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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934,
 for the fiscal year ended December 31, 2008, or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934,
 for the transition period from N/A to .
 Commission File Number 001-16581
 SOVEREIGN BANCORP, INC.
  Virginia
(State or other Jurisdiction 
of Incorporation or Organization)
    
    23-2453088
(I.R.S. Employer Identification No.)75 State Street, Boston, Massachusetts
    
    02109(Address of Principal Executive Offices)
    
    (Zip Code)
 
 Securities registered pursuant to Section 12(b) of the Act:
 Title
    
    Name of Exchange on Which RegisteredDepository Shares for Series C non-cumulative preferred stock
    
    NYSE7.75% Capital Securities (Sovereign Capital Trust V)
    
    NYSE
 Securities registered pursuant to Section 12(g) of the Act:
  þ o
 o þ
 þ o
 o
  Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



Form 10-K Cross Reference Index
 PageForward-Looking Statements
    
    
    3PART IItem 1
    
     Business
    
    
    4-7Item 1A
    
     Risk Factors
    
    
    8-10Item 1B
    
     Unresolved Staff Comments
    
    
    10Item 2
    
    
 Properties
    
    
    11Item 3
    
    
 Legal Proceedings
    
    
    11Item 4
    
     Submission of Matters to a Vote of Security Holders
    
    
    11Item 4A
    
     Executive Officers of the Registrant
    
    
    12PART IIItem 5
    
     Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
    
    
    12Item 6
    
     Selected Financial Data
    
    
    13Item 7
    
     Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14-50Item 7A
    
     Quantitative and Qualitative Disclosures About Market Risk
    
    
    50Item 8
    
     Financial Statements and Supplementary Data
    
    
    50-108Item 9
    
     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    109Item 9A
    
     Controls and Procedures
    
    
    109Item 9B
    
     Other Information
    
    
    109PART IIIItem 10
    
     Directors, Executive Officers and Corporate Governance
    
    
    109-110Item 11
    
     Executive Compensation
    
    
    111-140Item 12
    
     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    140Item 13
    
     Certain Relationships and Related Transactions, and Director Independence
    
    
    140-141Item 14
    
     Principal Accounting Fees and Services
    
    
    142PART IVItem 15
    
     Exhibits and Financial Statement Schedules
    
    
    143-144Signatures
    
    
    145
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Forward-Looking Statements
   
    
    the strength of the United States economy in general and the strength of the regional and local economies in which Sovereign conducts
operations, which may affect, among other things, the level of non-performing assets, charge-offs, and provision for credit losses;
    
    the effects of, or policies determined by the Federal Deposit Insurance Corporation, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
    
    inflation, interest rate, market and monetary fluctuations, which may, among other things reduce interest margins, impact funding sources and
affect the ability to originate and distribute financial products in the primary and secondary markets;
    
    adverse movements and volatility in debt and equity capital markets;
    
    adverse changes in the securities markets, including those related to the financial condition of significant issuers in our investment portfolio;
    
    revenue enhancement initiatives may not be successful in the marketplace or may result in unintended costs;
    
    changing market conditions may force us to alter the implementation or continuation of cost savings or revenue enhancement strategies;
    
    Sovereigns timely development of competitive new products and services in a changing environment and the acceptance of such products and
services by customers;
    
    the willingness of customers to substitute competitors products and services and vice versa;
    
    the ability of Sovereign and its third party vendors to convert and maintain Sovereigns data processing
and related systems on a timely and acceptable basis and within projected cost estimates;
    
    the impact of changes in financial services policies, laws and regulations, including laws, regulations
and policies concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and
insurance, and the application thereof by regulatory bodies and the impact of changes in and
interpretation of generally accepted accounting principles in the United States;
    
    technological changes;
    
    competitors of Sovereign may have greater financial resources and develop products and technology that
enable those competitors to compete more successfully than Sovereign;
    
    changes in consumer spending and savings habits;
    
    acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters;
    
    regulatory or judicial proceedings;
    
    changes in asset quality;
    
    the outcome of ongoing tax audits by federal, state and local income tax authorities may require
additional taxes be paid by Sovereign as compared to what has been accrued or paid as of period end.
    
