News Column

SANTANDER HOLDINGS USA, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

EXECUTIVE SUMMARY

Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent company of Santander Bank, N.A. (the "Bank"), a national banking association. SHUSA's principal executive offices are at 75 State Street, Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. The Bank, previously named Sovereign Bank, National Association, changed its name to Santander Bank, National Association on October 17, 2013. The Company is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander"). Rebranding and marketing the Bank under the Santander brand and changing its name to Santander Bank marked an important transition in the Company's turnaround strategy. Santander is one of the world's most recognized financial brands, and rebranding aligns with the Bank's strategies to strengthen its position in the United States. The Bank's primary business consists of attracting deposits from its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multi-family loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States, largely focused throughout Pennsylvania, New Jersey, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island, Delaware and Maryland. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loans and investments. In addition, the Bank generates other income from a number of sources, including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance. The Bank's principal expenses include interest expense on deposits, borrowings and other debt obligations, employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The Bank's loan and deposit volumes and, accordingly, the Company's financial results, are affected by competitive conditions, the economic environment, including interest rates, consumer and business confidence and spending. On January 28, 2014, the Company obtained a controlling financial interest in Santander Consumer USA Holdings Inc. ( together with its subsidiaries, "SCUSA "), which is the holding company of Santander Consumer USA Inc. SCUSA, headquartered in Dallas, Texas, is a full-service, technology-driven consumer finance company focused on vehicle finance and unsecured consumer lending products. On January 22, 2014, SCUSA's registration statement for an initial public offering (the "IPO") of shares of its common stock (the "SCUSA Common Stock"), was declared effective by the Securities and Commission (the "SEC"). Prior to the IPO, the Company owned approximately 65% of the shares of SCUSA Common Stock. On January 28, 2014, the IPO was closed, and certain stockholders of SCUSA, including the Company and Sponsor Auto Finance Holding Series LP ("Sponsor Holdings"), sold 85,242,042 shares of SCUSA Common Stock. Immediately following the IPO, the Company owned approximately 61% of the shares of SCUSA Common Stock. In connection with these sales, certain board representation, governance and other rights granted to DDFS LLC ("DDFS") and Sponsor Holdings were terminated as a result of the reduction in DDFS and Sponsor Holdings' collective ownership of shares of SCUSA Common Stock below certain ownership thresholds causing the Company to control SCUSA (the "Change in Control"). Prior to the Change in Control, the Company accounted for its investment in SCUSA under the equity method. Following the Change in Control, the Company consolidated the financial results of SCUSA in the Company's Condensed Consolidated Financial Statements. The Company's consolidation of SCUSA is treated as an acquisition of SCUSA by the Company in accordance with Accounting Standard Codification 805 - Business Combinations ("ASC 805"). SCUSA Common Stock is now listed for trading on the New York Stock Exchange under the trading symbol "SC." 101

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

of Operations



ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the second quarter of 2014, the U.S. economy continued on the path of economic recovery, as evidenced by a decrease in the unemployment rate and upward trends in household spending as well as corporate earnings.

The unemployment rate in June 2014 improved to 6.1%, down from 6.7% at March 31, 2014 and 7.6% one year ago. According to the U.S Bureau of Labor Statistics' June release, the decrease is attributable to employment growth across most major employment categories including professional and business services, retail trade, food services and drinking establishments and health care. Corresponding to increased employment, personal income and disposable income also increased during the first half of 2014, each growing 1.9% since December 2013. For the first half of the year, the Dow Jones Industrial Average increased approximately 3% and both the S&P 500 and Nasdaq increased approximately 7.4%. These factors as well as other initial indicators for the second quarter point to increases in corporate earnings during the second quarter to accompany the other indicators of positive economic growth. During the second quarter, the Federal Open Market Committee (the "FOMC") re-affirmed its target of 0-.25% for the federal funds rate, citing primarily the inflation rate, which remains slightly below the 2.0% target. The FOMC also announced the continued tapering of its agency mortgage-backed securities ("MBS") and long-term Treasury securities purchase programs. The 10-year Treasury bond rate at the end of the second quarter was 2.52%, compared to 2.48% at the end of the second quarter of 2013, an increase that corresponds to slight increases in mortgage interest rates over the past year and which has generally resulted in decreased mortgage origination and re-financing activity within the industry. This decrease in mortgage activity only contributes to the increased pressure on net interest income and margins within the industry. Despite the trends in mortgage origination, commercial banks continue to see positive indicators, including six quarters of consistent decreases in charge off rates for the total loan and lease portfolios of the 100 largest banks. Decreases in non-performing loans, restructured loans, and delinquencies also point to favorable trends in loan credit quality. Changing market conditions are considered a significant risk factor to the Company. The continued low interest rate environment presented challenges in the growth of net interest income for the banking industry, which continues to rely on non-interest activities to support revenue growth. Changing market conditions and political uncertainty could have an overall impact on the Company's results of operations and financial condition. Such conditions could also impact the Company's credit risk, and the associated provision for credit losses and legal expense could increase. 102

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

of Operations European Exposure Concerns about the European Union's sovereign debt and the future of the euro have caused uncertainty for financial markets globally. Other than borrowing agreements and related party transactions with Santander, as further described in the Financial Condition section of this MD&A Notes to the Condensed Consolidated Financial Statements, the Company's exposure to European countries includes the following: June 30, 2014 Financial Non-Financial Government Country Covered Bonds Institution Bonds Institutions Bonds Institution Bonds Total (in thousands) France $ - $ 143,669 $ 4,947 $ - $ 148,616 Germany - - 139,926 - 139,926 Great Britain - 136,088 296,750 - 432,838 Italy - 48,772 58,355 - 107,127 Netherlands - 33,106 - - 33,106 Norway - - 7,994 - 7,994 Portugal - - 41,241 - 41,241 Spain 94,235 4,071 121,553 74,484 294,343 Sweden - 77,828 - - 77,828 Switzerland - 9,987 - - 9,987 $ 94,235 $ 453,521 $ 670,766 $ 74,484 $ 1,293,006 The market value of the Company's European exposure at June 30, 2014 was $1.3 billion. December 31, 2013 Financial Non-Financial Government Country Covered Bonds Institution Bonds Institutions Bonds Institution Bonds Total (in thousands) France $ - $ 186,660 $ 30,037 $ - $ 216,697 Germany - - 140,576 - 140,576 Great Britain - 77,693 287,889 - 365,582 Italy - 48,828 42,674 - 91,502 Netherlands - 74,010 5,004 - 79,014 Norway - - 7,993 - 7,993 Portugal - - 41,396 - 41,396 Spain 94,544 4,098 121,808 67,914 288,364 Sweden - 25,888 - - 25,888 Switzerland - 14,454 - - 14,454 $ 94,544 $ 431,631 $ 677,377 $ 67,914 $ 1,271,466



The market value of the Company's European exposure at December 31, 2013 was $1.3 billion.

These investments are included within corporate debt securities discussed in Note 4 to the Condensed Consolidated Financial Statements. The Company's total exposure to European entities increased $21.5 million, or 1.7%, from December 31, 2013 to June 30, 2014.



As of June 30, 2014, the Company had approximately $224.1 million of loans that were denominated in a currency other than the USD.

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

of Operations Overall, gross exposure to the foregoing countries was approximately 1.1% of the Company's total assets as of June 30, 2014, and no more than 1% was to any given country or third party. The Company currently does not have credit protection on any of these exposures, nor does it provide lending services in Europe. The Company transacts with various European banks as counterparties to interest rate swaps and foreign currency transactions for its hedging and customer-related activities; however, these derivative transactions are generally subject to master netting and collateral support agreements, which significantly limit the Company's exposure to loss. Management conducts periodic stress tests of our significant country risk exposures, analyzing the direct and indirect impacts on the risk of loss from various macroeconomic and capital markets scenarios. We do not have significant exposure to foreign country risks because our foreign portfolio is relatively small. However, we have identified exposure to increased loss from U.S. borrowers associated with the potential indirect impact of a European downturn on the U.S. economy. We mitigate these potential impacts through our normal risk management processes, which include active monitoring and, if necessary, the application of loss mitigation strategies.



Credit Rating Actions

The following table presents Moody's and S&P credit ratings for the Bank, SHUSA, Santander and the Kingdom of Spain as of June 30, 2014:

BANK SHUSA SANTANDER SPAIN Moody's S&P Moody's S&P Moody's S&P Moody's S&P LT Senior Debt Baa1 BBB Baa2 BBB Baa1 BBB+ Baa2 BBB ST Deposits P-2 A-2 P-2 A-2 P-2 A-2 P-2 A-2 Outlook Stable Stable Negative Stable Stable Stable Positive Stable SHUSA funds its operations independently of the other entities owned by Santander, and believes its business is not necessarily closely related to the business or outlook of other entities owned by Santander. During the second quarter of 2014, S&P upgraded the long-term senior debt rating of Santander from BBB to BBB+. S&P also upgraded the Kingdom of Spain's long-term debt rating from BBB- to BBB and short-term deposits rating from A-3 to A-2. Future adverse changes in the credit ratings of Santander or the Kingdom of Spain could also further adversely impact SHUSA's or its subsidiaries' credit ratings, and any other adverse change in the condition of Santander could adversely affect SHUSA.



The Bank estimates a one or two notch downgrade by either S&P or Moody's would require the Bank to post up to an additional $4.3 million or $4.5 million, respectively, to comply with existing derivative agreements.

REGULATORY MATTERS

The Company's operations are subject to extensive laws and regulation by federal and state governmental authorities. Congress often considers new financial industry legislation, and the federal banking agencies routinely propose new regulations. New legislation and regulation may include changes with respect to the federal deposit insurance system, consumer financial protection measures, compensation and systematic risk oversight authority. There can be no assurance that new legislation and regulations will not affect us adversely.



Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA"), which instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of, and government intervention in, the financial services sector, was enacted. The DFA includes a number of provisions designed to promote enhanced supervision and regulation of financial companies and financial markets. The DFA introduced a substantial number of reforms that reshape the structure of the regulation of the financial services industry, requiring that more than 200 regulations be written. Although the full impact of this legislation on the Company and the industry will not be known until these regulations are complete, which could take several years, the enhanced regulation has involved and will involve higher compliance costs and have negatively affected the Company's revenue and earnings. 104

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations More specifically, the Act imposes heightened prudential requirements on bank holding companies ("BHCs") with at least $50.0 billion in total consolidated assets (often referred to as "systemically important financial institutions"), which includes the Company, and requires the Federal Reserve to establish prudential standards for such bank holding companies that are more stringent than those applicable to other bank holding companies, including standards for risk-based requirements and leverage limits; heightened capital standards, including eliminating trust preferred securities as Tier 1 regulatory capital; enhanced risk-management requirements; and credit exposure reporting and concentration limits. These changes are expected to impact the profitability and growth of the Company. The DFA mandates an enhanced supervision framework, which means that the Company is subject to annual stress tests by the Federal Reserve, and the Company and the Bank are required to conduct semi-annual and annual stress tests, respectively, reporting results to the Federal Reserve and the OCC. The Federal Reserve also has discretionary authority to establish additional prudential standards, on its own or at the Financial Stability Oversight Council's recommendation, regarding contingent capital, enhanced public disclosures, short-term debt limits, and otherwise as it deems appropriate. Under the Durbin Amendment to the DFA, in June 2011 the Federal Reserve issued the final rule implementing debit card interchange fee and routing regulation. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are "reasonable and proportional" to the costs incurred by issuers for electronic debit transactions, and prohibits network exclusivity arrangements on debit cards to ensure merchants have choices in how debit card transactions are routed. The DFA established the Consumer Financial Protection Bureau (the "CFPB"), which has broad powers to set the requirements for the terms and conditions of financial products. This has resulted in and is expected to continue to result in increased compliance costs and reduced revenue. The Bank routinely executes interest rate swaps for the management of its asset-liability mix, and also executes such swaps with its borrower clients. Under the DFA, the Bank is required to post collateral with certain of its counterparties and clearing exchanges. While clearing these financial instruments offers some benefits and additional transparency in valuation, the systems requirements for clearing execution add operational complexities to the business and accordingly increase operational risk exposure. Provisions of the DFA relating to the applicability of state consumer protection laws to national banks, including the Bank, became effective in July 2011. Questions may arise as to whether certain state consumer financial laws that were previously preempted by federal law are no longer preempted as a result of these new provisions. Depending on how such questions are resolved, the Bank may experience an increase in state-level regulation of its retail banking business and additional compliance obligations, revenue impacts and costs. SCUSA already is subject to such state-level regulation.



The DFA and certain other legislation and regulations impose various restrictions on compensation of certain executive offers. Our ability to attract and/or retain talented personnel may be adversely affected by these restrictions.

Other requirements of the DFA include increases in the amount of deposit insurance assessments the Bank must pay; changes to the nature and levels of fees charged to consumers which are negatively affecting the Bank's income; banning banking organizations from engaging in proprietary trading and restricting their sponsorship of, or investing in, hedge funds and private equity funds, subject to limited exceptions; and increasing regulation of the derivatives markets through measures that broaden the derivative instruments subject to regulation and require clearing and exchange trading as well as impose additional capital and margin requirements for derivatives market participants, which will increase the cost of conducting this business.



