.

Bank Regulatory Capital

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

The FDICIA established five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution’s capital tier depends upon its capital levels in relation to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized or adequately-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities. At June 30, 2009 and December 31, 2008, Sovereign Bank had met all quantitative thresholds necessary to be classified as well-capitalized under regulatory guidelines.

52

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Federal banking laws, regulations and policies also limit Sovereign Bank’s ability to pay dividends and make other distributions to Sovereign Bancorp. Sovereign Bank is required to give prior notice to the OTS before paying any dividend. In addition, Sovereign Bank must obtain prior OTS approval to declare a dividend or make any other capital distribution if, after such dividend or distribution, Sovereign Bank’s total distributions to Sovereign within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years, or if Sovereign Bank is not adequately capitalized at the time. In addition, OTS prior approval would be required if Sovereign Bank’s examination or CRA ratings fall below certain levels or Sovereign Bank is notified by the OTS that it is a problem association or an association in troubled condition. The following schedule summarizes the actual capital balances of Sovereign Bank at June 30, 2009 and December 31, 2008:

	TIER 1			TIER 1			TOTAL
	LEVERAGE			RISK-BASED			RISK-BASED
	CAPITAL			CAPITAL			CAPITAL
REGULATORY CAPITAL	RATIO			RATIO			RATIO
Sovereign Bank at June 30, 2009:
Regulatory capital	$	5,558,275		$	5,403,622		$	7,481,155
Minimum capital requirement (1)		1,446,863			2,412,973			4,825,946
Excess	$	4,111,412		$	2,990,649		$	2,655,209
Sovereign Bank capital ratio		7.68	%		8.96	%		12.40	%
Sovereign Bank at December 31, 2008:
Regulatory capital	$	4,434,350		$	4,166,510		$	6,449,472
Minimum capital requirement (1)		2,979,778			2,528,501			5,057,002
Excess	$	1,454,572		$	1,638,009		$	1,392,470
Sovereign Bank capital ratio		5.95	%		6.59	%		10.20	%

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

Listed below are capital ratios for Sovereign Bancorp.

TANGIBLE

TANGIBLE

COMMON

COMMON

TANGIBLE

TANGIBLE

EQUITY TO

EQUITY TO

EQUITY TO

EQUITY TO

TANGIBLE

TANGIBLE

TANGIBLE

TANGIBLE

TIER 1

ASSETS

ASSETS

ASSETS

ASSETS

LEVERAGE

EXCLUDING

INCLUDING

EXCLUDING

INCLUDING

CAPITAL

REGULATORY CAPITAL

OCI (2)

OCI (2)

OCI (2)

OCI (2)

RATIO

Capital ratio at June 30, 2009 (1)

2.71

%

1.76

%

5.47

%

4.55

%

7.35

%

Capital ratio at December 31, 2008 (1)

3.60

%

2.57

%

3.86

%

2.83

%

5.73

%

(1)	OTS capital regulations do not apply to savings and loan holding companies. These ratios are computed as if those regulations did apply to Sovereign Bancorp, Inc.
(2)	Tangible equity and tangible assets are defined as total equity and total assets less goodwill and other intangibles, net of any deferred tax liabilities.

As discussed in Note 2 in the Notes to Consolidated Financial Statements, we determined that the Transaction resulted in Santander obtaining control of Sovereign as Santander acquired all the voting shares of Sovereign. If push down accounting had been applied to the separate stand-alone financial statements of Sovereign, the measurement amounts for assets and liabilities as of January 30, 2009 would be based on the guidance in SFAS 141 (R), and would have approximated the purchase price of approximately $1.9 billion, as compared to Sovereign’s equity as of December 31, 2008 of approximately $5.6 billion. Such adjustments to fair value, if recorded, would have the effect of significantly reducing our regulatory capital and would require a capital infusion in order to ensure Sovereign Bank would remain well-capitalized.

Sovereign’s capital ratios were positively impacted by previously mentioned $1.8 billion preferred stock issuance to Santander and to a lesser extent the adoption of FSP FAS 115-2 and FAS 124-2.

53

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

Liquidity represents the ability of Sovereign to obtain cost effective funding to meet the needs of customers, as well as Sovereign’s financial obligations. Sovereign’s primary sources of liquidity include retail and commercial deposit gathering, FHLB borrowings, Federal Reserve borrowings, federal funds purchases, reverse repurchase agreements and wholesale deposit purchases. Other sources of liquidity include asset securitizations, loan sales, and periodic cash flows from amortizing mortgage backed securities.

Factors which impact the liquidity position of Sovereign Bank include loan origination volumes, loan prepayment rates, maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, Sovereign’s credit ratings, general market conditions, investment portfolio cash flows and maturity structure of wholesale funding, etc. These risks are monitored and centrally managed. This process includes reviewing all available wholesale liquidity sources. As of June 30, 2009, Sovereign had $25.3 billion in available overnight liquidity in the form of unused federal funds purchased lines, unused FHLB borrowing capacity and unencumbered investments to be pledged as collateral for additional borrowings. Sovereign also forecasts future liquidity needs and develops strategies to ensure that adequate liquidity is available at all times.