    Sovereigns success in managing the risks involved in the foregoing.
   3




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PART I
 
 Item 1  Business
 General
     Subsidiaries
  Employees
  Competition
  Environmental Laws
  Supervision and Regulation
 General.
  4




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Holding Company Regulation.
   Control of Sovereign.
     Regulatory Capital Requirements.
   5




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Standards for Safety and Soundness.
 Insurance of Accounts and Regulation by the FDIC.
     Federal Restrictions on Transactions with Affiliates and Insiders.
 Restrictions on Subsidiary Savings Institution Capital Distributions.
 Qualified Thrift Lender.
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Other Loan Limitations.
   Federal Reserve Regulation.
  Federal Home Loan Bank System.
  Community Reinvestment Act.
 Other Legislation.
  Corporate Information. www.sec.gov
 7




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Item 1A  Risk Factors
  
    
    The Current Economic Downturn May Continue to Deteriorate Our Asset
Quality and Adversely Affect Our Earnings and Cash Flow.Our business faces various material risks, including credit risk and the risk that the demand
for our products will decrease. In a recession or other economic downturn, these risks would
probably become more acute. In an economic downturn, our credit risk and associated provision
for credit losses and legal expense will increase. Also, decreases in consumer confidence,
real estate values, and interest rates, usually associated with a downturn, could combine to
make the types of loans we originate less profitable and could cause elevated levels of
losses on our commercial and consumer loans. Current economic conditions may continue to
deteriorate which would likely continue to adversely impact our results.
    
    Disruptions in the Global Financial Markets have Affected, and May
Continue to Adversely Affect, Sovereigns Business and Results of
Operations.Dramatic declines in the housing market during 2008, with falling home prices and increasing
foreclosures and unemployment, have resulted in significant write-downs of asset values by
financial institutions, including government-sponsored entities and major commercial and
investment banks. These write-downs, initially of mortgage-backed securities but spreading to
credit default swaps and other derivatives, have caused many
financial institutions to seek additional capital and to merge with other financial
institutions. Disruptions in the global financial markets have also adversely affected the
corporate bond markets, debt and equity underwriting and other elements of the financial
markets. Reflecting concern about the stability of the financial markets generally and the
strength of counterparties, some lenders and institutional investors have reduced and, in
some cases, ceased to provide funding to certain borrowers, including other financial
institutions. The impact on available credit, increased volatility in the financial markets
and reduced business activity has adversely affected, and may continue to adversely affect,
Sovereigns businesses, capital, liquidity or other financial condition and results of
operations, access to credit and the trading price of Sovereign preferred stock or debt
securities.
    
    Sovereign May Experience Further Write-Downs of its Financial
Instruments and Other Losses Related to Volatile and Illiquid Market
Conditions.Market volatility, illiquid market conditions and disruptions in the credit markets have made
it extremely difficult to value certain of Sovereigns assets. Subsequent valuations, in
light of factors then prevailing, may result in significant changes in the values of these
assets in future periods. In addition, at the time of any sales of these assets, the price
Sovereign ultimately realizes will depend on the demand and liquidity in the market at that
time and may be materially lower than their current fair value. Any of these factors could
require Sovereign to take further write-downs in respect of these assets, which may have an
adverse effect on the Companys results of operations and financial condition in future
periods.
    
    Liquidity is Essential to Sovereigns Businesses, and Sovereign Relies
on External Sources, Including Government Agencies to Finance a
Significant Portion of its Operations.Adequate liquidity is essential to Sovereigns businesses. The Companys liquidity could be
materially adversely affected by factors Sovereign cannot control, such as the continued
general disruption of the financial markets or negative views about the financial services
industry in general. In addition, Sovereigns ability to raise funding could be impaired if
lenders develop a negative perception of the Companys short-term or long-term financial
prospects, or a perception that the Company is experiencing greater liquidity risk. Recent
regulatory measures, such as the FDICs temporary guarantee of the newly issued senior debt
are designed to stabilize the financial markets and the liquidity position of financial
institutions such as Sovereign. It is unclear whether, or for how long, these facilities will
be extended and what impact termination of any of these facilities could have on Sovereigns
ability to access funding in the future. Sovereigns credit ratings are also important to
its liquidity. A reduction in Sovereigns credit ratings could adversely affect its
liquidity, widen its credit spreads or otherwise increase its borrowing costs.
    
    Recently Enacted Legislation Authorizing the U.S. Government to Take
Direct Action Within the Financial Services Industry, and Other
Legislation and Regulation Currently Under Consideration, May Not
Stabilize the U.S. Financial System in the Near Term.On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into
law. In addition, on February 17, 2009, the American Recovery and Reinvestment Act of 2009
(ARRA) was signed by President Obama. The purpose of these U.S. government actions is to
stabilize and provide liquidity to the U.S. financial markets and jumpstart the U.S. economy.
The U.S. government is currently considering, and may consider in the future, additional
legislation and regulations with similar purposes. The EESA, ARRA and other governmental
programs may not have their intended impact of stabilizing, providing liquidity to or
restoring confidence in the financial markets. Further, the discontinuation and/or expiration
of these or other governmental programs could result in a worsening of current market
conditions.
    