Basel III

New and evolving capital standards, both as a result of the DFA and the implementation in the U.S. of Basel III, could have a significant effect on banks and BHCs, including SHUSA and its bank subsidiaries. During July 2013, the Federal Reserve, the FDIC and the OCC released final U.S. Basel III regulatory capital rules implementing the global regulatory capital reforms of Basel III. The final rules establish a comprehensive capital framework that includes both the advanced approaches for the largest internationally active U.S. banks, formerly known as Basel II, and a standardized approach that will apply to all banking organizations with over $500 million in assets. Subject to various transition periods, the rule is effective for the largest banks on January 1, 2014, and for all other banks on January 1, 2015. 105 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The new rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios that, when fully phased in, will require banking organizations, including SHUSA and its banking subsidiaries, to maintain a minimum "common equity Tier 1" (or "CET1") ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures, plus certain off-balance sheet exposures (as the average for each quarter of the month-end ratios for the quarter). The effective date of these requirements for SHUSA and the Bank is January 1, 2015. A capital conservation buffer of 2.5% above each of these levels (to be phased in over three years starting in 2016, beginning at 0.625% and increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019) will be required for banking institutions to avoid restrictions on their ability to make capital distributions, including paying dividends. The final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that MSRs, deferred tax assets dependent upon future taxable income, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 for SHUSA and the Bank is to begin on January 1, 2015 and be phased in over three years. As of June 30, 2014, the Bank's and SHUSA's Tier 1 common capital ratio under Basel III, on a fully phased-in basis under the standardized approach, were 13.15% and 11.01% respectively, based on management's interpretation of the final rules adopted by the FRB in July 2013. The estimate is based on management's current interpretation, expectations, and understanding of the final U.S. Basel III rules. As mentioned above, the minimum required Tier 1 common capital ratio is comprised of the 4.5% minimum and the 2.5% conservation buffer. On that basis, we believe that, as of June 30, 2014, the Company would remain well-capitalized under the currently enacted capital adequacy requirements of Basel III, including when implemented on a fully phased-in basis. See the Bank Regulatory Capital section of this Management's Discussion and Analysis for the Company's ratios under Basel I standards. The implementation of certain regulations and standards relating to regulatory capital could disproportionately affect our regulatory capital position relative to that of our competitors, including those that may not be subject to the same regulatory requirements as the Company. Historically, regulation and monitoring of bank and BHC liquidity has been addressed as a supervisory matter, both in the U.S. and internationally, without required formulaic measures. The Basel III liquidity framework will require banks and BHCs to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation going forward. One test, referred to as the liquidity coverage ratio ("LCR"), is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to its expected net cash outflow for a 30-day time horizon. The other, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium and long-term funding of the assets and activities of banking entities over a one-year time horizon. On October 24, 2013, the FRB, FDIC and OCC issued a proposal to implement the Basel III LCR for certain internationally active banks and nonbank financial companies and a modified version of the LCR for certain depository institution holding companies that are not internationally active. The LCR and modified LCR are based on the Basel III liquidity framework and would be an enhanced prudential liquidity standard consistent with the DFA. The proposed effective date is January 1, 2015, subject to a two-year phase-in period. The comment period for the proposal ended on January 31, 2014. The proposal did not include the NSFR. Basel III contemplates that the NSFR will be subject to an observation period through mid-2016 and, subject to any revisions resulting from the analyses conducted and data collected during the observation period, implemented as a minimum standard by January 1, 2018. The Basel Committee reportedly is considering revisions to the Basel III liquidity framework presented in December 2010. The Basel Committee plans on introducing the NSFR final standard in the next two years. 106

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

of Operations



Enhanced Prudential Standards for Capital Adequacy

Certain banks and bank holding companies, including the Company and the Bank, are required to perform stress tests and submit capital plans to the Federal Reserve and the OCC on an annual basis, and to receive a notice of non-objection to the capital plans from the Federal Reserve and the OCC before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. As a consolidated subsidiary of SHUSA, SCUSA is included in our stress tests and capital plans. On March 26, 2014, the Federal Reserve announced that, based on qualitative concerns, it objected to our capital plans. The FRB did not object to SHUSA's payment of dividends on its outstanding class of preferred stock. On May 1, 2014, the Board of Directors of SCUSA declared a dividend of $0.15 per share of SCUSA common stock, payable on May 30, 2014 to its shareholders of record on May 12, 2014 (the "May SCUSA Dividend"). The Federal Reserve informed SHUSA on May 22, 2014 that it does not object to SCUSA's payment of the May SCUSA Dividend, provided that Santander contribute at least $20.9 million of capital to SHUSA prior to such payment, so that SHUSA's consolidated capital position would be unaffected by the May SCUSA dividend. The Federal Reserve also informed SHUSA that, until the Federal Reserve issues a non-objection to SHUSA's capital plan, any future SCUSA dividend will require prior receipt of a written non-objection from the Federal Reserve. On May 28, 2014, SHUSA issued 84,000 shares of its common stock, no par value per share, to Santander in exchange for cash in the amount of $21 million. SHUSA has informed SCUSA that SHUSA does not currently expect to submit a revised capital plan to the Federal Reserve until January 2015. Foreign Bank Organizations On February 19, 2014, the Federal Reserve issued final rules to strengthen regulatory oversight of foreign banking organizations. These rules require foreign banking organizations, such as the Company's parent Santander, with over $50 billion in global consolidated assets and over $10 billion in total assets held by its U.S. subsidiaries, such as Santander, to create a U.S. intermediate holding company (an "IHC") over all of its U.S. bank and U.S. non-bank subsidiaries. U.S. branches and agencies of foreign banks are not included in the IHC. The formation of these IHCs will allow U.S. regulators to supervise these institutions similarly to U.S. systemically important bank holding companies, meaning that they will be subject to similar capital rules and enhanced prudential standards, including capital stress tests, single-counterparty credit limits, overall risk management, and early remediation requirements. As a result of this rule, Santander could be required to transfer its U.S. nonbank subsidiaries currently outside of the Company to the Company, which would become an IHC, or establish a top-tier IHC structure that would include all of its U.S. bank and non-bank subsidiaries within the same chain of ownership. The Company is currently working on its compliance plan which will be submitted to the Federal Reserve in January of 2015. A phased-in approach is being used for the standards and requirements. Certain enhanced prudential standards are effective in 2015, with other standards and requirements becoming effective on July 1, 2016 through July 1, 2017.



Bank and BHC Regulations

As a national bank, the Bank is subject to the OCC's regulations under the National Bank Act. The various laws and regulations administered by the OCC for national banks affect corporate practices and impose certain restrictions on activities and investments to ensure that the Bank operates in a safe and sound manner. These laws and regulations also require the Bank to disclose substantial business and financial information to the OCC and the public.



Federal laws restrict the types of activities in which BHCs may engage, and subject them to a range of supervisory requirements, including regulatory enforcement actions for violations of laws and policies. BHCs may engage in the business of banking and managing and controlling banks, as well as closely-related activities.

Foreclosure Matters

On April 13, 2011, the Bank consented to the issuance of a consent order by the Bank's previous primary federal banking regulator, the OTS, as part of an interagency horizontal review of foreclosure practices at 14 mortgage servicers. Upon its conversion to a national bank on January 26, 2012, the Bank entered into a stipulation consenting to the issuance of a consent order (the "Order") by the OCC, which contains the same terms as the OTS consent order. 107 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Order required the Bank to take a number of actions, including designating a Board committee to monitor and coordinate the Bank's compliance with the provisions of the Order, develop and implement plans to improve the Bank's mortgage servicing and foreclosure practices, designate a single point of contact for borrowers throughout the loss and mitigation foreclosure processes, and take certain other remedial actions. Specifically, the Bank: (a) retained an independent consultant to conduct a review of certain foreclosure actions or proceedings for loans serviced by the Bank; (b) strengthened coordination with its borrowers by providing them with a single point of contact to avoid borrower confusion and ensure effective communication in connection with any foreclosure, loss mitigation or loan modification activities; (c) improved processes and controls to ensure that foreclosures are not pursued once a mortgage has been approved for modification, unless repayments under the modified loan are not made; (d) enhanced controls and oversight over the activities of third-party vendors, including external legal counsel and other servicers; (e) strengthened its compliance programs to ensure mortgage servicing and foreclosure operations comply with applicable legal requirements and supervisory guidance, and assure appropriate policies and procedures are in place for staffing, training, oversight, and quality control of those processes; (f) improved its management information systems for foreclosure, loss mitigation and loan modification activities that ensure timely delivery of complete and accurate information to facilitate effective decision-making; and (g) centralized governance and management for the originations, servicing and collections in its mortgage business. On January 7, 2013, the Bank and nine other mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing reached an agreement in principle with the OCC and the FRB to make cash payments and provide other assistance to borrowers. On February 28, 2013, the agreements were finalized with all ten mortgage servicing companies, including the Bank. Other assistance includes reductions of principal on first and second liens, payments to assist with short sales, deficiency balance waivers on past foreclosures and short sales, and forbearance assistance for unemployed homeowners. On January 24, 2013, twelve other mortgage servicing companies subject to enforcement action for deficient practices in mortgage loan servicing and foreclosure processes also reached an agreement with the OCC or the FRB, as applicable. As a result of the agreement, the participating servicers, including the Bank, have ceased their independent foreclosure reviews, which involved case-by-case reviews, and replaced them with a broader framework allowing eligible borrowers to receive compensation in a more timely manner. This arrangement has not eliminated all of the Company's risks associated with foreclosures, as it does not protect the Bank from potential individual borrower claims, class actions lawsuits, actions by state attorneys general, or actions by the Department of Justice or other regulators. In addition, all of the other terms of the Order are still in effect. Under the agreement, the Bank paid $6.2 million into a remediation fund, the majority of which has been distributed to borrowers, and will engage in mortgage modifications over the next two years in an aggregate principal amount of $9.9 million. In return, the OCC will waive any civil money penalties that could have been assessed against the Bank. During 2013, the Company submitted for credit from the OCC mortgage loans in the amount of $74.1 million, which represents the principal balance of mortgage loans for which the Bank completed foreclosure avoidance activities with the Bank's borrowers. As of March 31, 2014, the Bank had already exceeded its requirements under the settlement agreement. The OCC is requiring the Bank to engage a consultant to validate that the submissions the Bank has made to the OCC qualify as foreclosure avoidance activities under the terms of the agreement. The Bank represents 0.17% of the total $9.3 billion settlement among the participating banks and is the smallest participant in the agreement. The total $16.1 million related to the remediation fund and mortgage modifications was fully reserved at March 31, 2014.



Identity Theft Protection Product Matter

The Bank has been in discussions to address concerns that some customers may have paid for but did not receive certain benefits of an identity theft protection product from a third-party vendor. The Bank has begun discussions with the third-party vendor on potential remedial actions to impacted customers. During 2013, fees expected to be returned to customers of $30.0 million were expensed within general and administrative expenses on the Condensed Consolidated Statement of Operations. As of June 30, 2014, $13.2 million of payments were returned to customers as the first phase of the remediation. Further remediation of this matter is ongoing. 108 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations



Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.



The following activities are disclosed in response to Section 13(r) with respect to affiliates of Santander UK within the Santander group.

During the period covered by this quarterly report:

A Santander UK entity holds frozen savings and current accounts for three

customers resident in the U.K. who are currently designated by the U.S for

terrorism. The accounts held by each customer were blocked after the

customer's designation and have remained blocked and dormant for the first

half of 2014. No revenue was generated by Santander UK on these accounts.

An Iranian national, resident in the U.K., who is currently designated by

the U.S. under the Iranian Financial Sanctions Regulations and Designation

held a mortgage with Santander UK that was issued prior to any such

designation. No further draw-down has been made (or would be allowed)

under this mortgage, although Santander UK continues to receive repayment

installments. In the first half of 2014, total revenue in connection with

this mortgage was 27,550, while net profits were negligible relative to

the overall profits of Santander UK. Santander UK does not intend to enter into any new relationships with this customer, and any disbursements will



only be made in accordance with applicable sanctions. The same Iranian

national also holds two investment accounts with Santander Asset

Management UK Limited. The accounts remained frozen for the first half of

2014. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. In the first half of 2014,



total revenue for the Santander in connection with the investment accounts

was 23,200 whilst net profits were negligible relative to its overall

profits. In addition, the Santander group has certain legacy export credits and performance guarantees with Bank Mellat, which are included in the U.S. Department of the Treasury's Office of Foreign Assets Control's Specially Designated Nationals and Blocked Persons List. Santander entered into two bilateral credit facilities in February 2000 in an aggregate principal amount of 25.9 million. Both credit facilities matured in 2012. In addition, in 2005 Santander participated in a syndicated credit facility for Bank Mellat of 15.5 million, which matures on July 6, 2015. As of June 30, 2014, the Santander group was owed 3.6 million under this credit facility. Bank Mellat has been in default under all of these agreements in recent years and Santander has been and expects to continue to be repaid any amounts due by official export credit agencies, which insure between 95% and 99% of the outstanding amounts under these credit facilities. No funds have been extended by Santander under these facilities since they were granted. The Santander group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations - either under tender documents or under contracting agreements - of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007. However, should any of the contractors default in their obligations under the public bids, the Santander group would not be able to pay any amounts due to Bank Sepah or Bank Mellat because any such payments would be frozen pursuant to Council Regulation (EU) No. 961/2010. In the aggregate, all of the transactions described above resulted in approximately 76,600 gross revenues and approximately in 40,000 net loss to the Santander group in the first half of 2014, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Santander group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount - which payment would be frozen as explained above (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). Accordingly, the Santander group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws. 109

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2014 AND 2013 Three-Month Period Six-Month Period Ended June 30, Ended June 30,

(Dollars in thousands) 2014 2013 2014



2013

Net interest income $ 1,590,034$ 385,277$ 2,762,139$ 781,295 Provision for credit losses (686,034 ) (10,000 ) (1,021,364 ) (26,850 ) Total non-interest income 638,290 254,392 3,499,546 674,213 General and administrative expenses (870,238 ) (378,679 ) (1,610,519 ) (758,918 ) Other expenses (132,991 ) (27,755 ) (163,091 ) (58,336 ) Income before income taxes 539,061 223,235 3,466,711 611,404 Income tax provision (199,746 ) (35,308 ) (1,249,753 ) (137,978 ) Net income $ 339,315$ 187,927$ 2,216,958$ 473,426 Net interest income increased $1.2 billion and $2.0 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. These increases were primarily caused by the impact of approximately $1.2 billion and $2.0 billion earned following the Change in Control for the three-month and six-month periods ended June 30, 2014, respectively. The impact of the



Change in Control on total interest on loans was offset by the decreases

on interest on loans of $17.8 million and $49.1 million. The provision for credit losses increased to $686.0 million and $1.0 billion for the three-month and six-month periods ended June 30, 2014,



respectively, compared to provisions of $10.0 million and $26.9 million

during the corresponding periods in 2013. The increases were primarily due

to the Change in Control.



Total non-interest income increased $383.9 million and $2.8 billion for

the three-month and six-month periods ended June 30, 2014, respectively,

compared to the corresponding periods in 2013, primarily due to the $2.4 billion gain recognized from the Change in Control during the first quarter of 2014. Also contributing to the increase was miscellaneous



income increasing $451.4 million and $698.8 million for the three-month

and six-month periods ended June 30, 2014, respectively, which was offset

by decreases in equity method investment income of $120.1 million and $282.5 million for the three-month and six-month periods ended June 30,



2014, respectively and mortgage banking revenue of $33.8 million and $53.1

million for the three-month and six-month periods ended June 30, 2014,

respectively, when compared to the corresponding periods in 2013. Total general and administrative expenses increased $491.6 million and $851.6 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, primarily due to increased compensation and benefits, loan expenses, and other administrative expenses. Other expenses increased $105.2 million and $104.8 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, primarily caused by an



impairment charge of $97.5 million of long-lived assets in the second

quarter of 2014. The income tax provision increased $164.4 million and $1.1 billion to



$199.7 million and $1.2 billion for the three-month and six-month periods

ended June 30, 2014, respectively, from a provision of $35.3 million and $138.0 million for the corresponding periods in 2013. The movement was primarily due to the discrete tax benefit recognized during the first quarter of 2014, mainly related to the Change in Control. 110

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CONDENSED CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT



NET INTEREST MARGIN ANALYSIS

THREE-MONTH PERIODS ENDED JUNE 30, 2014 AND 2013 2014 (1) 2013 Tax Tax Average Equivalent Yield/ Average Equivalent Yield/ Balance Interest Rate Balance Interest Rate (in thousands) EARNING ASSETS INVESTMENTS AND INTEREST EARNING DEPOSITS $ 13,919,999$ 80,561 2.32 % $ 18,413,880$ 96,758 2.10 % LOANS(2): Commercial loans 25,525,650 211,169 3.32 % 24,916,812 213,335 3.43 % Multi-family 9,323,782 95,933 4.13 % 7,526,084 85,620 4.56 % Consumer loans: Residential mortgages 9,600,362 96,021 4.00 % 10,216,956 102,194 4.00 % Home equity loans and lines of credit 6,202,153 55,346 3.58 % 6,471,171 60,517 3.75 % Total consumer loans secured by real estate 15,802,515 151,367 3.84 % 16,688,127 162,711 3.90 % Retail installment contracts and auto loans 21,298,433 1,137,964 21.43 % 187,734 3,475 7.42 % Personal unsecured 1,707,820 164,416 38.61 % 433,383 10,391 9.62 % Other consumer(3) 1,509,581 33,988 9.03 % 1,534,168 23,374 6.11 % Total consumer 40,318,349 1,487,735 14.80 % 18,843,412 199,951 4.25 % Total loans 75,167,781 1,794,837 9.58 % 51,286,308 498,906 3.90 % Allowance for loan losses (4) (1,268,686 ) - - (956,555 ) - - NET LOANS 73,899,095 1,794,837 9.74 % 50,329,753 498,906 3.97 % TOTAL EARNING ASSETS 87,819,094 1,875,398 8.56 % 68,743,633 595,664 3.47 % Other assets(5) 21,271,047 11,799,135 TOTAL ASSETS $ 109,090,141$ 80,542,768 INTEREST BEARING FUNDING LIABILITIES Deposits and other customer related accounts: Interest bearing demand deposits $ 10,946,895$ 6,184 0.23 % $ 9,431,467$ 3,288 0.14 % Savings 4,092,261 1,397 0.14 % 3,888,691 1,363 0.14 % Money market 19,126,366 19,384 0.41 % 17,595,532 19,087 0.44 %



Certificates of deposit 7,277,223 19,750 1.09 % 11,144,631

29,658 1.07 % TOTAL INTEREST BEARING DEPOSITS 41,442,745 46,715 0.45 % 42,060,321 53,396 0.51 % BORROWED FUNDS: FHLB advances 7,045,631 66,321 3.77 % 11,499,174 85,309 2.97 % Federal funds and repurchase agreements 1,923 - - % 120,583 47 0.16 % Other borrowings 28,361,836 157,635 2.23 % 3,369,140 58,319 6.94 % TOTAL BORROWED FUNDS (6) 35,409,390 223,956 2.54 % 14,988,897 143,675 3.84 % TOTAL INTEREST BEARING FUNDING LIABILITIES 76,852,135 270,671 1.41 % 57,049,218 197,071 1.38 % Noninterest bearing demand deposits 7,883,429 7,860,177 Other liabilities(7) 2,488,743 2,012,872 TOTAL LIABILITIES 87,224,307 66,922,267 STOCKHOLDER'S EQUITY 21,865,834 13,620,501 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 109,090,141$ 80,542,768 TAXABLE EQUIVALENT NET INTEREST INCOME $ 1,604,727$ 398,593 NET INTEREST SPREAD (8) 7.15 % 2.09 % NET INTEREST MARGIN (9) 7.33 % 2.32 %



(1) Average balances are based on daily averages when available. When daily

averages are unavailable, mid-month averages are substituted.

(2) Interest on loans includes amortization of premiums and discounts on

purchased loan portfolios and amortization of deferred loan fees, net of

origination costs. Average loan balances includes non-accrual loans and LHFS.

(3) Other consumer primarily includes recreational vehicles and marine loans.

(4) Refer to Note 5 to the Condensed Consolidated Financial Statements for

further discussion.

(5) Other assets primarily includes goodwill and intangibles, premise and

equipment, net deferred tax assets, equity method investments, bank-owned

life insurance, accrued interest receivable, derivative assets, miscellaneous

receivables, prepaid expenses and MSRs. Refer to Note 8 to the Condensed

Consolidated Financial Statements for further discussion.

(6) Refer to Note 9 to the Condensed Consolidated Financial Statements for

further discussion.

(7) Other liabilities primarily includes accounts payable and accrued expenses,

derivative liabilities, net deferred tax liabilities and the unfunded lending

commitments liability.

(8) Represents the difference between the yield on total earning assets and the

cost of total funding liabilities.

(9) Represents annualized, taxable equivalent net interest income divided by

average interest-earning assets. 111

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CONDENSED CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT



NET INTEREST MARGIN ANALYSIS

SIX-MONTH PERIODS ENDED JUNE 30, 2014 AND 2013 2014 (1) 2013 Tax Tax Average Equivalent Yield/ Average Equivalent Yield/ Balance Interest Rate Balance Interest Rate (in thousands) EARNING ASSETS INVESTMENTS AND INTEREST EARNING DEPOSITS $ 14,666,591$ 161,506 2.20 % $ 19,657,365$ 207,467 2.11 % LOANS(2): Commercial loans 24,926,955 417,597 3.37 % 24,929,023 424,765 3.43 % Multi-family 9,138,797 186,443 4.11 % 7,543,831 169,297 4.52 % Consumer loans: Residential mortgages 9,614,289 192,583 4.01 % 10,576,122 210,842 3.99 % Home equity loans and lines of credit 6,226,557 110,630 3.58 % 6,521,434 118,531 3.66 % Total consumer loans secured by real estate 15,840,846 303,213 3.84 % 17,097,556 329,373 3.86 % Retail installment contracts and auto loans 17,511,736 1,892,323 21.79 % 222,100 8,223 7.47 % Personal unsecured 1,437,366 272,501 38.23 % 436,955 22,398 10.34 % Other consumer(3) 1,502,544 60,731 8.15 % 1,583,475 47,878 6.10 % Total consumer 36,292,492 2,528,768 14.04 % 19,340,086 407,872 4.23 % Total loans 70,358,244 3,132,808 8.97 % 51,812,940 1,001,934 3.89 % Allowance for loan losses (4) (1,099,851 ) - - (985,839 ) - - NET LOANS 69,258,393 3,132,808 9.11 % 50,827,101 1,001,934 3.97 % TOTAL EARNING ASSETS 83,924,984 3,294,314 7.91 % 70,484,466 1,209,401 3.45 % Other assets(5) 19,022,995 11,963,321 TOTAL ASSETS $ 102,947,979$ 82,447,787 INTEREST BEARING FUNDING LIABILITIES Deposits and other customer related accounts: Interest bearing demand deposits $ 10,799,201$ 13,047 0.24 % $ 9,384,726$ 6,924 0.15 % Savings 4,027,282 2,672 0.13 % 3,858,996 2,597 0.14 % Money market 19,069,057 38,372 0.41 % 17,402,967 39,028 0.45 %



Certificates of deposit 7,621,537 41,570 1.10 % 11,772,488

61,787 1.06 % TOTAL INTEREST BEARING DEPOSITS 41,517,077 95,661 0.46 % 42,419,177 110,336 0.52 % BORROWED FUNDS: FHLB advances 7,458,034 138,402 3.74 % 12,017,519 169,203 2.83 % Federal funds and repurchase agreements 967 - - % 1,079,188 2,109 0.39 % Other borrowings 23,983,695 270,706 2.28 % 3,472,216 120,048 6.97 % TOTAL BORROWED FUNDS (6) 31,442,696 409,108 2.62 % 16,568,923 291,360 3.53 % TOTAL INTEREST BEARING FUNDING LIABILITIES 72,959,773 504,769 1.39 % 58,988,100 401,696 1.37 % Noninterest bearing demand deposits 7,897,987 7,843,876 Other liabilities(7) 2,081,636 2,116,999 TOTAL LIABILITIES 82,939,396 68,948,975 STOCKHOLDER'S EQUITY 20,008,583 13,498,812 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 102,947,979$ 82,447,787 TAXABLE EQUIVALENT NET INTEREST INCOME $ 2,789,545$ 807,705 NET INTEREST SPREAD (8) 6.51 % 2.08 % NET INTEREST MARGIN (9) 6.70 % 2.30 %



(1) Average balances are based on daily averages when available. When daily

averages are unavailable, mid-month averages are substituted.

(2) Interest on loans includes amortization of premiums and discounts on

purchased loan portfolios and amortization of deferred loan fees, net of

origination costs. Average loan balances includes non-accrual loans and LHFS.

(3) Other consumer primarily includes recreational vehicles and marine loans.

(4) Refer to Note 5 to the Condensed Consolidated Financial Statements for

further discussion.

(5) Other assets primarily includes goodwill and intangibles, premise and

equipment, net deferred tax assets, equity method investments, bank-owned

life insurance, accrued interest receivable, derivative assets, miscellaneous

receivables, prepaid expenses and MSRs. Refer to Note 8 to the Condensed

Consolidated Financial Statements for further discussion.

(6) Refer to Note 9 to the Condensed Consolidated Financial Statements for

further discussion.

(7) Other liabilities primarily includes accounts payable and accrued expenses,

derivative liabilities, net deferred tax liabilities and the unfunded lending

commitments liability.

(8) Represents the difference between the yield on total earning assets and the

cost of total funding liabilities.

(9) Represents annualized, taxable equivalent net interest income divided by

average interest-earning assets. 112

-------------------------------------------------------------------------------- SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations NET INTEREST INCOME Three-Month Period Six-Month Period Ended June 30, Ended June 30, 2014 2013 2014 2013 (in thousands) INTEREST INCOME: Interest-earning deposits $ 1,566$ 1,045$ 3,561$ 2,069 Investments available-for-sale 60,284 79,542 121,868 173,178 Other investments 9,638 6,272 17,745 12,492 Total interest income on investment securities and interest-earning deposits 71,488 86,859 143,174 187,739 Interest on loans 1,791,311 495,490 3,125,831 995,253 Total Interest Income 1,862,799 582,349 3,269,005 1,182,992 INTEREST EXPENSE: Deposits and customer accounts 48,809 53,396 97,756 110,338 Borrowings and other debt obligations 223,956 143,676 409,110 291,359 NET INTEREST INCOME: $ 1,590,034$ 385,277$ 2,762,139$ 781,295 Net interest income increased $1.2 billion and $2.0 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, primarily due to the Change in Control during the first quarter of 2014. The impact of the Change in Control on total net interest income for the three-month and six-month periods ended June 30, 2014 was $1.2 billion and $2.0 billion, respectively.



Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits decreased $15.4 million and $44.6 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. Overall, the decrease in interest income on investment securities was primarily attributable to the decrease in the available-for-sale investment portfolio resulting from the sale of MBS and collateralized mortgage obligation securities ("CMOs") during 2013. The average balance of investment securities and interest-earning deposits for the three-month and six-month periods ended June 30, 2014 was $13.9 billion and $14.7 billion, respectively, which was a decrease of $4.5 billion and $5.0 billion compared to average balances of $18.4 billion and $19.7 billion for the corresponding periods in 2013. The average tax equivalent yields of investment securities and interest-earning deposits were 2.32% and 2.20%, for the three-month and six-month periods ended June 30, 2014 and 2013, respectively, compared to 2.10% and 2.11% for the corresponding periods in 2013.



Interest Income on Loans

Interest income on loans increased $1.3 billion and $2.1 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The increase in interest income on loans was primarily due to the Change in Control, offset by decreases within the Bank's loan portfolio. The impact of the Change in Control on total interest income on loans was $1.3 billion and $2.2 billion for the three-month and six-month periods ended June 30, 2014, respectively, while interest income on loans at the Bank decreased $19.0 million and $50.7 million for the three-month and six-month periods ended June 30, 2014, respectively, due to the following factors:



Interest income on commercial loans decreased $14.2 million and $27.8

million, or 6.8% and 6.6%, during the three-month and six-month periods

ended June 30, 2014, respectively, compared to the corresponding periods

in 2013 as a result of significant loan payoffs during 2013.



Interest income on consumer loans not secured by real estate decreased

$9.1 million and $22.2 million, or 9.3% and 11.3%, during the three-month

and six-month periods ended June 30, 2014, respectively, compared to the

corresponding periods in 2013. These decreases were primarily attributable

to the run-off in non-strategic portfolios, including indirect auto. 113

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The average balance of total loans was $75.2 billion and $70.4 billion with an average yield of 9.58% and 8.97% for the three-month and six-month periods ended June 30, 2014, respectively, compared to $51.3 billion and $51.8 billion with an average yield of 3.90% and 3.89% for the corresponding periods in 2013. The increase in the average balance of total loans was primarily due to the Change in Control. The average balance of retail installment contracts and auto loans, which comprised a majority of the increase, was $21.3 billion and $17.5 billion with an average yield of 21.43% and 21.79% for the three-month and six-month periods ended June 30, 2014, respectively, compared to $187.7 million and $222.1 million with an average yield of 7.42% and 7.47% for the corresponding periods in 2013.



Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts decreased $4.6 million and $12.6 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The average balance of total interest-bearing deposits was $41.4 billion and $41.5 billion with an average cost of 0.45% and 0.46% for the three-month and six-month periods ended June 30, 2014, respectively, compared to an average balance of $42.1 billion and $42.4 billion with an average cost of 0.51% and 0.52% for the corresponding periods in 2013. The decrease in interest expense on deposits and customer-related accounts was primarily due to the lower interest rate environment as well as the Company's continued focus on repositioning its account mix and increasing its lower-cost deposits.



Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $80.3 million and $117.8 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The increase in interest expense on borrowed funds was due to the Change in Control, which accounted for $121.2 million and $198.3 million of total interest expense on borrowings for the three-month and six-month periods ended June 30, 2014, respectively. This was offset by a decrease in interest expense on borrowed funds of $40.9 million and $80.6 million for the Bank and holding company for the three-month and six-month periods ended June 30, 2014, respectively, as a result of the Bank's use of the proceeds from the sale of investment securities during 2013 to pay off existing borrowed funds. The average balance of total borrowings was $35.4 billion and $31.4 billion with an average cost of 2.54% and 2.62% for the three-month and six-month periods ended June 30, 2014, respectively, compared to an average balance of $15.0 billion and $16.6 billion with an average cost of 3.84% and 3.53% for the corresponding periods in 2013.



PROVISION FOR CREDIT LOSSES

The provision for credit losses is based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the loan portfolio. The provision for credit losses for the three-month and six-month periods ended June 30, 2014 was $686.0 million and $1.0 billion, respectively, compared to $10.0 million and $26.9 million for the corresponding periods in 2013. The increase in the provision can be attributed to the retail installment contracts and auto loans portfolio added from the Change in Control, which occurred in the first quarter of 2014. 114 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table presents the activity in the allowance for credit losses for the periods indicated: Three-Month Period Six-Month Period Ended June 30, Ended June 30, 2014 2013 2014 2013 (in thousands) Allowance for loan losses, beginning of period $ 1,110,592$ 971,092 834,337 $ 1,013,469 Charge-offs: Commercial 22,886 36,247 52,477 70,586 Consumer 614,818 19,513 762,567 48,309 Total charge-offs 637,704 78,775 815,044 169,808 Recoveries: Commercial 4,321 9,137 9,710 31,505 Consumer 257,613 4,785 330,489 6,735 Total recoveries 261,934 22,545 340,199 54,351 Charge-offs, net of recoveries 375,770 56,230 474,845 115,457 Provision for loan losses (1) $ 691,034 10,000 1,066,364 26,850 Allowance for loan losses, end of period $ 1,425,856$ 924,862 $



1,425,856 $ 924,862

Reserve for unfunded lending commitments, beginning of period $ 180,000 210,000 220,000 210,000 Provision for unfunded lending commitments (1) $ (5,000 ) - (45,000 ) - Loss on unfunded lending commitments $ (4,726 ) $ - (4,726 ) $ - Reserve for unfunded lending commitments, end of period 170,274 210,000 170,274 210,000 Total allowance for credit losses, end of period $ 1,596,130$ 1,134,862$ 1,596,130$ 1,134,862



(1) The provision for credit losses in the Condensed Consolidated Statement of

Operations is the sum of the total provision for loan losses and provision

for unfunded lending commitments.