The Company has increased its liquidity position, and, as of June 30, 2009, we had over $25.4 billion in committed liquidity from the FHLB and the Federal Reserve Bank. The Company also has cash deposits at June 30, 2009 of $4.8 billion compared with $3.8 billion at year end. We believe that this provides adequate liquidity in this difficult economic environment.

Sovereign Bancorp has the following major sources of funding to meet its liquidity requirements: dividends and returns of investment from its subsidiaries and capital injections from the parent company. Sovereign Bank may pay dividends to Santander subject to approval of the OTS, as discussed above. During the first quarter of 2009, Sovereign issued $1.8 billion of preferred stock to Santander. The preferred stock pays non-cumulative dividends of 10% per annum. In July 2009, Santander converted all of its investment into 7.2 million shares of Sovereign common stock. This action further demonstrates the support of our Parent Company and reduces the cash obligations of Sovereign Bancorp with respect to the dividend on this preferred issuance.

As previously mentioned, Sovereign adopted SFAS No. 157 on January 1, 2008. Sovereign’s level 3 investments are comprised of certain non-agency mortgage backed securities which are not actively traded. In certain instances, Sovereign is the sole investor of the issued security. Sovereign evaluates prices from a third party pricing service, third party broker quotes for certain securities and from another independent third party valuation source to determine their estimated fair value. Our fair value estimates assume liquidation in an orderly market and not under distressed circumstances. If Sovereign was required to sell these securities in an unorderly fashion, actual proceeds received could potentially be significantly less than their estimated fair values.

Net cash used by operating activities was $582.2 million for 2009. Net cash provided by investing activities for 2009 was $3.7 billion and primarily due to a net decrease in loans of $4.4 billion, maturities and repayments of investments of $3.6 billion, and proceeds from the sale of investments of $2.6 billion, offset by purchases of investments of $6.8 billion. Net cash used by financing activities for 2009 was $2.1 billion, which consisted of a $3.7 billion reduction in wholesale borrowings and $1.1 billion in the repayment of debt, offset by proceeds of $1.8 billion from the sale of preferred stock and an increase in deposits of $827.2 million. See the Consolidated Statement of Cash Flows for further details on our sources and uses of cash.

54

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Contractual Obligations and Commercial Commitments

Sovereign 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 Sovereign to make cash payments over time as detailed in the table below.

	Payments Due by Period
			Less than		Over 1 yr		Over 3 yrs		Over
	Total		1 year		to 3 yrs		to 5 yrs		5 yrs
FHLB advances (1)	$	12,525,522	$	6,074,328	$	978,664	$	858,278	$	4,614,252
Fed Funds (1)		1,000,007		1,000,007		—		—		—
Other debt obligations (1)		5,257,115		492,997		2,499,702		1,428,028		836,388
Junior subordinated debentures due to Capital Trust entities (1)(2)		3,860,536		83,480		170,378		179,092		3,427,586
Certificates of deposit (1)		17,289,179		16,382,054		700,560		124,524		82,041
Investment partnership commitments (3)		8,563		8,444		26		26		67
Operating leases		840,329		102,573		187,598		134,504		415,654
Total contractual cash obligations	$	40,781,251	$	24,143,883	$	4,536,928	$	2,724,452	$	9,375,988

(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, 2009. 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)	Excludes unamortized premiums or discounts.
(3)	The commitments to fund investment partnerships represent future cash outlays for the construction and development of properties for low-income housing, and historic tax credit projects. The timing and amounts of these commitments are projected based upon the financing arrangements provided in each project’s partnership or operating agreement, and could change due to variances in the construction schedule, project revisions, or the cancellation of the project.

Excluded from the above table are deposits of $32.3 billion that are due on demand by customers. Additionally, $85.8 million of tax liabilities associated with unrecognized tax benefits under FIN 48 have been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations.

Sovereign is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, loans sold with recourse, forward contracts and interest rate swaps, caps and floors. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these financial instruments reflect the extent of involvement Sovereign 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.

Sovereign’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. Sovereign 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. Sovereign controls the credit risk of its interest rate swaps, caps and floors and forward contracts through credit approvals, limits and monitoring procedures.

Amount of Commitment Expiration per Period:

	Total
Other Commercial	Amounts		Less than		Over 1 yr		Over 3 yrs
Commitments	Committed		1 year		to 3 yrs		to 5 yrs		Over 5 yrs
Commitments to extend credit	$	14,694,344	$	5,777,245	$	3,185,090	$	1,072,158	$	4,659,851
Standby letters of credit		2,537,399		626,660		1,047,056		578,511		285,172
Loans sold with recourse		577,619		276,308		40,679		77,390		183,242
Forward buy commitments		569,207		535,862		33,345		—		—
Total commercial commitments	$	18,378,569	$	7,216,075	$	4,306,170	$	1,728,059	$	5,128,265

55

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Sovereign’s standby letters of credit meet the definition of a guarantee under FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. These transactions are conditional commitments issued by Sovereign to guarantee the performance of a customer to a third party. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments is 2.7 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, Sovereign would be required to honor the commitment. Sovereign 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, 2009 was $2.5 billion, and the approximate value of the underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $2.2 billion. The fees related to standby letters of credit are deferred and amortized over the life of the commitment. These fees are immaterial to Sovereign’s financial statements at June 30, 2009. We believe that the utilization rate of these letters of credit will continue to be substantially less than the amount of these commitments, as has been our experience to date.