    The Preparation of Sovereigns Financial Statements Requires the Use of Estimates That May Vary From Actual Results.The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make significant
estimates that affect the financial statements. One example of a significant critical
estimate is the level of the allowance for credit losses. Due to the inherent nature of this
estimate, Sovereign cannot provide absolute assurance that it will not significantly increase
the allowance for credit losses and/or sustain credit losses that are significantly higher
than the provided allowance.
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
    
    The Preparation of Sovereigns Tax Returns Requires the Use of
Estimates & Interpretations of Complex Tax Laws and Regulations and
Are Subject to Review By Taxing Authorities.Sovereign is subject to the income tax laws of the U.S., its states and municipalities and
certain foreign countries. These tax laws are complex and subject to different
interpretations by the taxpayer and the relevant Governmental taxing authorities. In
establishing a provision for income tax expense and filing returns, the Company must make
judgments and interpretations about the application of these inherently complex tax laws.
Actual income taxes paid may vary from estimates depending upon changes in income tax laws,
actual results of operations, and the final audit of tax returns by taxing authorities. Tax
assessments may arise several years after tax returns have been filed. Sovereign reviews its
tax balances quarterly and as new information becomes available, the balances are adjusted,
as appropriate. The Company is subject to ongoing tax examinations and assessments in various
jurisdictions. The Internal Revenue Service (the IRS) recently examined the Companys
federal income tax returns for the years 2002 through 2005. The IRS completed this review in
2008. Included in this examination cycle are two separate financing transactions with an
international bank totaling $1.2 billion. As a result of these transactions, Sovereign was
subject to foreign taxes of $154.0 million during the years 2003 through 2005 and claimed a
corresponding foreign tax credit for foreign taxes paid during those years. In 2006 and 2007,
Sovereign was subject to an additional $87.6 million and $22.5 million, respectively, of
foreign taxes related to these financing transactions and claimed a corresponding foreign tax
credit. The IRS issued a notification of adjustment disallowing the foreign tax credits
taken in 2003-2005 in the amount of $154.0 million related to
these transactions; disallowing deductions for issuance costs and
interest expense related to the transaction which would result in an
additional tax liability of $24.9 million; and assessed interest and penalties, the combined amount of which totaled approximately $71.0 million.
In addition, the IRS has commenced its audit for the years 2006 and 2007. We expect that in the future the IRS will
propose to disallow the foreign tax credits taken in 2006 and 2007 of
$87.6 million and $22.5 million, respectively; disallow deductions
for issuance costs and interest expense which would result in an
additional tax liability of $37.1 million; and to assess interest and penalties. Sovereign
expects that it will need to litigate this matter with the IRS. Sovereign continues to
believe that it is entitled to claim these foreign tax credits and deductions and also
believes that its recorded tax reserves for this position of $58.3 million adequately
provides for any potential exposure to the IRS related to this item and other tax
assessments. However, as the Company continues to go through the IRS administrative process,
and if necessary litigation, we will continue to evaluate the appropriate tax reserve levels
for this position and any changes made to the tax reserves may materially affect Sovereigns
income tax provision, net income and regulatory capital in future periods.
    
    Changing Interest Rates May Adversely Affect Our Profits.To be profitable, we must earn more money from interest on loans and investments and
fee-based revenues than the interest we pay to our depositors and creditors and the amount
necessary to cover the cost of our operations. Rising interest rates may hurt our income
because they may reduce the demand for loans and the value of our investment securities and
our loans, and increase the amount that we must pay to attract deposits and borrow funds. If
interest rates decrease, our net interest income could be negatively affected if interest
earned on interest-earning assets, such as loans, mortgage-related securities, and other
investment securities, decreases more quickly than interest paid on interest-bearing
liabilities, such as deposits and borrowings. This would cause our net interest income to go
down. In addition, if interest rates decline, our loans and investments may prepay earlier
than expected, which may also lower our income. Interest rates do and will continue to
fluctuate, and we cannot predict future Federal Reserve Board actions or other factors that
will cause rates to change. If the yield curve steepens or flattens, it could impact our net
interest income in ways management may not accurately predict.
    
    We Experience Intense Competition for Loans and Deposits.Competition among financial institutions in attracting and retaining deposits and making
loans is intense. Our most direct competition for deposits has come from commercial banks,
savings and loan associations and credit unions doing business in our areas of operation, as
well as from nonbanking sources, such as money market mutual funds and corporate and
government debt securities. Competition for loans comes primarily from commercial banks,
savings and loan associations, consumer finance companies, insurance companies and other
institutional lenders. We compete primarily on the basis of products offered, customer
service and price. A number of institutions with which we compete have greater assets and
capital than we do and, thus, may have a competitive advantage.
    