The Company's net charge-offs increased for the three-month and six-month periods ended June 30, 2014, respectively, compared to the three-month and six-month periods ended June 30, 2013. The increases are significantly related to the retail installment contracts and auto loans portfolio added from the Change in Control, and the charge-offs on that portfolio. Net charge-offs in the commercial portfolio decreased for both three-month and six-month periods ended June 30, 2014 , respectively, compared to the corresponding periods in the prior year. Despite increased loan charge-offs, the ratio of net loan charge-offs to average total loans remained low, at 0.5% and 0.7% for the three-month and six-month periods ended June 30, 2014, respectively, compared to 0.1% and 0.2% for the three-month and six-month periods ended June 30, 2013. Commercial loan net charge-offs as a percentage of average commercial loans remained at 0.1% for both the three-month and six-month periods ended June 30, 2014, respectively, as well as for the three-month and six-month periods ended June 30, 2013. The consumer loan net charge-off ratio was 0.9% and 1.2% for the three-month and six-month periods ended June 30, 2014, respectively, compared to 0.2% and 0.4% for the three-month and six-month periods ended June 30, 2013. The increase in consumer charge-offs is primarily due to the credit quality of the retail installment contract and auto loans portfolio, a majority of which are considered non-prime loans. 115 -------------------------------------------------------------------------------- SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations NON-INTEREST INCOME Three-Month Period Six-Month Period Ended June 30, Ended June 30, 2014 2013 2014 2013 (in thousands) Consumer fees $ 96,713$ 57,755$ 179,677$ 112,532 Commercial fees 42,559 47,548 85,529 100,043 Mortgage banking income, net 16,762 50,518 29,709 82,826 Equity method investments (7,416 ) 112,643 12,226 294,737 Bank owned life insurance 16,981 15,033 31,163 28,982



Net gain recognized in earnings 9,405 (40,957 ) 2,439,888

32,565 Miscellaneous income 463,286 11,852 721,354 22,528 Total non-interest income $ 638,290$ 254,392$ 3,499,546$ 674,213 Total non-interest income increased $383.9 million and $2.8 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. These increases were primarily due to the gain recognized from the Change in Control.



Consumer Fees

Consumer fees increased $39.0 million and $67.1 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The increases for the three-month and six-month periods ended June 30, 2014 were mainly due to the additional fee activity of $30.5 million and $53.1 million respectively, following the Change in Control.



Commercial Fees

Commercial fees decreased $5.0 million and $14.5 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. These decreases were primarily due to the composition of commercial loan portfolios during the second quarter of 2014, compared to the second quarter of 2013. Mortgage Banking Revenue Three-Month Period Six-Month Period Ended June 30, Ended June 30, 2014 2013 2014 2013 (in thousands) Mortgage and multifamily servicing fees $ 10,434$ 11,200$ 21,270$ 22,243 Net gains on sales of residential mortgage loans and related securities 10,654 8,737 13,851 42,143 Net gains on sales of multi-family mortgage loans 5,308 18,344 15,608 28,814 Net (losses)/gains on hedging activities 3,152 (5,867 ) 652 (31,957 ) Net (losses)/gains from changes in MSR fair value (6,893 ) 23,270 (11,352 ) 33,366 MSR principal reductions (5,893 ) (5,166 )



(10,320 ) (11,783 )

Total mortgage banking income, net $ 16,762$ 50,518$ 29,709$ 82,826

Mortgage banking income consists of fees associated with servicing loans not held by the Company, as well as originations, amortization and changes in the fair value of MSRs and recourse reserves. Mortgage banking income results also include gains or losses on the sale of mortgage loans, home equity loans and lines of credit and MBS that were related to loans originated or purchased and held by the Company, as well as gains or losses on mortgage banking derivative and hedging transactions. 116

-------------------------------------------------------------------------------- SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES



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

of Operations Mortgage banking revenue decreased $33.8 million and $53.1 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The $33.8 million decrease for the three-month period ended June 30, 214 was primarily due to a decline in the fair value of the MSR. The $53.1 million decrease is primarily due to a decline in the gains on sales of residential mortgage loans as the Company has continued the strategic shift begun in late 2013 to retain residential mortgage loans held for investment and a decline in the fair value of the MSR, partially offset by an increase in the gains from hedging activities.



Over the past two years, there has been significant volatility in mortgage interest rates. This volatility has significantly impacted the Company's mortgage banking revenue. The following table details certain residential mortgage rates for the Bank as of the dates indicated:

30-Year Fixed 15-Year Fixed March 31, 2012 3.99 % 3.25 % June 30, 2012 3.75 % 3.13 % September 30, 2012 3.50 % 2.88 % December 31, 2012 3.38 % 2.75 % March 31, 2013 3.63 % 2.99 % June 30, 2013 4.38 % 3.50 % September 30, 2013 4.38 % 3.38 % December 31, 2013 4.63 % 3.50 % March 31, 2014 4.38 % 3.50 % June 30, 2014 4.13 % 3.38 % Mortgage and multifamily servicing fees decreased $0.8 million and $1.0 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The decreases were primarily due to decreases in multifamily servicing fees. At June 30, 2014 and December 31, 2013, the Company serviced mortgage and multifamily real estate loans for the benefit of others totaling $3.4 billion and $4.6 billion, respectively. Net gains on sales of residential mortgage loans and related securities increased $1.9 million and decreased $28.3 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013 due to a strategic reduction in loan sales by the Company. During the first half of 2013, the Company maintained its strategy to sell the majority of mortgage loans originated. In late 2013, the Company altered this strategy of selling the majority of loans originated to holding the majority of loans originated for investment. The Company has continued this strategy in the first half of 2014. For the three-month and six-month periods ended June 30, 2014, the Company sold $227.8 million and $419.9 million of loans for gains of $10.7 million and $13.9 million, respectively, compared to $1.3 billion and $2.8 billion of loans sold for gains of $8.7 million and $42.1 million for the three-month and six-month periods ended June 30, 2013, respectively. The Company periodically sells qualifying mortgage loans to the FHLMC, GNMA and FNMA in return for MBS issued by those agencies. The Company reclassifies the net book balance of loans sold to those agencies from loans to investment securities available for sale. For those loans sold to the agencies for which the Company retains the servicing rights, the Company allocates the net book balance transferred between servicing rights and investment securities based on their relative fair values. Net gains on sales of multi-family mortgage loans were $5.3 million and $15.6 million the for the three-month and six-month periods ended June 30, 2014, respectively, compared to $18.3 million and $28.8 million for the corresponding periods in 2013 , primarily due to the decrease in the FNMA recourse liability. The Company previously sold multi-family loans in the secondary market to FNMA while retaining servicing. In September 2009, the Bank elected to stop selling multi-family loans to FNMA and, since that time, has retained all production for the multi-family loan portfolio. Under the terms of the multi-family sales program with FNMA, the Company retained a portion of the credit risk associated with those loans. As a result of that agreement, the Company retains a 100% first loss position on each multi-family loan sold to FNMA under the program until the earlier to occur of (i) the aggregate approved losses on the multi-family loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole or (ii) all of the loans sold to FNMA under the program are fully paid off. 117

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations At June 30, 2014 and December 31, 2013, the Company serviced $3.0 billion and $4.3 billion, respectively, of multi-family loans for FNMA that were sold to FNMA under this program. These loans had a credit loss exposure of $153.5 million and $159.0 million, respectively, and losses, if any, resulting from representation and warranty defaults would be in addition to the credit loss exposure. The servicing asset for these loans was completely amortized in 2013. The Company has established a liability related to the fair value of the retained credit exposure for multi-family loans sold to FNMA. This liability represents the amount the Company estimates 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 the portfolio is projected to incur based upon internal specific information and an industry-based default curve with a range of estimated losses. At each of June 30, 2014 and December 31, 2013, the Company had a liability of $51.7 million and $68.0 million, respectively, related to the fair value of the retained credit exposure for loans sold to FNMA under this program. Net gains/(losses) on hedging activities increased $9.0 million and $32.6 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, due to the mortgage rate environment and the significant decreases in the mortgage loan pipeline. Also contributing to the change was the Company's change in strategy to hold mortgage loans originated as opposed to originating them for sale. Net gains/(losses) from changes in MSR fair value decreased $30.2 million and $44.7 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The carrying value of the related MSRs at June 30, 2014 and December 31, 2013 was $124.1 million and $141.8 million, respectively. The MSR asset fair value decrease during 2014 was the result of decreased interest rates.



MSR principal reductions recognized a loss of $0.7 million and a gain of $1.5 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, due to the reduction in prepayments and mortgage refinancing.

Gain on SCUSA Change in Control and Equity Method Investments

Prior to the closing of the IPO in January 2014, the Company accounted for its investment in SCUSA under the equity method. Following the closing of the IPO, the Company consolidated the financial results of SCUSA in the Company's Condensed Financial Statements beginning with its Form 10-Q for the first quarter of 2014. In connection with the Change in Control of SCUSA , the Company recognized a gain of $2.4 billion during the first quarter of 2014. The Company recognized a loss of $7.4 million and a gain of $12.2 million on equity method investments for the three-month and six-month periods ended June 30, 2014, respectively. The Company recognized $112.6 million and $294.7 million income from equity method investments for the three-month and six-month periods ended June 30, 2013, respectively. The decreases in equity method investment were due to the Change in Control, which resulted in accounting for SCUSA as a consolidated subsidiary beginning January 28, 2014.



Bank-Owned Life Insurance ("BOLI")

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI increased $1.9 million and $2.2 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013.



Net gain recognized in earnings

Net gains recognized in earnings increased $50.4 million and $2.4 billion for the three-month and six-month periods ended June 30, 2014, respectively, when compared to the corresponding periods in 2013. The net gains recognized for the three-month and six-month periods ended June 30, 2014 were primarily due to the Change in Control. For additional information on the Change in Control, see Note 3 to the Condensed Consolidated Financial Statements. 118 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The net gain realized for the three-month period ended June 30, 2014 was primarily comprised of the sale of state and municipal securities with a book value of $89.0 million for a gain of $5.2 million, the sale of corporate debt securities with a book value of $63.2 million for a gain of $2.7 million, and the sale of mortgage-backed securities with a book value of $21.6 million for a gain of $1.3 million. The net gain realized, excluding OTTI, for the three-month period ended June 30, 2013 was primarily comprised of the sale of collateralized mortgage obligations with a book value of $2.7 billion for a gain of $35.7 million, offset by fair market value changes on derivative positions related to investment sales. The net gain realized, excluding OTTI, for the six-month period ended June 30, 2013 was primarily comprised of the sale of collateralized mortgage obligations with a book value of $4.1 billion for a gain of $69.0 million and the sale of corporate debt securities with a book value of $905.7 million for a gain of $34.7 million.



Miscellaneous Income

Miscellaneous income increased $451.4 million and $698.8 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The increases are primarily due to the Change in Control and Chrysler Lease Income.



GENERAL AND ADMINISTRATIVE EXPENSES

Three-Month Period Six-Month Period Ended June 30, Ended June 30, 2014 2013 2014 2013 (in thousands) Compensation and benefits $ 284,427$ 165,887$ 603,386$ 340,621 Occupancy and equipment expenses 112,221 90,304 233,091 182,548 Technology expense 43,798 31,425 84,068 60,120 Outside services 43,150 20,182 79,109 38,084 Marketing expense 11,119 8,203 25,219 15,211 Loan expense 88,291 17,825 157,299 37,679 Other administrative expenses 287,232 44,853



428,347 84,655 Total general and administrative expenses $ 870,238$ 378,679$ 1,610,519$ 758,918

Total general and administrative expenses increased $491.6 million and $851.6 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The increases were due primarily to the Change in Control, as well as increased compensation and benefit expenses, increased occupancy and equipment expenses, and loan expense during the six-months ended June 30, 2014. Compensation and benefits expense increased $118.5 million and $262.8 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, primarily due to the Company's investment in personnel through salary increases, increased headcount and other compensation charges associated with management changes. Occupancy and equipment expenses increased $21.9 million and $50.5 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The increases primarily due to the increases in office occupancy related to continued higher property maintenance expenses in the periods following the Company's rebranding. Marketing expense increased $2.9 million and $10.0 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, primarily due to the launch of new deposit and loan products. Loan expense increased $70.5 million and $119.6 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The increases were primarily due to increased loan servicing and collection expenses resulting from the Change in Control. Other administrative expenses increased $242.4 million and $343.7 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, primarily due to the Change in Control during the first quarter of 2014 and increasing expenses associated with the leasing business. 119

-------------------------------------------------------------------------------- SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OTHER EXPENSES Three-Month Period Six-Month Period Ended June 30, Ended June 30, 2014 2013 2014 2013 (in thousands) Amortization of intangibles $ 20,892$ 7,118$ 32,940$ 14,816 Deposit insurance premiums and other costs 14,553 20,613 28,970 43,250 Loss on debt extinguishment - 24 3,635 270 Impairment of long-lived assets 97,546 - 97,546 - Total other expenses $ 132,991$ 27,755$ 163,091$ 58,336



Total other expenses increased $105.2 million and $104.8 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013.

The increases in amortization of intangibles were $13.8 million and $18.1 million for the three-month and six-month periods ended June 30, 2014, respectively, due to the addition of intangibles related to the Change in Control, and were offset by decreases in deposit insurance premiums of $6.1 million and $14.3 million for the three-month and six-month periods ended June 30, 2014, respectively, resulting from lower FDIC insurance premium rates and assessments.

In the second quarter of 2014, an impairment of long-lived assets charge of $97.5 million was recorded due to the restructuring of our capitalized software.

INCOME TAX PROVISION An income tax provision of $199.7 million and $1.2 billion was recorded for the three-month and six-month periods ended June 30, 2014, respectively, compared to $35.3 million and $138.0 million for the corresponding periods in 2013. This resulted in an effective tax rate of 37.1% and 36.1% for the three-month and six-month periods ended June 30, 2014, respectively, compared to 15.8% and 22.6% for the corresponding periods in 2013. The higher tax rates in 2014 were primarily attributable to a deferred tax expense recorded on the book gain resulting from the Change in Control and post Change in Control results of SCUSA. The Company's effective tax rate in future periods will be affected by the results of operations allocated to the various tax jurisdictions within which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company's interpretations by tax authorities that examine tax returns filed by the Company or any of its subsidiaries. LINE OF BUSINESS RESULTS General The Company's segments consist of Retail Banking, Auto Finance & Alliances, Real Estate and Commercial Banking, and GBM. Prior to the closing of the IPO in January 2014, the Company accounted for its investment in SCUSA under the equity method. Following the closing of the IPO, the Company consolidated the financial results of SCUSA in the Company's condensed financial statements effective January 28, 2014. For additional information with respect to the Company's reporting segments, see Note 17 to the Condensed Consolidated Financial Statements. 120

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations During the first quarter of 2014, certain management and business line changes were announced as the Company reorganized its management reporting structure in order to improve its structure and focus to better align management teams and resources with the business goals of the Company and to provide enhanced customer service to its clients. These changes became effective for reporting purposes during the second quarter. Accordingly, the following changes were made within the Company's reportable segments to provide greater focus on each of its core businesses:



The Investment Services business unit has been combined with the Retail

Banking business unit.