Asset and Liability Management

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

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

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

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

	The following estimated percentage
If interest rates changed in parallel by the	increase/(decrease) to
amounts below at June 30, 2009	net interest income would result
Up 100 basis points		3.18	%
Down 50 basis points		(0.91	)%

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

56

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Management then looks at the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk and also highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to Sovereign’s MVE at June 30, 2009 and December 31, 2008:

	The following estimated percentage
	increase/(decrease) to MVE would result
If interest rates changed in parallel by	June 30, 2009			December 31, 2008
Base	$	7,481,155		$	6,735,655
Up 200 basis points		(6.41)	%		(5.80	)%
Up 100 basis points		2.55	%		(2.51	)%

Because the assumptions used are inherently uncertain, Sovereign 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.

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

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

As part of its overall business strategy, Sovereign 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 Sovereign from the interest rate risk associated with these fixed rate assets. Sovereign 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, Sovereign enters into customer-related financial derivative transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers.

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

57

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

Item 4.  Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2009. Based on this evaluation, our principal executive officer and our principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009 to ensure that information required to be disclosed by the Company in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2009, that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

58

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1  — Legal Proceedings

Reference should be made to Footnote 11 for disclosure regarding the lawsuit filed by Sovereign against the Internal Revenue Service. Besides this item, Sovereign is not involved in any pending material legal proceeding other than routine litigation occurring in the ordinary course of business.

Item 1A  — Risk Factors

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

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

No shares of the Company’s common stock were repurchased during the three-month period ended June 30, 2009.

59

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 6  — Exhibits

(a) Exhibits

(2.1	)	Transaction Agreement, dated as of October 13, 2008, between Sovereign Bancorp, Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 2.1 to Sovereign Bancorp’s Current Report on Form 8-K filed October 16, 2008).
(3.1	)	Amended and Restated Articles of Incorporation of Sovereign Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to Sovereign Bancorp’s Current Report on Form 8-K filed January 30, 2009).
(3.2	)	Amended and Restated Bylaws of Sovereign Bancorp, Inc. (Incorporated by reference to Exhibit 3.2 to Sovereign Bancorp’s Current Report on Form 8-K filed January 30, 2009).
(3.3	)	Certificate of Designations for the Series D Preferred Stock (Incorporated by reference to Exhibit 3.1 of Sovereign Bancorp’s Current Report on Form 8-K filed on March 27, 2009).
(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.

60

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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.

	SOVEREIGN BANCORP, INC. (Registrant)
Date: August 6, 2009	/s/ Gabriel Jaramillo
	Gabriel Jaramillo
	Chairman of the Board, Chief Executive Officer (Authorized Officer)
Date: August 6, 2009	/s/ Guillermo Sabater
	Guillermo Sabater
	Chief Financial Officer (Principal Financial Officer)

61

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

EXHIBITS INDEX

(2.1	)	Transaction Agreement, dated as of October 13, 2008, between Sovereign Bancorp, Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 2.1 to Sovereign Bancorp’s Current Report on Form 8-K filed October 16, 2008).
(3.1	)	Amended and Restated Articles of Incorporation of Sovereign Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to Sovereign Bancorp’s Current Report on Form 8-K filed January 30, 2009).
(3.2	)	Amended and Restated Bylaws of Sovereign Bancorp, Inc. (Incorporated by reference to Exhibit 3.2 to Sovereign Bancorp’s Current Report on Form 8-K filed January 30, 2009).
(3.3	)	Certificate of Designations for the Series D Preferred Stock (Incorporated by reference to Exhibit 3.1 of Sovereign Bancorp’s Current Report on Form 8-K filed on March 27, 2009).
(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.

62

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
RULE 13a-14(a) OF THE SECURITIES
EXCHANGE ACT, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gabriel Jaramillo, Chief Executive Officer of Sovereign Bancorp, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sovereign Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Gabriel Jaramillo          
Gabriel Jaramillo
Chief Executive Officer
August 6, 2009

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
RULE 13a-14(a) OF THE SECURITIES
EXCHANGE ACT, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Guillermo Sabater, Chief Financial Officer of Sovereign Bancorp, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sovereign Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Guillermo Sabater          
Guillermo Sabater
Chief Financial Officer
August 6, 2009

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sovereign Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gabriel Jaramillo, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all in material respects, the financial condition and results of operations of the Company.

/s/ Gabriel Jaramillo          
Gabriel Jaramillo
Chief Executive Officer
August 6, 2009

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sovereign Bancorp, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Guillermo Sabater, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Guillermo Sabater          
Guillermo Sabater
Chief Financial Officer
August 6, 2009

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.