    We Are Subject to Substantial Regulation Which Could Adversely Affect Our Business and Operations.As a financial institution, we are subject to extensive regulation, which materially affects
our business. Statutes, regulations and policies to which we and Sovereign Bank are subject
may be changed at any time, and the interpretation and the application of those laws and
regulations by our regulators is also subject to change. There can be no assurance that
future changes in regulations or in their interpretation or application will not adversely
affect us.The regulatory agencies having jurisdiction over banks and thrifts have under consideration a
number of possible rulemaking initiatives which impact bank and thrift and bank and thrift
holding company capital requirements. Adoption of one or more of these proposed rules could
have an adverse effect on us and Sovereign Bank.Existing federal regulations limit our ability to increase our commercial loans. We are
required to maintain 65% of our assets in residential mortgage loans and certain other loans,
including small business loans. We also cannot have more than 20% of our total assets in
commercial loans that are not secured by real estate, however, only 10% can be large
commercial loans not secured by real estate, more than 10% in small business loans, or more
than four times our risk based capital in commercial real estate loans. A small business loan
is one with an original amount of $2 million or less, and a large commercial loan is a loan
with an original loan amount of more than $2 million. Our existing strategy is to focus loan
growth on commercial loans which generally have higher yields and profitability. We may be
limited in the amount of commercial loan growth that we can achieve based on the above
regulations.
    
    Changes in Accounting Standards Could Impact Reported Earnings.The accounting standard setters, including the FASB, SEC and other regulatory bodies,
periodically change the financial accounting and reporting standards that govern the
preparation of Sovereigns consolidated financial statements. These changes can be hard to
predict and can materially impact how it records and reports its financial condition and
results of operations. In some cases, Sovereign could be required to apply a new or revised
standard retroactively, resulting in the restatement of prior period financial statements.
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
    
    We Rely on Third Parties for Important Products and Services.Third party vendors provide key components of our business infrastructure such as loan and
deposit servicing systems, internet connections and network access. Any problems caused by
these third parties, including as a result of their not providing us their services for any
reason or their performing their services poorly, could adversely affect our ability to
deliver products and services to our customers and otherwise to conduct our business.
Replacing these third party vendors could also entail significant delays and expense.
    
    Our Framework for Managing Risks May Not be Effective in Mitigating Risk and Loss to Our Company.Our risk management framework is made up of various processes and strategies to manage our
risk exposure. Types of risks to which we are subject include liquidity risk, credit risk,
market risk, interest rate risk, operational risk, legal risk, compliance risk, reputation
risk and fiduciary risk, among others. Our framework to manage risk, including the
frameworks underlying assumptions, may not be effective under all conditions and
circumstances. If our risk management framework proves ineffective, we could suffer
unexpected losses and could be materially adversely affected.
    
    Our Disclosure Controls and Procedures May Not Prevent or Detect All Errors or Acts of Fraud.Our disclosure controls and procedures are designed to reasonably assure that information
required to be disclosed by us in reports we file or submit under the Exchange Act is
accumulated and communicated to management, and recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. Any disclosure controls and
procedures or internal controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.These inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or
more people or by any unauthorized override of the controls. Accordingly, because of the
inherent limitations in our control system, misstatements due to error or fraud may occur and
not be detected.
    
    Integration Risks Exist Related to the Acquisition of the Company by Santander.On January 30, 2009, Sovereign was acquired by Santander. Sovereign may not be integrated
successfully into the existing businesses of Santander or the integration may be more
difficult, time-consuming or costly than expected. The combined company may not realize, to
the extent or at the time we expect, revenue synergies and cost savings from the transaction.
Deposit attrition, operating costs, customer losses and business disruptions following the
transaction, including difficulties in maintaining relationships with employees, could be
greater than expected.
 
 Item 1B Unresolved Staff Comments
  10




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Item 2  Properties
           
 Item 3  Legal Proceedings
      
 Item 4  Submission of Matters to a Vote of Security Holders
  11




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Item 4A  Executive Officers of the Registrant
      
 PART II
 
 Item 5  Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    Average
    
    Total Number of
    
    Maximum Number ofTotal
    
    Price
    
    Shares Purchased as
    
    Shares that may beNumber of
    
    Paid
    
    Part of Publicly
    
    Purchased UnderShares
    
    Per
    
    Announced Plans or
    
    the Plans orPeriod
    
    Purchased
    
    Share
    
    Programs (1)
    
    Programs (1)10/1/08 through 10/31/08
    
    
    704
    
    
    $
    7.46
    
    
    Not Applicable
    
    
    19,500,00011/1/08 through 11/30/08
    
    
    169
    
    
    $
    4.31
    
    
    Not Applicable
    
    
    19,500,00012/1/08 through 12/31/08
    
    
    720
    
    
    $
    2.70
    
    
    Not Applicable
    
    
    19,500,000
 
 (1)
    
    Sovereign had three stock repurchase programs in effect that allowed the Company to repurchase
up to 40.5 million shares of Company common stock as of December 31, 2008. Twenty one million
shares were purchased under these repurchase programs as of December 31, 2008. All of Sovereigns
stock repurchase programs have no prescribed time limit in which to fill the authorized repurchase
amount. 12