The CEVF line, formerly included in the Specialty and Government Banking

business unit, has been moved into the Auto Finance and Alliances business

unit.

The Specialty and Government Banking business unit has been combined with

the Real Estate and Commercial Banking business unit.

Accordingly, prior period information for this quarter has been recast.

Results Summary

Retail Banking

Net interest income increased $32.6 million and $63.4 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The net spread on a match-funded basis for this segment was 1.50% for both the three-month and six-month periods ended June 30, 2014, compared to 1.11% and 1.10% for the corresponding periods in 2013. The average balance of the Retail Banking segment's gross loans was $18.1 billion for both the three-month and six-month periods ended 2014, respectively, compared to $19.2 billion and $19.7 billion for the corresponding periods in 2013. The average balance of deposits was $36.5 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to $37.6 billion and $37.5 billion for the corresponding periods in 2013. Total non-interest income decreased $29.4 million and $49.6 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, primarily due to the decrease in the sales of mortgage loans and MBS. The provision for credit losses decreased $3.9 million and $42.4 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. Total expenses increased $38.1 million and $63.4 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, primarily due to increased rent, increased grounds maintenance, re-stocking of branch materials in 2014 mainly due to the Bank's rebranding in 2013, and leasehold improvements in the branches. Total average assets for the three-month and six-month periods ended June 30, 2014 were $18.7 billion and $18.7 billion, respectively, compared to $19.6 billion and $20.1 billion for the corresponding periods in 2013. The decreases were primarily driven by the mortgage portfolio.



Auto Finance & Alliances

Net interest income increased $3.5 million and $7.4 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, driven primarily by the Chrysler Capital dealer floorplan business line launched in the third quarter of 2013. The net spread on a match-funded basis for this segment was 3.46% and 3.50% for the three-month and six-month periods ended June 30, 2014, respectively, compared to 3.74% and 3.71% for the corresponding periods in 2013. Total non-interest income increased $33.8 million and $39.4 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, due primarily to the launch of the indirect leasing segment in 2014. The provision for credit losses decreased $0.8 million and $0.6 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013, due primarily to a release of the reserve associated with customer exits. Total expenses increased $33.7 million and $42.0 million for the three-month and six-month periods ended 2014, respectively, compared to the corresponding periods in 2013, due primarily to the depreciation expense from operating lease assets associated with the launch of the indirect leasing segment in 2014. Total average assets were $2.9 billion and $2.6 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to $1.8 billion and $1.7 billion for the corresponding periods in 2013. Total average deposits were $58.5 million and $58.9 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to $59.2 million and $61.4 million for the corresponding periods in 2013. 121 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations



Real Estate and Commercial Banking

Net interest income increased $18.2 million and $27.6 million during the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The net spread on a match-funded basis for this segment was 1.94% and 1.87% for the three-month and six-month periods ended June 30, 2014, respectively, compared to 1.85% and 1.82% for the corresponding periods in 2013. Driven by growth in the multi-family portfolio, the average balance of this segment's gross loans increased to $23.0 billion and $22.8 billion during the three-month and six-month periods ended June 30, 2014, respectively, compared to $21.9 billion for the corresponding periods in 2013. Growth in government banking drove the average balance of deposits to $9.7 billion and $9.8 billion during the three-month and six-month periods ended June 30, 2014, respectively, compared to $8.2 billion during the corresponding periods in 2013. Total non-interest income decreased $13.8 million and $15.7 million during the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. This decline was centered in a decrease in serviced portfolio reserve releases. The release of credit losses was $12.0 million and $7.4 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to a provision of $9.5 million and a release of $6.6 million for the corresponding periods of 2013. Total expenses increased $2.6 million and $6.8 million during the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013.



Total average assets were $22.8 billion and $22.6 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to $21.7 billion and $21.6 billion for the corresponding periods in 2013.

Global Banking & Markets

Net interest income increased $1.1 million and $2.0 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The net spread on a match-funded basis was 2.39% and 2.42% for the three-month and six-month periods ended June 30, 2014, respectively, compared to 2.61% and 2.51% for the corresponding periods in 2013. The average balance of this segment's gross loans was $7.6 billion and $7.2 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to $7.5 billion for the corresponding periods in 2013. The average balance of deposits was $1.2 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to $741.6 million and $759.6 million for the corresponding periods in 2013. Total non-interest income decreased $6.3 million and $9.1 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The provision for credit losses decreased $6.2 million and $9.3 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. Total expenses increased $6.1 million and $9.7 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. Total average assets were $9.2 billion and $8.8 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to $8.3 billion and $8.4 billion for the corresponding periods in 2013.



Other

Net interest income decreased $43.3 million and $101.2 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods of the preceding year. Total non-interest income increased $64.3 million and $22.3 million for the three-month and six-month periods ended June 30, 2014, respectively, compared to the corresponding periods in 2013. Total expenses increased $90.0 million during the three-month period ended June 30, 2014 and increased $89.6 million during the six-month period ended June 30, 2014, respectively, compared to the corresponding periods in 2013.



Average assets were $26.1 billion and $26.3 billion for the three-month and six-month periods ended June 30, 2014, respectively, compared to $29.2 billion and $30.5 billion for the corresponding periods of the prior year.

SCUSA

From December 2011 until January 28, 2014, SCUSA was accounted for as an equity method investment. In 2014, SCUSA's results of operations were consolidated with SHUSA. SCUSA is managed as a separate business unit, with its own systems and processes, and is reported as a separate segment. 122 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION LOAN PORTFOLIO The Company's loan portfolio(1) consisted of the following at the dates provided: June 30, 2014 December 31, 2013 June 30, 2013 Amount Percent Amount Percent Amount Percent (dollars in thousands) Commercial loans (excluding $ 25,824,702 34.0% $ 23,932,125 47.8% $ 24,218,135 48.1% multi-family loans) Multi-family loans 9,229,611 12.1% 8,237,029 16.5% 7,522,650 14.9% Consumer loans secured by real 15,842,181 20.9% 15,983,898 31.9% 16,521,497 32.8% estate Consumer loans not secured by 25,031,801 33.0% 1,897,574 3.8% 2,090,313 4.2% real estate Total Loans $ 75,928,295 100.0% $ 50,050,626 100.0% $ 50,352,595 100.0% (1) Includes LHFS Commercial loans (excluding multi-family loans) increased approximately $1.9 billion, or 7.9%, from December 31, 2013 to June 30, 2014, and $1.6 billion, or 6.6%, from June 30, 2013 to June 30, 2014. The increase from December 31, 2013 and June 30, 2013 was primarily due to commercial and industrial and commercial real estate loans added in connection with the Change in Control during the first quarter of 2014 as well as new loans originated within the GBM portfolio. The year over year increase was partially offset by significant loan payoffs during June 2013. Multi-family loans increased $1.0 billion, or 12.1%, from December 31, 2013 to June 30, 2014, and increased $1.7 billion, or 22.7%, from June 30, 2013 to June 30, 2014. These increases were primarily due to the Company's repurchase during the third quarter of 2013 and first quarter of 2014 from FNMA of $660.1 million and $816.5 million, respectively, of performing multifamily loans that had been previously sold with servicing retained. Consumer loans secured by real estate, including LHFS, decreased $141.7 million, or 0.9%, from December 31, 2013 to June 30, 2014, and $0.7 billion, or 4.1%, from June 30, 2013 to June 30, 2014. The year over year decrease was primarily due to overall lower origination activity, which was the result of several factors, including higher interest rates and a seasonal slowdown in home purchase applications. The decrease from December 31, 2013 was negligible. The consumer loan portfolio not secured by real estate increased $23.1 billion, or 1,219.1%, from December 31, 2013 to June 30, 2014, and $22.9 billion, or 1,097.5%, from June 30, 2013 to June 30, 2014. The driver of the increase is the more than $20 billion retail installment contract and personal unsecured loans portfolios consolidated from the Change in Control in the first quarter of 2014. NON-PERFORMING ASSETS Non-performing assets increased during the period, to $2.0 billion, or 1.76% of total assets, at June 30, 2014, compared to $1.1 billion, or 1.4% of total assets, at December 31, 2013, due to the retail installment contract and auto loan portfolios acquired during the Change in Control. Non-performing loans in all other portfolios decreased during the period. Nonperforming assets consist of nonaccrual loans and leases, which represent loans and leases no longer accruing interest, other real estate owned ("OREO") properties, and other repossessed assets. When interest accruals are suspended, accrued interest income is reversed, with accruals charged against earnings. The Company generally places all commercial, consumer, and residential mortgage loans except credit cards on nonaccrual status at 90 days past due for interest, principal or maturity, or earlier if it is determined that the collection of principal or interest on the loan is in doubt. For certain individual portfolios, including the retail installment contract portfolio, nonaccrual status may begin at 60 days past due. Personal unsecured loans, including credit cards, generally continue to accrue interest until they are 180 days delinquent, at which point they are charged-off and all interest is removed from interest income. 123

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In general, when the borrower's ability to make required interest and principal payments has resumed and collectability is no longer believed to be in doubt, the loan or lease is returned to accrual status. Generally, commercial loans categorized as nonaccrual remain in nonaccrual status until the payment status is current and an event occurs that fully remediates the impairment or the loan demonstrates a sustained period of performance without a past due event, typically for six months but for a minimum of 90 days, and there is reasonable assurance as to the collectability of all amounts due. Within the residential mortgage and home equity portfolios, the accrual status is generally systematically driven, so that if the customer makes a payment that brings the loan below 90 days past due, the loan automatically returns to accrual status.



Commercial

Commercial non-performing loans decreased $74.9 million from December 31, 2013 to June 30, 2014. At June 30, 2014, Commercial non-performing loans accounted for 0.8% of total commercial loans, compared to 1.2% of total commercial loans at December 31, 2013. The decrease is primarily attributable to overall improvements in credit quality, including decreased delinquencies, TDRs, and net charge-offs.



Consumer Secured by Real Estate

The following table shows non-performing loans compared to total loans outstanding for the residential mortgage and home equity portfolios as of June 30, 2014 and December 31, 2013, respectively:

June 30, 2014



December 31, 2013

Residential Home equity loans and Residential Home equity loans and mortgages (1) lines of credit mortgages (1) lines of credit (dollars in thousands) Non-performing loans ("NPLs") $ 448,249 $ 143,787 $ 473,566 $ 141,961 Total loans $ 9,651,706$ 6,190,475$ 9,672,204 $ 6,311,694 NPLs as a percentage of total loans 4.6 % 2.3 % 4.9 % 2.2 % NPLs in foreclosure status 43.6 % 14.1 % 41.7 % 13.4 % (1) Includes LHFS The NPL ratio is significantly higher for the Company's residential mortgage loan portfolio compared to its consumer loans secured by real estate portfolio due to a number of factors, including: the prolonged workout and foreclosure resolution processes for residential mortgage loans; differences in risk profiles; and mortgage loans located outside the Northeast and Mid-Atlantic United States. Resolution challenges with low foreclosure sales continue to impact both residential mortgage and consumer loans secured by real estate portfolio NPL balances, but foreclosure inventory decreased quarter-over-quarter. The foreclosure moratorium was lifted and activity resumed in the fourth quarter of 2011, but delays in Pennsylvania, New Jersey, New York, and Massachusetts limited the decline in NPL balances and contributed to a higher NPL ratio in 2014. As of June 30, 2014, foreclosures in all states except Delaware and Washington, D.C. were moving forward. Both Delaware and Washington, D.C. are delayed due to new legal complexities surrounding documentation required to initiate a new foreclosure proceeding. New foreclosure laws were enacted in Massachusetts in August 2012, and the Massachusetts Division of Banks issued its final rules on the implementation of the new foreclosure law in June 2013. These final rules require lenders to offer loan modification terms to certain borrowers prior to proceeding with foreclosure, unless the lender is able to prove that modification would result in greater losses for the bank or that the borrower has rejected the offer. Lenders are also required to send notice to borrowers regarding their right to request a modification. Breach notices for Massachusetts foreclosures recommenced in September 2013. 124 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table represents the concentration of foreclosures by state as a percentage of total foreclosures at June 30, 2014 and December 31, 2013, respectively: June 30, 2014 December 31, 2013 New Jersey 34.5% 34.0% New York 17.7% 18.2% Pennsylvania 12.8% 14.3% Massachusetts 12.3% 2.9% All other states 22.7% 30.6% The foreclosure closings issue has a greater impact on the residential mortgage portfolio than the consumer real estate secured portfolio due to the larger volume of loans in first lien position in that portfolio which have equity upon which to foreclose. Exclusive of Chapter 7 bankruptcy NPL accounts, approximately 89.5% of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only 46.0% of the 90+ day delinquent loan balances in the consumer real estate secured portfolio are secured by a first lien. Consumer real estate secured NPL loans may get charged off more quickly due to the lack of equity to foreclose from a second lien position.



The Alt-A segment consists of loans with limited documentation requirements which were originated through brokers outside the Bank's geographic footprint. At June 30, 2014 and December 31, 2013, the residential mortgage portfolio included the following Alt-A loans:

June 30, 2014 December 31, 2013 (dollars in thousands) Alt-A loans $ 986,765$ 1,060,560 Alt-A loans as a percentage of the residential mortgage portfolio 10.2 % 11.0 % Alt-A loans designated "out-of-footprint" $ 396,161 $



430,138

Alt-A loans designated as "out-of-footprint" as a percentage of Alt-A loans 40.1 % 40.6 % Alt-A loans in NPL status $ 161,529 $



176,197

Alt-A loans in NPL status as a percentage of residential mortgage NPLs 36.0 % 37.2 % The performance of the Alt-A segment has remained poor, averaging a 16.4% NPL ratio for the year to date 2014. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of 1.4% per month. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the first quarter of 2009, when the portfolio was placed in run-off, compared to 36.0% at June 30, 2014. As the Alt-A segment runs off and higher quality residential mortgages are added to the portfolio, the shift in product mix is expected to lower NPL balances. Finally, the proportion of out-of-footprint loans is significantly higher in the residential mortgage portfolio than in the consumer loans secured by real estate portfolio. Historically, the NPL ratio for out-of-footprint loans has been higher compared with in-footprint lending. A total of $819.4 million, or 8.5%, of the residential mortgage loan portfolio was originated with collateral located outside the Bank's geographic footprint as of June 30, 2014. Out-of-footprint NPL balances for the residential mortgage loan portfolio were $64.5 million, or 7.9% of out-of-footprint balances, as of June 30, 2014. The out-of-footprint NPL balance represented 14.4% of the total NPL balance of the residential mortgage loan portfolio. In comparison, the consumer loans secured by real estate portfolio has significantly less out-of-footprint loans, with a total of $43.3 million, or 0.7%, originated with collateral located outside the Bank's geographic footprint. The out-of-footprint NPL balance represented only 1.3% of the total NPL balance for the consumer loans secured by real estate portfolio.