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Item 6  Selected Financial Data
 SELECTED FINANCIAL DATAAT OR FOR THE YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands, except per share data)Balance Sheet DataTotal assets
    
    $
    77,093,668
    
    
    $
    84,746,396
    
    
    $
    89,641,849
    
    
    $
    63,678,726
    
    
    $
    54,489,026Loans held for investment, net of allowance
    
    
    54,300,618
    
    
    
    56,522,575
    
    
    
    54,505,645
    
    
    
    43,072,670
    
    
    
    36,102,598Loans held for sale(1)
    
    
    327,332
    
    
    
    547,760
    
    
    
    7,611,921
    
    
    
    311,578
    
    
    
    137,478Investment securities
    
    
    10,020,110
    
    
    
    15,142,392
    
    
    
    14,877,640
    
    
    
    12,557,328
    
    
    
    11,546,877Deposits and other customer accounts
    
    
    48,438,573
    
    
    
    49,915,905
    
    
    
    52,384,554
    
    
    
    37,977,706
    
    
    
    32,555,518Borrowings and other debt obligations
    
    
    20,816,224
    
    
    
    26,126,082
    
    
    
    26,849,717
    
    
    
    18,720,897
    
    
    
    16,140,128Stockholders equity
    
    $
    5,596,714
    
    
    $
    6,992,325
    
    
    $
    8,644,399
    
    
    $
    5,810,699
    
    
    $
    4,988,372Summary Statement of OperationsTotal interest income
    
    $
    3,923,164
    
    
    $
    4,656,256
    
    
    $
    4,326,404
    
    
    $
    2,962,587
    
    
    $
    2,255,917Total interest expense
    
    
    2,019,853
    
    
    
    2,792,234
    
    
    
    2,504,856
    
    
    
    1,330,498
    
    
    
    819,327Net interest income
    
    
    1,903,311
    
    
    
    1,864,022
    
    
    
    1,821,548
    
    
    
    1,632,089
    
    
    
    1,436,590Provision for credit losses(1) (2)
    
    
    911,000
    
    
    
    407,692
    
    
    
    484,461
    
    
    
    90,000
    
    
    
    127,000Net interest income after provision for credit
losses(5)
    
    
    992,311
    
    
    
    1,456,330
    
    
    
    1,337,087
    
    
    
    1,542,089
    
    
    
    1,309,590Total non-interest income(1) (2)
    
    
    (818,743
    )
    
    
    354,396
    
    
    
    285,574
    
    
    
    602,664
    
    
    
    450,525General and administrative expenses
    
    
    1,541,409
    
    
    
    1,345,838
    
    
    
    1,289,989
    
    
    
    1,089,204
    
    
    
    942,661Other expenses(2) (3)
    
    
    265,793
    
    
    
    1,874,600
    
    
    
    313,541
    
    
    
    163,429
    
    
    
    236,232(Loss)/Income before income taxes
    
    
    (1,633,634
    )
    
    
    (1,409,712
    )
    
    
    19,131
    
    
    
    892,120
    
    
    
    581,222Income tax provision (benefit)(9)
    
    
    723,576
    
    
    
    (60,450
    )
    
    
    (117,780
    )
    
    
    215,960
    
    
    
    127,670Net (Loss)/Income
    
    $
    (2,357,210
    )
    
    $
    (1,349,262
    )
    
    $
    136,911
    
    
    $
    676,160
    
    
    $
    453,552Share DataCommon shares outstanding at end of period (in
thousands)
    
    
    663,946
    
    
    
    481,404
    
    
    
    473,755
    
    
    
    358,018
    
    
    
    345,775Basic (loss)/earnings per share
    
    $
    (3.98
    )
    
    $
    (2.85
    )
    
    $
    0.30
    
    
    $
    1.77
    
    
    $
    1.34Diluted (loss)/earnings per share
    
    $
    (3.98
    )
    
    $
    (2.85
    )
    
    $
    0.30
    
    
    $
    1.69
    
    
    $
    1.29Common share price at end of period
    
    $
    2.98
    
    
    $
    11.40
    
    
    $
    25.39
    
    
    $
    20.59
    
    
    $
    21.48Dividends declared per common share
    
    $
    
    
    
    $
    .320
    
    
    $
    .300
    
    
    $
    .170
    
    
    $
    .115Selected Financial RatiosBook value per common share(4)
    
    $
    8.14
    
    
    $
    14.12
    
    
    $
    17.83
    
    
    $
    15.46
    
    
    $
    13.74Common dividend payout ratio(5)
    
    
    N/A
    
    
    
    N/A
    
    
    
    92.11
    %
    
    
    9.02
    %
    
    
    8.21
    %Return on average assets(6)
    
    
    (2.99
    )%
    
    
    (1.62
    )%
    
    
    0.17
    %
    
    
    1.11
    %
    
    
    .90
    %Return on average equity(7)
    
    
    (31.27
    )%
    
    
    (15.40
    )%
    
    
    1.82
    %
    
    
    11.92
    %
    
    
    10.74
    %Average equity to average assets(8)
    
    
    9.55
    %
    
    
    10.52
    %
    
    
    9.46
    %
    
    
    9.34
    %
    
    
    8.36
    %
 
 (1)
    
    Our provisions for credit losses in 2008 and 2007 were negatively impacted by the deterioration in the credit quality of our loan portfolios which was impacted by the
weakening of the United States economy as well as declines in residential real estate prices. See additional discussion in Managements Discussion and Analysis.
Non-interest income for 2008 includes a $602 million loss on the sale of our CDO portfolio and a $575 million other-than-temporary impairment charge on FNMA and FHLMC
preferred stock and an other-than-temporary impairment charge of $308 million on certain non-agency mortgage backed securities. Non-interest income for 2007 includes a
pretax other-than-temporary impairment charge of $180.5 million on FNMA and FHLMC preferred stock.(2)
    
    In connection with a strategic decision made in the fourth quarter of 2006, management decided to take several steps to improve the profitability and capital position
of the Company. The Company decided to sell certain loans including $2.9 billion of low yielding residential real estate and $4.3 billion of correspondent home equity
loans whose credit quality had deteriorated significantly in 2006. The proceeds from these sales were utilized to reduce FHLB borrowings and brokered certificate of
deposits. In 2006, we recorded charges of $296 million through the provision for credit losses related to the correspondent home equity loan sale and recorded a $28.2
million reduction in mortgage banking revenues as a result of re-classifying these loans to held for sale at December 31, 2006 and carrying the loans at their market
value which was less than cost. In the first quarter of 2007, Sovereign recorded and additional charge of $119.9 million on our correspondent home equity loan
portfolio. See additional discussion in Managements Discussion and Analysis. Also in the fourth quarter of 2006, several members of executive management resigned from
the Company and approximately 360 employees were notified that their positions were being eliminated. In 2006, Sovereign recorded severance charges of $63.9 million
related to these events which was recorded in other expenses. Finally, Sovereign sold approximately $1.5 billion of low yielding investment securities in connection
with the restructuring plan. The proceeds from this sale were reinvested in higher yielding securities as they were needed for collateral on certain of our debt and
deposit obligations. However, in 2006, we recorded a pre-tax loss of $43 million in connection with this sale which was recorded in non-interest income. Sovereign also
recorded investment securities charges of $305.8 million during the second quarter of 2006 which was recorded in non-interest income. See Managements Discussion and
Analysis and Footnotes 6, 7 and 28 to the Consolidated Financial Statements for further discussion.(3)
    
    2008 results include an impairment charge of $95 million on an equity method investment. The impairment was caused by a decline in 2008 earnings compared to prior
years from this investment as well as the expectation that future results will be significantly impacted by the current recessionary environment. 2007 results include
a $1.58 billion goodwill impairment charge related to the Companys Metro New York and Shared Services Consumer reporting units. See Managements Discussion and
Analysis and Footnote 4 to the Consolidated Financial Statements for further discussion.(4)
    
    Book value per share is calculated using stockholders equity divided by common shares outstanding at end of such period.(5)
    
    Common dividend payout ratio is calculated by dividing total common dividends paid by net income for the period. The ratios for 2008 and 2007 are not applicable due to the net
losses recorded during these time periods.(6)
    
    Return on average assets is calculated by dividing net income by the average balance of total assets for the year.(7)
    
    Return on average equity is calculated by dividing net income by the average balance of stockholders equity for the year.(8)
    
    Average equity to average assets is calculated by dividing the average balance of stockholders equity for the year by the average balance of total assets for the year.(9)
    
    2008 results were negatively impacted by the establishment of a $1.43 billion valuation allowance against deferred tax assets. Given that Sovereign has recorded
significant losses in recent periods and due to the challenging economic conditions anticipated in 2009, the Company concluded that it was more likely than not that
the majority of our deferred tax assets would not be realized in future periods on a stand alone basis. This conclusion was made without regards to the anticipated
benefits that our pending transaction with Santander will have on the company. 13




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##### Table of Contents



Managements Discussion and Analysis
 
 Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A)
 EXECUTIVE SUMMARY
      Market Conditions and Credit
   14




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##### Table of Contents



RECENT INDUSTRY CONSOLIDATION IN OUR GEOGRAPHIC FOOTPRINT
   15




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##### Table of Contents



CURRENT INTEREST RATE ENVIRONMENT
  CREDIT RISK ENVIRONMENT
       16




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##### Table of Contents



RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 YEAR ENDED DECEMBER 31,(Dollars in thousands, except per share data)
    