Consumer Not Secured by Real Estate

Retail installment contracts and unsecured consumer amortizing term loans are classified as non-performing when they are greater than 60 days past due as to principal or interest. Except for loans accounted for using the fair value option, at the time a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed against interest income. When an account is returned to a performing status of 60 days or less past due, the Company returns to accruing interest on the contract. The accrual of interest on revolving unsecured consumer loans continues until the loan is charged off. 125 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Non-performing loans in the consumer loans not secured by real estate portfolio increased $848.0 million from December 31, 2013 to June 30, 2014. At June 30, 2014, Non-performing consumer loans not secured by real estate accounted for 3.4% of total consumer loans not secured by real estate, compared to 0.6% of total consumer loans not secured by real estate at December 31, 2013. The increase is attributed to the retail installment contracts and auto loans acquired in the Change in Control during the first quarter which include non-prime loans. Despite this overall increase, aging for the acquired retail installment contracts and auto loans portfolio has improved from the prior quarter. The following table presents the composition of non-performing assets at the dates indicated: June 30, 2014 December 31, 2013 (dollars in thousands) Non-accrual loans: Commercial: Commercial real estate $ 216,454 $ 250,073 Commercial and industrial 66,876 100,894 Multi-family 14,115 21,371 Total commercial loans 297,445 372,338 Consumer: Residential mortgages 448,249 473,566 Consumer loans secured by real estate 143,787



141,961

Consumer not secured by real estate 858,502 10,544 Total consumer loans 1,450,538 626,071 Total non-accrual loans 1,747,983 998,409 Other real estate owned 85,458 88,603 Repossessed vehicles 141,305 - Other repossessed assets 6,379 3,073



Total other real estate owned and other repossessed assets

233,142



91,676

Total non-performing assets $ 1,981,125 $



1,090,085

Past due 90 days or more as to interest or principal and accruing interest $ 88,777 $



2,545

Annualized net loan charge-offs to average loans (2) 1.3 % 0.4 % Non-performing assets as a percentage of total assets 1.8 % 1.4 % NPLs as a percentage of total loans 2.3 % 2.0 % Non-performing assets as a percentage of total loans, real estate owned and repossessed assets 2.6 % 2.2 % Allowance for credit losses as a percentage of total non-performing assets (1) 80.6 % 96.7 % Allowance for credit losses as a percentage of total NPLs (1) 91.3 % 105.6 %



(1) The allowance for credit losses is comprised of the allowance for loan losses

and the reserve for unfunded lending commitments, and is included in Other

liabilities.

(2) Annualized net loan charge-offs to average loans is calculated as annualized

net loan charge-offs divided by the average loan balance for the six-month

period ended June 30, 2014.

Excluding loans past due which are classified as non-accrual, loans past due have increased from $388.4 million at December 31, 2013 to $2.4 billion at June 30, 2014.

No commercial loans were 90 days or more past due and still accruing interest as of June 30, 2014. Potential problem loans are loans not currently classified as non-performing loans for which management has doubts as to the borrowers' ability to comply with the present repayment terms. These assets are principally loans delinquent more than 30 days but less than 90 days. Potential problem commercial loans totaled approximately $52.2 million and $41.5 million at June 30, 2014 and December 31, 2013, respectively. Potential problem consumer loans amounted to $2.9 billion and $344.4 million at June 30, 2014 and December 31, 2013, respectively. Management has included these loans in its evaluation and reserved for them during the respective periods. 126 -------------------------------------------------------------------------------- SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES



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

of Operations TDRs Troubled debt restructurings ("TDRs") are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of the customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal. TDRs are generally placed in nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after demonstrating at least six consecutive months of sustained payments following modification, as long as the Company believes the principal and interest of the restructured loan will be paid in full. For the retail installment contract portfolio, loans may return to accrual status when the balance is remediated to current status. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.



The following table summarizes TDRs at the dates indicated:

June 30, 2014December 31, 2013

(in thousands) Performing Commercial $ 151,145 $ 152,615 Residential mortgage 450,577 446,678 Other consumer 690,766 57,313 Total performing 1,292,488 656,606 Non-performing Commercial 82,332 97,220 Residential mortgage 187,487 192,794 Other consumer 86,905 57,023 Total non-performing 356,724 347,037 Total $ 1,649,212 $ 1,003,643



Total non-performing TDRs increased $9.7 million from December 31, 2013 to June 30, 2014. This change was primarily attributable to the retail installment contracts and auto loans acquired in the Change in Control during the first quarter which include non-prime loans.

Commercial

Performing commercial TDRs increased from 61.1% of total commercial TDRs at December 31, 2013 to 64.7% of total commercial TDRs at June 30, 2014. The improvement is attributable to improving credit quality among commercial borrowers, including improved aging and overall decreases in non-performing loans when compared with the prior year.

Residential Mortgages

Performing residential mortgage TDRs increased from 69.9% of total residential mortgage TDRs at December 31, 2013 to70.6% of total residential TDRs at June 30, 2014. This improvement is attributable to improving credit quality among the portfolio, including improved aging, decreases in non-performing loans, and fewer modifications overall.



Other Consumer Loans

TDRs on home equity loans and lines of credit decreased for both the three-month and six-month periods ended June 30, 2014, compared with the prior year. Subsequent re-defaults for home equity loans and lines of credit also decreased for the same periods. 127

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In accordance with our policies and guidelines, we, at times, offer payment deferrals to borrowers on our retail installment contracts, under which the consumer is allowed to move up to three delinquent payments to the end of the loan. Our policies and guidelines limit the number and frequency of deferrals that may be granted to one every six months and eight over the life of a loan. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account. We evaluate the results of our deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, we believe that payment deferrals granted according to our policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio. Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off by us. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of our allowance for loan losses are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the allowance for loan losses and related provision for loan losses. Changes in these ratios and periods are considered in determining the appropriate level of allowance for loan losses and related provision for loan losses. If a customer's financial difficulty is not temporary, we may agree, or be required by a bankruptcy court, to grant a modification involving one or a combination of the following: a reduction in interest rate, a reduction in the loan's principal balance, or an extension of the maturity date. The servicer also may grant concessions on our unsecured consumer loans in the form of principal or interest rate reductions or payment plans.



TDR activity in the unsecured and other consumer portfolios was negligible to overall TDR activity.

ALLOWANCE FOR CREDIT LOSSES The allowance for loan losses and the reserve for unfunded lending commitments (collectively, the "Allowance for Credit Losses") are maintained at levels that management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks inherent in the 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 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, 2014 December 31, 2013 % of Loans % of Loans Amount to Total Loans Amount to Total Loans (dollars in thousands) Allocated allowance: Commercial loans $ 359,811 46.2 % $ 443,074 64.4 % Consumer loans 1,027,044 53.8 % 363,647 35.6 % Unallocated allowance 39,001 immaterial 27,616 immaterial Total allowance for loan losses $ 1,425,856 100.0 % $ 834,337 100.0 % Reserve for unfunded lending commitments 170,274



220,000

Total allowance for credit losses $ 1,596,130$ 1,054,337 128

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The allowance for credit losses increased $541.8 million from December 31, 2013 to June 30, 2014 and decreased as a percentage of total loans to 2.10% at June 30, 2014 compared to 2.11% at December 31, 2013. The decrease in the allowance for credit losses can be attributed to an overall improvement in the credit quality, risk rating and portfolio composition of the loan portfolio, specifically in the commercial loan portfolio, with decreases in net charge-offs, delinquent loans, and non-accrual loans. Management regularly monitors the condition of the Bank's portfolio, considering factors such as historical loss experience, trends in delinquency and non-performing loans, changes in risk composition and underwriting standards, the experience and ability of staff, and regional and national economic conditions and trends. The risk factors inherent in the allowance for credit losses are continuously reviewed and revised by management when conditions indicate that the estimates initially applied are different from actual results. The Company also performs a comprehensive analysis of the allowance for credit losses 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 credit losses do not diminish the fact that the entire allowance for credit losses is available to absorb losses in the loan portfolio and related commitment portfolio. The Company's principal focus is to ensure the adequacy of the total allowance for credit losses. The allowance for credit losses is subject to review by banking regulators. The Company's primary bank regulators regularly conduct examinations of the allowance for credit losses and make assessments regarding its adequacy and the methodology employed in its determination. A loan is considered to be impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g., less than 90 days) or insignificant shortfall in the amount of payments does not necessarily result in the loan being identified as impaired. Impaired loans are defined as all TDRs plus non-accrual commercial loans in excess of $1 million. In addition, the Company may perform a specific reserve analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant. The Company performs a specific reserve analysis on certain loans within the Corporate Banking and other commercial classes of financing receivables, regardless of loan size.



Commercial

For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3.0 million), the Company has specialized credit officers, a monitoring unit, and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For the commercial loan portfolios, risk ratings are assigned to each loan to differentiate risk within the portfolio, reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrower's current risk profile and the related collateral position. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower's risk rating on at least an annual basis, and more frequently if warranted. This reassessment process is managed by credit officers and is overseen by the Credit Monitoring group to ensure consistency and accuracy in risk ratings, as well as the appropriate frequency of risk rating reviews by the Bank's credit officers. The Company's Internal Audit group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded below a certain level, the Company's Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management's strategies for the customer relationship going forward. If a loan is identified as impaired and is collateral-dependent, an initial appraisal is obtained to provide a baseline to determine the property's fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of the asset, obsolescence, etc.), an appraisal is obtained more frequently. At a minimum, updated appraisals for impaired loans are obtained within a 12-month period if the loan remains outstanding for that period of time. 129 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations



If a loan is identified as impaired and is not collateral-dependent, impairment is measured based on a present value of expected future cash flows methodology.

When the Bank determines that the value of an impaired loan is less than its carrying amount, the Bank recognizes impairment through a provision estimate or a charge-off to the allowance. Management performs these assessments on at least a quarterly basis. For commercial loans, a charge-off is recorded when a loan, or a portion thereof, is considered uncollectible and of such little value that its continuance on the Bank's books as an asset is not warranted. Charge-offs are recorded on a monthly basis, and partially charged-off loans continue to be evaluated on at least a quarterly basis, with additional charge-offs or loan loss provisions taken on the remaining loan balance, if warranted, utilizing the same criteria. The portion of the allowance for loan losses related to the commercial portfolio decreased from $443.1 million at December 31, 2013 (1.38% of commercial loans) to $359.8 million at June 30, 2014 (1.03% of commercial loans). The primary factor resulting in the decrease is that the portfolio risk distribution has shown improvement related to portfolio credit quality (lower levels of classified and non-accruing loans). In addition, there has been a decrease in probability of default rates associated with commercial loans that have resulted in a decrease in reserve balances. In the normal course of business, the Company reviews and updates its models to ensure that it is using the best available information in determining its allowances for credit losses. During the second quarter of 2014, the Company completed and tested a new allowance model for the Santander Real Estate Capital (SREC) portfolio. The new model is internally-calibrated using the Bank's own portfolio and historical experience, compared to the prior model which used third-party data of portfolios that encompassed the Bank's portfolio but also included portfolios of a broader population as well. The implementation of this model, along with continued improvement in the credit quality of the SREC portfolio and the overall credit environment, resulted in the Company recording a release of provision in the amount of $76.8 million.



Consumer

The consumer loan and small business loan portfolios are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratios, and credit scores. Management evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral. Management documents the collateral type, the date of the most recent valuation, and whether any liens exist to determine the value to compare against the committed loan amount. For both residential mortgage and home equity loans, loss severity assumptions are incorporated in the loan loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various combined LTV ("CLTV") bands in these portfolios. CLTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current CLTV. The Company's allowance for loan losses incorporates the refreshed CLTV information to update the distribution of defaulted loans by CLTV as well as the associated loss given default for each CLTV band. Reappraisals at the individual property level are not considered cost-effective or necessary on a recurring basis; however, reappraisals are performed on certain higher risk accounts to support line management activities and default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted. Residential mortgages and any portion of a home equity loan or line of credit not adequately secured by collateral are generally charged-off when deemed to be uncollectible or delinquent 180 days or more (120 days for closed-end consumer loans not secured by real estate), whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment likelihood include: a loan that is secured by collateral and is in the process of collection; a loan supported by a valid guarantee or insurance; or a loan supported by a valid claim against a solvent estate. Auto loans are charged off when an account becomes 121 days delinquent if the Company has not repossessed the vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. Credit cards that are 180 days delinquent are charged-off and all interest is removed from interest income. 130 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As of June 30, 2014, the Company had $762.8 million and $5.2 billion of consumer home equity loans and lines of credit, which included $348.0 million and $3.0 billion, or 45.6% and 57.9%, in junior lien positions, respectively. As a result of the update to the home equity model completed and fully implemented in the first half of 2014, the Company switched from analyzing loss severity rates using a 150-day period to a 90-day period. Loss severity rates on these consumer home equity loans and lines of credit in junior lien positions, using the 90-day period, were 57.0% and 77.2%, respectively, as of June 30, 2014. To ensure the Company has captured losses inherent in its home equity portfolios, the Company estimates its allowance for loan losses for home equity loans and lines of credit by segmenting its portfolio into sub-segments based on the nature of the portfolio and certain risk characteristics such as product type, lien positions, and origination channels. Projected future defaulted loan balances are estimated within each portfolio sub-segment by incorporating risk parameters, including the current payment status as well as historical trends in delinquency rates. Other assumptions, including prepayment and attrition rates, are also calculated at the portfolio sub-segment level and incorporated into the estimation of the likely volume of defaulted loan balances. The projected default volume is stratified across CLTV ratio bands, and a loss severity rate for each CLTV band is applied based on the Company's historical net credit loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market, or industry conditions, or changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. The Company considers the delinquency status of its senior liens in cases in which the Company services the lien. The Company currently services the senior lien on 24.2% of junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.7% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impacts to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown. Beginning in 2014, the Company began considering the actual delinquency status of senior liens serviced by other servicers through the use of credit bureau data. The Company's allowance models and reserve levels are back-tested on a quarterly basis to ensure that both remain within appropriate ranges. As a result, management believes that the current allowance for loan losses is maintained at a level sufficient to absorb inherent losses in the portfolio. Depository and lending institutions in the U.S. generally are expected to experience a significant volume of home equity lines of credit which will be approaching the end of their draw periods over the next several years, following the growth in home equity lending experienced during 2003 through 2007. As a result, many of these home equity lines of credit will either convert to amortizing loans or have principal due as balloon payments. The percentage of the Company's current home equity lines of credit that are expected to reach the end of their draw periods prior to December 31, 2018 is approximately 4.0% and not considered significant. The Company's home equity lines of credit are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 10 years, along with amortizing repayment periods of up to 15 years. We currently do not monitor delinquency rates differently for amortizing and non-amortizing lines, but instead segment our home equity line of credit portfolio by certain other risk characteristics which we monitor, along with several credit quality metrics including delinquency. Our home equity lines of credit are generally underwritten considering fully drawn and fully amortizing levels. As a result, we currently do not anticipate a significant deterioration in credit quality when these home equity lines of credit begin to amortize. We are currently enhancing our data capabilities to monitor home equity line of credit delinquency trends by amortizing and non-amortizing status, and will look to expand our disclosures in future filings to discuss any significant delinquency trends affecting the Company's home equity portfolios when this information becomes available. For retail installment contracts and personal unsecured loans, the Company estimates the allowance for loan losses at a level considered adequate to cover probable credit losses inherent in the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company's judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan losses. The allowance for consumer loans was $1.0 billion and $363.6 million at June 30, 2014 and December 31, 2013, respectively. The allowance as a percentage of consumer loans was 2.51% at June 30, 2014 and 2.03% at December 31, 2013. The increase is primarily related to additional allowance recorded for the loan portfolio acquired during the Change in Control in the first quarter of 2014. 131 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Unallocated Additionally, the Company reserves for certain inherent, but undetected, losses that are probable within the loan portfolio. Absent significant other factors to the contrary, management generally considers an unallocated position within 5% of the overall allowance to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated allowance for loan and lease loss positions are considered in light of these factors. The unallocated allowance for loan losses was $39.0 million at June 30, 2014 and $27.6 million at December 31, 2013.