    2008
    
    2007Net interest income
    
    $
    1,903,311
    
    
    $
    1,864,022Provision for credit losses
    
    
    911,000
    
    
    
    407,692Total non-interest income
    
    
    (818,743
    )
    
    
    354,396General and administrative expenses
    
    
    1,541,409
    
    
    
    1,345,838Other expenses
    
    
    265,793
    
    
    
    1,874,600Net (loss)/income
    
    $
    (2,357,210
    )
    
    $
    (1,349,262
    )Basic (loss)/earnings per share
    
    $
    (3.98
    )
    
    $
    (2.85
    )Diluted (loss)/earnings per share
    
    $
    (3.98
    )
    
    $
    (2.85
    )
  
    
    Net interest income increased 2.1%
during 2008 due to an expansion in net
interest margin to 2.91% from 2.73% a
year ago, partially offset by a $3.3
billion decline in earning assets.
    
    The increase in provision for credit
losses in 2008 is related to the
previously mentioned deterioration in
our loan portfolios due to the current
economic environment.
    
    Included in non-interest income:
 (1)
    
    Net losses on investment securities of $1.5 billion and
$176.4 million in 2008 and 2007, respectively. Our 2008 and
2007 results included other-than-temporary impairment charges
of $575.3 million and $180.5 million, respectively, on FNMA
and FHLMC preferred stock. Net losses on investment
securities in 2008 also included a $602.3 million loss on the
sale of our CDO portfolio and a $308 million
other-than-temporary impairment charge on non-agency mortgage
backed securities. See Note 6 for additional details.(2)
    
    An increase in capital markets revenues of $43.1 million
due to charges of $46.9 million related to customers who
defaulted on repurchase agreements and other financing
obligations during 2007.(3)
    
    An increase in mortgage banking revenues in 2008 of
$54.6 million due to a $119.9 million lower of cost or market
adjustment related to the previously mentioned correspondent
home equity loan transactions in the first quarter of 2007.
Mortgage banking revenues included a $47.3 million
residential MSR impairment in 2008 due to increased
prepayment speed assumptions due to lower market interest
rates.
 
    
    Increases in general and administrative
expenses in 2008 were due primarily to
increased cash based compensation of
$87.9 million, which included severance
charges of $11.1 million and a
reduction in workforce severance
charges of $15.8 million. REO and loan
expenses also increased $17.6 million
as a result of deteriorating credit
conditions. Marketing expense increased
$22.9 million due to the Customer First
initiative during 2008 as well as
advertising campaigns incurred in the
fourth quarter of 2008 to reclaim
deposits lost at the end of the third
quarter and related to the Santander
transaction. Additionally, deposit
insurance premiums increased $28.5
million due to FDIC regulations to
implement the Reform Act.
    
    Other expenses have decreased due primarily to non-deductible
goodwill impairment charges of $943 million in our Metro New
York reporting unit and $634 million in our Shared Services
Consumer reporting unit in 2007. See Note 4 for additional
details on this charge. Sovereign also recorded restructuring
and ESOP termination charges of $102.1 million in 2007. 2008
results included an impairment charge of $95 million on our
equity method investments. See Note 1 for details.
    
    Sovereign recorded an income tax expense of $723.6 million in
2008 compared to a benefit of $60.5 million in 2007. As
previously discussed 2008 results included a valuation
allowance of $1.43 billion due to the conclusion that it was
more likely than not that our deferred tax assets were not
realizable on a stand alone basis. 2007 tax results were
significantly impacted by the aforementioned significant
charges which magnified the impact of our favorable permanent
tax-free items. See a later section of the MD&A for further
discussion.
 17




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Net Interest Income.
     18




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##### Table of Contents



Table 1: Net Interest Margin
 YEAR
          ENDED DECEMBER 31,2008
        
        
        2007
        
        
        2006Average
        
        
        
        
        
        
        Yield/
        
        
        Average
        
        
        
        
        
        
        Yield/
        
        
        Average
        
        
        
        
        
        
        Yield/Balance
        
        
        Interest
        
        
        Rate
        
        
        Balance
        
        
        Interest
        
        
        Rate
        
        
        Balance
        
        
        Interest
        
        
        RateInterest-earning assets:Interest-earning deposits
        
        $
        256,268
        
        
        $
        4,285
        
        
        
        1.67
        %
        
        $
        307,596
        
        
        $
        16,562
        
        
        
        5.38
        %
        
        $
        285,382
        
        
        $
        13,897
        
        
        
        4.87
        %Investment securities(1)Available for sale
        
        
        10,498,218
        
        
        