Reserve for Unfunded Lending Commitments

In addition to the allowance for loan and lease losses, the Bank estimates probable losses related to unfunded lending commitments. Risk factors, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses, and this reserve is classified within Other liabilities on the Company's Condensed Consolidated Balance Sheet. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the allowance for loan losses. The reserve for unfunded lending commitments decreased from $220.0 million at December 31, 2013 to $170.3 million at June 30, 2014. The decrease is due in a shift from off-balance sheet lending commitments, primarily to commercial customers, to loans or lines of credit included on the Company's balance sheet as financing receivables. As a result of these shifts, the net impact of the decrease in reserve for unfunded lending commitments to the overall allowance for credit losses is immaterial.



INVESTMENT SECURITIES

Investment securities consist primarily of MBS, tax-free municipal securities, corporate debt securities, asset-backed securities ("ABS") and stock in the FHLB and the FRB. MBS consist of pass-through, collateralized mortgage obligations, and adjustable rate mortgages issued by federal agencies. The Company's MBS are either guaranteed as to principal and interest by the issuer or have ratings of "AAA" by Standard and Poor's and Moody's at the date of issuance. The Company's available-for-sale investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately. Total investment securities available-for-sale increased $28.8 million to $11.7 billion at June 30, 2014, compared to $11.6 billion at December 31, 2013. For additional information with respect to the Company's investment securities, see Note 4 in the Notes to the Condensed Consolidated Financial Statements.



The Company held $125.1 million of trading securities at June 30, 2014. There were no trading securities at December 31, 2013.

Other investments, which consists of FHLB stock and FRB stock, remained flat at $0.8 billion at June 30, 2014 and December 31, 2013, primarily due to purchases of FHLB and FRB stock, which were offset by the FHLB's repurchase of its stock.



The average life of the available-for-sale investment portfolio (excluding certain ABS) at June 30, 2014 was approximately 4.58 years, compared to 5.25 years at December 31, 2013. The average effective duration of the investment portfolio (excluding certain ABS) at June 30, 2014 was approximately 3.80 years. The actual maturities of MBS available for sale will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.

132 -------------------------------------------------------------------------------- SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES



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

of Operations GOODWILL Goodwill totaled $8.9 billion and $3.4 billion at June 30, 2014 and December 31, 2013, respectively. During the second quarter of 2014, the Company reorganized its management reporting structure in order to better align management teams and resources with the business goals of the Company and to provide enhanced customer service to its clients. The result of these changes on reporting units has been further discussed in Note 7 to the Condensed Consolidated Financial Statements. The following table shows goodwill by reporting unit at June 30, 2014: Global Real Estate Banking & Auto and Markets and Finance & Commercial Large Retail Banking Alliances Banking Corporate SCUSA Total (in thousands) Goodwill at June 30, 2014 $1,815,729$71,522$1,406,048$131,130$5,476,844$8,901,273 At June 30, 2014, goodwill represented 7.9% and 40.5% of total assets and total stockholder's equity, respectively compared to 4.4% of total assets and 25.3% of total stockholder's equity, at December 31, 2013. The increase is related to the addition of goodwill from the Change in Control. Refer to further discussion of this transaction in Note 3 to the Condensed Consolidated Financial Statements. The Company conducts a full evaluation of goodwill impairment at the reporting unit level on an annual basis, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. No impairment indicators were noted since the annual review as of October 1, 2013 and, accordingly, no impairment test has been performed. The Company expects to perform its next annual goodwill impairment test in the fourth quarter of 2014.



DEFERRED TAXES AND OTHER TAX ACTIVITY

The Company's net deferred tax balance was a liability of $376.8 million at June 30, 2014, compared to an asset of $748.0 million at December 31, 2013. The decrease of $1.1 billion was primarily due to $829.8 million of deferred taxes recorded in connection with the Change in Control, a $93.9 million reduction in deferred tax assets due to the adoption of ASU 2013-11, a $111.3 million reduction due to an overall decrease in cumulative temporary differences, and an $89.8 million reduction in deferred tax assets related to a decrease in investment and market-related unrealized losses. The Company has a lawsuit pending against the United States in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of the two financing transactions, the Company paid foreign taxes of $264.0 million from 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the IRS disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million. The Company has paid the taxes, penalties and interest associated with the IRS adjustments for all tax years, and the lawsuit will determine whether the Bank is entitled to a refund of the amounts paid. The Company has recorded a receivable in other assets for the amount of these payments, less a tax reserve of $96.9 million, as of June 30, 2014. On October 17, 2013, the Court issued a written opinion in favor of the Company relating to a motion for partial summary judgment on a significant issue in the case. The Company subsequently filed a motion for summary judgment requesting the Court to conclude the case in its entirety and enter a final judgment awarding the Company a refund of all amounts paid. In response, the IRS filed a motion opposing the Company's motion, and filed a cross-motion for summary judgment requesting that the Court enter a final judgment in the IRS' favor. The Company anticipates that the Court will rule on the parties' motions within the next several months and make a determination as to whether further proceedings are required at the District Court level to resolve any remaining legal or factual issues, which could affect the Company's entitlement to some or all of the refund. The Company expects the IRS to appeal any decision in favor of the Company. In 2013, two different federal courts decided cases involving similar financing structures entered into by the Bank of New York Mellon Corp. and BB&T Corp. (referred to as the Salem Financial Case) in favor 133 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of the IRS. Bank of New York Mellon Corp. and BB&T Corp. have filed notices of appeal in their respective cases. The Company remains confident in its position and believes its reserve amount adequately provides for potential exposure to the IRS related to these items. As this litigation progresses over the next 24 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $96.9 million to an increase of $296.0 million. 134

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OTHER ASSETS Other assets at June 30, 2014 were $1.5 billion, compared to $1.2 billion at December 31, 2013. The increase in other assets was primarily due to activity in other repossessed assets and miscellaneous assets and receivables. Other repossessed assets increased $139.7 million, primarily due to the Change in Control. Miscellaneous assets and receivables increased $156.4 million, primarily due to the Change in Control and an increase in lease receivables, offset by the timing of wire transfers.



DEPOSITS AND OTHER CUSTOMER ACCOUNTS

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



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

June 30, 2014 December 31, 2013 Percent of total Percent of total Balance deposits Balance deposits (dollars in thousands) Interest-bearing demand deposits $ 11,103,931 22.3 % $ 10,423,610 21.1 %



Non-interest-bearing

demand deposits 8,230,276 16.5 % 8,022,529 16.2 % Savings 4,071,857 8.2 % 3,885,724 7.8 % Money market 19,515,433 39.2 % 19,050,473 38.5 % Certificates of deposit 6,878,295 13.8 % 8,139,070 16.4 % Total Deposits $ 49,799,792 100.0 % $ 49,521,406 100.0 % Total deposits and other customer accounts increased $0.3 billion from December 31, 2013 to June 30, 2014. The increase in deposits was due to increases in Interest-bearing demand deposits, Non-interest-bearing demand deposits, Savings, Money Market accounts, partially offset by a decrease in CDs. The increase in deposits was primarily comprised of increases in interest-bearing demand deposits of $680.3 million, or 6.5%, and money market accounts of $465.0 million, or 2.4%, due mainly to continuing better economic conditions encouraging movement from non-interest bearing accounts to interest-bearing investments. CDs decreased $1.3 billion, or 15.5%, due to continued run-off as certain CD products matured and the lack of the Company's rollover of certain wholesale CDs, as customers and the Company have opted to maintain balances in more liquid transaction accounts. In addition, the Company continues to focus its efforts on repositioning its account mix and increasing lower-cost deposits. The improved funding mix and maturities of CDs reduced the cost of total deposits from 0.51% for the second quarter of 2013 to 0.45% for the second quarter of 2014.



Demand deposit overdrafts that have been reclassified as loan balances were $43.9 million and $66.5 million at June 30, 2014 and December 31, 2013, respectively. Time deposits of $100,000 or more totaled $2.4 billion and $2.8 billion at June 30, 2014 and December 31, 2013, respectively.

BORROWINGS AND OTHER DEBT OBLIGATIONS

The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. Collateralized advances are available from the FHLB if certain standards related to creditworthiness are met. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. The holding company has term loans and lines of credit with Santander and other third-party lenders. In addition, SCUSA has warehouse lines of credit and securitizes some of its retail installment contracts, which are structured secured financings. Total borrowings and other debt obligations at June 30, 2014 were $38.2 billion, compared to $12.4 billion at December 31, 2013. Total borrowings increased $25.8 billion primarily due to the Change in Control. The total impact of SCUSA's borrowings and debt obligations at June 30, 2014 was $26.0 billion. See further detail on borrowings activity in Note 9 to the Condensed Consolidated Financial Statements. 135 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations



OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 6 and Note 14 to the Condensed Consolidated Financial Statements, and Liquidity and Capital Resources analysis.



BANK REGULATORY CAPITAL

Our capital priorities are to support client growth, business investment, and maintain appropriate capital in light of economic uncertainty and the Basel III framework. We continue to improve our capital levels and ratios through retention of quarterly earnings and expect to build capital through retention of future earnings. The Company is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At June 30, 2014 and December 31, 2013, respectively, the Bank met the well-capitalized capital ratio requirements. The Company's capital levels exceeded the ratios required for BHCs. For a discussion of Basel III and the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned Regulatory Matters within this Management's Discussion and Analysis. The Federal Deposit Insurance Corporation Improvement Act (the "FDICIA") established five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution's capital tier depends on its capital levels in relation to various capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized or adequately-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities. Federal banking laws, regulations and policies also limit the Bank's ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank's total distributions to the holding company within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) the Bank is not adequately capitalized at the time. In addition, the OCC's prior approval would be required if the Bank's examination or Community Reinvestment Act ratings fall below certain levels or the Bank is notified by the OCC that it is a problem association or in troubled condition. The Bank must obtain the OCC's prior written approval to make any capital distribution until it has positive retained earnings. Any dividend declared and paid or return of capital has the effect of reducing the Bank's capital ratios. During the first quarter of 2014, the Bank declared and paid $50.0 million in return of capital to SHUSA. There were no returns of capital to SHUSA declared or paid during the second quarter of 2014. 136 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following schedule summarizes the actual capital balances of the Bank and SHUSA at June 30, 2014: BANK Well-capitalized Minimum June 30, 2014 Requirement(2) Requirement(2) Tier 1 leverage capital ratio 12.46 % 5.00 % 4.00 % Tier 1 risk-based capital ratio 13.56 % 6.00 % 4.00 % Total risk-based capital ratio 15.29 % 10.00 % 8.00 % Tier 1 common capital ratio(1) 13.56 % n/a n/a SHUSA Well-capitalized Minimum June 30, 2014 Requirement(2) Requirement(2) Tier 1 leverage capital ratio 12.45 % 5.00 % 4.00 % Tier 1 risk-based capital ratio 13.09 % 6.00 % 4.00 % Total risk-based capital ratio 15.06 % 10.00 % 8.00 % Tier 1 common capital ratio(1) 11.06 % n/a n/a (1) Ratio presented due to regulators emphasizing the Tier 1 common capital ratio in their evaluation of bank and BHC capital levels, although this metric is not provided for in bank regulations. For all BHCs undergoing its Comprehensive Capital Analysis and Review, the FRB has established a 5% minimum Tier 1 common equity ratio under stress scenarios. (2) As defined by OCC regulations.



LIQUIDITY AND CAPITAL RESOURCES

Overall

The Company continues to maintain strong bank and BHC liquidity positions. Liquidity represents the ability of the Company to obtain cost-effective funding to meet the needs of customers as well as the Company's financial obligations. Factors that impact the liquidity position of the Company include loan origination volumes, loan prepayment rates, the maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, the Company's credit ratings, investment portfolio cash flows, the maturity structure of the Company's wholesale funding, and other factors. These risks are monitored and managed centrally. The Bank's Asset/Liability Committee reviews and approves the liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements. Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would: increase its borrowing costs; require it to replace funding lost due to the downgrade, which may include the loss of customer deposits; and limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in this Management's Discussion and Analysis captioned in the Economic and Business Environment section.



Sources of Liquidity

Parent Company and Bank

The Company has several sources of funding to meet its liquidity requirements, including its core deposit base, liquid investment securities portfolio, ability to acquire large deposits, FHLB borrowings, wholesale deposit purchases, federal funds purchased, and FRB borrowings, as well as through securitizations in the ABS market and committed credit lines from third-party banks and Santander. In addition, the Company, through SCUSA, utilizes large flow agreements. The Company has the following major sources of funding to meet its liquidity requirements: dividends and returns of investments from its subsidiaries, short-term investments held by non-bank affiliates, and access to the capital markets. 137

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Institutional borrowings The Company regularly projects its funding needs under various stress scenarios and maintains contingency plans consistent with the Company's access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash at the Federal Reserve Bank, unencumbered liquid assets, and capacity to borrow at the FHLB and the Federal Reserve Bank's discount window.



Available Liquidity

As of June 30, 2014, the Bank had approximately $26.5 billion in committed liquidity from the FHLB and the FRB. Of this amount, $15.3 billion is unused and therefore provides additional borrowing capacity and liquidity for the Company. At June 30, 2014 and December 31, 2013, liquid assets (cash and cash equivalents, LHFS, and securities available for sale exclusive of securities pledged as collateral) totaled approximately $11.0 billion and $10.2 billion, respectively. These amounts represented 22.1% and 20.6% of total deposits at June 30, 2014 and December 31, 2013, respectively. In addition to liquid assets, the Company also has available liquidity from federal funds counterparties of $1.3 billion. Management believes that the Company has ample liquidity to fund its operations. Cash and cash equivalents Six-Month Period Ended June 30, 2014 2013 (in thousands) Net cash provided by operating activities 2,339,509



867,076

Net cash (used)/provided in investing activities (6,640,868 )



7,171,610

Net cash provided/(used) by financing activities 4,460,060 (6,440,402 )



Cash provided by operating activities

Net cash provided by operating activities was $2.3 billion for the six-month period ended June 30, 2014, mainly driven by $2.6 billion in proceeds from loans held for sale and $1.0 billion of provision for credit losses, offset by $2.3 billion of originations of loans held for sale, net of repayments. Net cash provided by operating activities was $0.9 billion for the six-month period ended June 30, 2013.



Cash used in investing activities

For the six months ended June 30, 2014, net cash used in investing activities was $6.6 billion, primarily due to $5.0 billion in loan purchases and activity and $3.2 billion in leased vehicle purchases.



For the six months ended June 30, 2013, net cash provided by investing activities was $7.2 billion, primarily due to $7.8 billion in proceeds from sales, pre-payments, and maturities of available-for-sale investment securities and $2.7 billion in loan purchases and activity, offset by purchases of available-for-sale investment securities of $3.4 billion.

Cash provided by financing activities

For the six months ended June 30, 2014, net cash provided by financing activities of $4.5 billion was driven primarily by an increase in proceeds from the issuance of common stock of $1.8 billion, an increase in deposits of $0.6 billion, and by an increase in net borrowing activity of $2.1 billion. Net cash used by financing activities for the six months ended June 30, 2013 was $6.4 billion, which consisted primarily of a $1.1 billion increase in deposits and net borrowing activity of $5.4 billion.



See the Condensed Consolidated Statement of Cash Flows for further details on our sources and uses of cash.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Credit Facilities



Third-Party Revolving Credit Facilities

Warehouse Lines

Warehouse lines are used to fund new originations. Each line specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. Warehouse lines are generally backed by auto retail installment contracts and, in the case of the Chrysler Capital dedicated facility described below, leases. These credit lines generally have one- or two-year commitments, staggered maturities and floating interest rates. We maintain daily funding forecasts for originations, acquisitions, and other large outflows such as tax payments to balance the desire to minimize funding costs with our liquidity needs. SCUSA's warehouse lines generally have net spread, delinquency, and net loss ratio limits. These limits are generally calculated based on the portfolio collateralizing the line; however, for two of the warehouse lines, delinquency and net loss ratios are calculated with respect to the serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased over-collateralization requirements or, in the case of limits calculated with respect to the specific portfolio underlying certain credit lines, result in an event of default under these agreements. If an event of default occurred under one of these agreements, the lender could elect to declare all amounts outstanding under the agreement immediately due and payable, enforce its interests against collateral pledged under the agreement, restrict SCUSA's ability to obtain additional borrowings under the agreement, and/or remove SCUSA as servicer. SCUSA does not currently have any ratios above limits permitted under its warehouse lines, and it has never had a warehouse line terminated due to failure to comply with any ratio or meet any covenant. A default under one of these lines could be enforced only with respect to that line. SCUSA maintains a credit facility with seven banks providing an aggregate commitment of $4.3 billion. This facility can be used for both loan and lease financing (with lease financing comprising no more than 50% of the outstanding balance upon advance). The facility requires reduced advance rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.



Repurchase Facility

SCUSA also obtains financing through an investment management agreement under which it pledges retained subordinated bonds on its securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging from 30 to 90 days.



Total Return Swap

SCUSA also obtains financing through a total return swap under which it pledges retained subordinated bonds on its own securitizations as collateral for a financing facility that includes a requirement that it settles with the counterparty at maturity an amount based on the change in the fair value of the underlying bonds during the facility's term.



Santander Credit Facilities

Santander historically has provided, and continues to provide SCUSA's business with significant funding support in the form of committed credit facilities. Through its New York branch, Santander provides SCUSA with $4.5 billion of long-term committed revolving credit facilities. The facilities offered through Santander's New York branch are structured as three and five year floating rate facilities, with current maturity dates of December 31, 2016 and 2018. Santander has the option allow SCUSA to continue to renew the terms of these facilities annually going forward, thereby maintaining three- and five-year maturities. These facilities currently permit unsecured borrowing, but generally are collateralized by retail installment contracts as well as securitization notes payables and residuals by SCUSA. Any secured balances outstanding under the facilities at the time of their maturity will amortize to match the maturities and expected cash flows of the corresponding collateral. There was an average outstanding balance of approximately $3.6 billion under the Santander Credit Facilities during the quarter ended June 30, 2014. The maximum outstanding balance during the period was $4.3 billion. 139 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Santander also has provided a $500.0 million letter of credit facility with a maturity date of December 31, 2014 that SCUSA can use as credit enhancement to support increased borrowings on certain third-party credit facilities. SCUSA has not used this facility since December 2012. Santander also serves as the counterparty for many of SCUSA's derivative financial instruments.



Secured Structured Financings

SCUSA obtains long-term funding for its receivables through securitizations in the ABS market. The ABS market provides an attractive source of funding due to its cost efficiency, a large and deep investor base, and tenors that appropriately match the cash flows of the debt to the cash flows of the underlying assets. The term structure of a securitization locks in fixed-rate funding for the life of the underlying fixed-rate assets, and the matching amortization of the assets and liabilities provides committed funding for the collateralized loans throughout their terms. Because of prevailing market rates, SCUSA did not issue ABS transactions in 2008 or 2009, but began issuing ABS again in 2010. SCUSA has been the largest issuer of retail auto ABS in the U.S. since 2011. SCUSA has issued a total of over $30 billion in retail auto ABS since 2010. SCUSA executes each securitization transaction by selling receivables to trusts ("the Trusts") that issue ABS to investors. To attain specified credit ratings for each class of bonds, these transactions have credit enhancement requirements in the form of subordination, restricted cash accounts, excess cash flow, and over-collateralization, which result in more receivables being transferred to the Trusts than the amount of ABS they issue. Excess cash flows result from the difference between the finance and interest income received from the obligors on the receivables and the interest paid to the ABS investors, net of credit losses and expenses. Initially, excess cash flows generated by the Trusts are used to pay down outstanding debt of the Trusts, increasing over collateralization until the targeted level of assets has been reached. Once the targeted level of over-collateralization is reached and maintained, excess cash flows generated by the Trusts are released to SCUSA as distributions. SCUSA also receives monthly servicing fees as servicer for the Trusts. SCUSA's securitizations each require an increase in credit enhancement levels if cumulative net losses, as defined in the documents underlying each ABS transaction, exceed a specified percentage of the pool balance. None of SCUSA's securitizations has a cumulative net loss percentage above its limit. SCUSA's on-balance sheet securitization transactions utilize bankruptcy-remote special purpose entities (SPEs) which are also variable interest entities (VIEs) that meet the requirements to be consolidated in our financial statements. Following a securitization, the finance receivables and notes payable related to the securitized retail installment contracts remain on our Condensed Consolidated Balance Sheet. We recognize finance and interest income as well as fee income on the collateralized retail installment contracts and interest expense on the ABS issued. We also record a provision for loan losses to cover probable loan losses on the retail installment contracts. While these Trusts are included in our Condensed Consolidated Financial Statements, they are separate legal entities. The finance receivables and other assets sold to the Trusts are owned by them available to satisfy the notes payable related to the securitized retail installment contracts, and are not available to SCUSA's or those of our creditors or our other subsidiaries. SCUSA has completed three securitizations in 2014 in addition to six subordinated bond transactions to fund residual interests from existing securitizations. SCUSA currently has 26 securitizations outstanding with a cumulative ABS balance of approximately $13 billion. Its securitizations generally have several classes of notes, with principal paid sequentially based on seniority and any excess spread distributed to the residual holder. SCUSA generally retains the lowest bond class and the residual interest in each securitization, and uses the proceeds from the securitization to repay borrowings outstanding under its credit facilities, originate and acquire new loans and leases, and for general corporate purposes. SCUSA generally exercises clean-up call options on its securitizations when the collateralization pool balance reaches 10% of its original balance. SCUSA periodically issues amortizing notes in private placements that are structured similarly to its public and Rule 144A securitizations, but are issued to banks and conduits. Historically, all of SCUSA's securitizations and private issuances have been collateralized by vehicle retail installment contracts and loans; however, in 2013, SCUSA issued its first amortizing notes backed by vehicle leases. As of June 30, 2014, SCUSA had private issuances of notes backed by vehicle leases totaling approximately $1.4 billion. 140 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Flow Agreements SCUSA enters into flow agreements under which loans and leases are sold on a periodic basis to provide funding for new originations. These loans are not on the balance sheet, but may provide a gain on sale and a stable stream of servicing fee income. On June 13, 2013, SCUSA entered into a flow agreement with Bank of America under which SCUSA committed to sell a contractually determined amount of eligible loans to Bank of America on a monthly basis. The amount sold monthly is up to $300 million and varies depending on the amount and credit quality of eligible current month originations and prior month sales. The agreement extends through May 31, 2018. For loans sold, we retain the servicing rights at contractually agreed upon rates. We also will receive or pay a servicer performance payment if net credit losses on the sold loans are lower or higher, respectively, than expected net credit losses at the time of sale. These servicer performance payments are limited to a percentage of principal balance sold or expected losses at time of sale and are not expected to be significant to our total servicing compensation from the flow agreement. In May 2014, SCUSA entered into a flow agreement with Citizens Bank of Pennsylvania whereby Citizens has committed to purchase up to $600 million per quarter of prime Chrysler Capital originations over the next three years. The minimum commitment is $250.0 million per quarter for the first four quarters and $400.0 million per quarter thereafter.



Off-Balance Sheet Financing

During the fourth quarter of 2013 and the first quarter of 2014, SCUSA executed a total of three Chrysler Capital-branded securitizations, all of which were issued under Rule 144A of the 1933 Securities Act. All of the notes and residual interests in these securitizations were issued to third parties, and SCUSA recorded the transactions as true sales of the retail installment contracts securitized and removed the loans sold from its balance sheet. SCUSA anticipates executing similar transactions in the future.



Uses of Liquidity

The Company uses liquidity for debt service and repayment of borrowings, as well as for funding loan commitments and satisfying deposit withdrawal requests.

Dividends and Stock Issuances

During the first six months of 2014, the Bank paid $50.0 million in return of capital to SHUSA. At June 30, 2014, the holding company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months. In February 2014, the Company issued 7.0 million shares of common stock to Santander in exchange for cash in the amount of $1.75 billion. Also in February 2014, the Company raised $750.0 million of capital by issuing 3.0 million shares of common stock to Santander in exchange for canceling debt of an equivalent amount.



In May 2014, the Company issued 84,000 shares of its common stock to Santander in exchange for cash in the amount of $21.0 million.

Following these transactions and as of June 30, 2014, the Company had 530,391,043 shares of common stock outstanding.

On May 1, 2014, SCUSA's Board of Directors declared a cash dividend of $0.15 per share, which was paid on May 30, 2014 to shareholders of record as of the close of business day May 12, 2014. 141

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CONTRACTUAL OBLIGATIONS The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and asset/liability management, to fund acquisitions, and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below. Payments Due by Period Less than Over 1 yr Over 3 yrs Over Total 1 year to 3 yrs to 5 yrs 5 yrs (in thousands) FHLB advances (1) $ 10,386,523$ 3,928,893$ 3,517,141$ 2,940,489 $ - Notes payable - revolving facilities 7,762,950 1,521,598 5,491,352 750,000 - Notes payable - secured structured financings 13,894,950 744,019 2,618,517 8,689,622 1,842,792 Other debt obligations (1) (2) 3,948,674 409,305 1,761,595 1,546,380 231,394 Junior subordinated debentures due to capital trust entities (1) (2) 248,379 161,770 86,609 - - Certificates of deposit (1) 6,970,755 4,225,350 2,620,340 124,865 200 Non-qualified pension and post-retirement benefits 68,218 6,565 13,332 13,582 34,739 Operating leases(3) 702,398 105,037 195,617 143,400 258,344 Total contractual cash obligations $ 43,982,847$ 11,102,537$ 16,304,503$ 14,208,338$ 2,367,469



(1) Includes interest on both fixed and variable rate obligations. The interest

associated with variable rate obligations is based on interest rates in

effect at June 30, 2014. The contractual amounts to be paid on variable rate

obligations are affected by changes in market interest rates. Future changes

in market interest rates could materially affect the contractual amounts to

be paid.

(2) Includes all carrying value adjustments, such as unamortized premiums and

discounts and hedge basis adjustments.

(3) Does not include future expected sublease income.

Excluded from the above table are deposits of $42.9 billion that are due on demand by customers. Additionally, $137.1 million of tax liabilities associated with unrecognized tax benefits have been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with those obligations. The Company is a party to financial instruments and other arrangements with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage its exposure to fluctuations in interest rates. See further discussion on these risks in Note 10 and Note 14 to the Condensed Consolidated Financial Statements.



ASSET AND LIABILITY MANAGEMENT

Interest Rate Risk

Interest rate risk arises primarily through the Company's traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing net interest income and the 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 securitizations/sales, and financial derivatives. 142 -------------------------------------------------------------------------------- SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES



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

of Operations 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 Federal funds rates compared with the three-month LIBOR rate. Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option 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 those net interest income simulations, and scenario and market value analyses, and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions on new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing. Further information on risk factors can be found under Part II, Item 1A Risk Factors, in the Company's Quarterly Report on Form 10-Q for the quarter-ended June 30, 2014.



Net Interest Income Simulation Analysis

The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense ("net interest income sensitivity"). This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's 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 described above. This information is used to develop proactive strategies to ensure that the Company's risk position remains within Board-approved limits so that future earnings are not significantly adversely affected by future interest rates.



The table below reflects the estimated sensitivity to the Company'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, 2014 net interest income would result Down 100 basis points (0.77 )% Up 100 basis points 1.19 % Up 200 basis points 2.35 %



Market Value of Equity Analysis

The Company also evaluates the impact of interest rate risk by utilizing market value of equity ("MVE") modeling. This analysis measures the present value of all estimated future interest income and interest expense cash flows of the Company over the estimated remaining life of the balance sheet. MVE is calculated as the difference between the market value of assets and liabilities. The MVE calculation utilizes only the current balance sheet, and therefore does not factor in any future changes in balance sheet size, balance sheet mix, yield curve relationships or product spreads, which may mitigate the impact of any interest rate changes. Management examines 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 highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company's MVE at June 30, 2014 and December 31, 2013. 143 --------------------------------------------------------------------------------

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following estimated percentage increase/(decrease) to MVE would result If interest rates changed in parallel by June 30, 2014 December 31, 2013 Down 100 basis points (2.09 )% 0.87 % Up 100 basis points (0.82 )% (2.00 )% Up 200 basis points (2.59 )% (4.53 )% 144

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations



Limitations of Interest Rate Risk Analyses

Since the assumptions used are inherently uncertain, the Company cannot predict precisely the effect of higher or lower interest rates on net interest income or MVE. 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, characteristics of new business and behavior of existing positions, and changes in market conditions and management strategies, among other factors.



Uses of Derivatives to Manage Interest Rate and Other Risks

To mitigate interest rate risk and, to a lesser extent, foreign exchange, equity and credit risks, the Company uses derivative financial instruments to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. Through the Company's capital markets and mortgage banking activities, it is subject to price risk. The Company employs various tools to measure and manage price risk in its portfolios. In addition, the Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any point in time depends on the market environment and expectations of future price and market movements, and will vary from period to period. Management uses derivative instruments to mitigate the impact of interest rate movements on the fair value of certain liabilities, assets and highly 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.



The Company enters into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments. These derivatives are designated as fair value hedges at inception.

The Company's derivative portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments. The Company typically retains the servicing rights related to residential mortgage loans that are sold. Residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 8 to the Condensed Consolidated Financial Statements. The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate. We also utilize forward contracts to manage market risk associated with certain expected investment securities sales and equity options, which manage our market risk associated with certain customer deposit products.



For additional information on foreign exchange contracts, derivatives and hedging activities, see Note 10 to the Condensed Consolidated Financial Statements.

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