        621,906
        
        
        
        5.92
        
        
        
        12,971,273
        
        
        
        804,025
        
        
        
        6.20
        
        
        
        11,217,296
        
        
        
        658,966
        
        
        
        5.87Held to maturity
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        2,248,565
        
        
        
        125,886
        
        
        
        5.60Other
        
        
        930,926
        
        
        
        23,786
        
        
        
        2.56
        
        
        
        901,197
        
        
        
        51,645
        
        
        
        5.73
        
        
        
        849,040
        
        
        
        51,414
        
        
        
        6.06Total investments
        
        
        11,685,412
        
        
        
        649,977
        
        
        
        5.56
        
        
        
        14,180,066
        
        
        
        872,232
        
        
        
        6.15
        
        
        
        14,600,283
        
        
        
        850,163
        
        
        
        5.82Loans:Commercial loan
        
        
        27,501,518
        
        
        
        1,560,936
        
        
        
        5.68
        
        
        
        25,422,607
        
        
        
        1,823,144
        
        
        
        7.17
        
        
        
        20,833,022
        
        
        
        1,489,484
        
        
        
        7.15Multi-family
        
        
        4,628,080
        
        
        
        275,504
        
        
        
        5.95
        
        
        
        4,657,978
        
        
        
        296,126
        
        
        
        6.36
        
        
        
        3,612,737
        
        
        
        224,290
        
        
        
        6.21Consumer:Residential mortgage
        
        
        12,234,402
        
        
        
        687,691
        
        
        
        5.62
        
        
        
        14,525,467
        
        
        
        825,685
        
        
        
        5.68
        
        
        
        15,770,676
        
        
        
        888,546
        
        
        
        5.63Home equity loans and
            lines of credit
        
        
        6,509,952
        
        
        
        367,645
        
        
        
        5.65
        
        
        
        6,868,727
        
        
        
        469,760
        
        
        
        6.84
        
        
        
        10,119,375
        
        
        
        654,760
        
        
        
        6.47Total consumer loans
            secured by real estate
        
        
        18,744,354
        
        
        
        1,055,336
        
        
        
        5.63
        
        
        
        21,394,194
        
        
        
        1,295,445
        
        
        
        6.06
        
        
        
        25,890,051
        
        
        
        1,543,306
        
        
        
        5.96Auto loans
        
        
        6,308,417
        
        
        
        440,309
        
        
        
        6.98
        
        
        
        6,187,487
        
        
        
        433,172
        
        
        
        7.00
        
        
        
        4,457,932
        
        
        
        266,806
        
        
        
        5.98Other
        
        
        303,131
        
        
        
        23,136
        
        
        
        7.63
        
        
        
        360,486
        
        
        
        31,248
        
        
        
        8.67
        
        
        
        452,029
        
        
        
        37,201
        
        
        
        8.23Total Consumer
        
        
        25,355,902
        
        
        
        1,518,781
        
        
        
        5.99
        
        
        
        27,942,167
        
        
        
        1,759,865
        
        
        
        6.30
        
        
        
        30,800,012
        
        
        
        1,847,313
        
        
        
        6.00Total loans
        
        
        57,485,500
        
        
        
        3,355,221
        
        
        
        5.84
        
        
        
        58,022,752
        
        
        
        3,879,135
        
        
        
        6.69
        
        
        
        55,245,771
        
        
        
        3,561,087
        
        
        
        6.45Allowance for loan
            losses
        
        
        (836,217
        )
        
        
        
        
        
        
        
        
        
        
        (533,263
        )
        
        
        
        
        
        
        
        
        
        
        (489,775
        )
        
        
        
        
        
        
        Net loans(1)(2)
        
        
        56,649,283
        
        
        
        3,355,221
        
        
        
        5.92
        
        
        
        57,489,489
        
        
        
        3,879,135
        
        
        
        6.75
        
        
        
        54,755,996
        
        
        
        3,561,087
        
        
        
        6.50Total interest-earning
            assets
        
        
        68,334,695
        
        
        
        4,005,198
        
        
        
        5.86
        
        
        
        71,669,555
        
        
        
        4,751,367
        
        
        
        6.63
        
        
        
        69,356,279
        
        
        
        4,411,250
        
        
        
        6.36Non-interest-earning
            assets
        
        
        10,347,204
        
        
        
        
        
        
        
        
        
        
        
        11,646,477
        
        
        
        
        
        
        
        
        
        
        
        10,139,116
        
        
        
        
        
        
        
        Total assets
        
        $
        78,681,899
        
        
        $
        4,005,198
        
        
        
        5.09
        %
        
        $
        83,316,032
        
        
        $
        4,751,367
        
        
        
        5.70
        %
        
        $
        79,495,395
        
        
        $
        4,411,250
        
        
        
        5.55
        %Interest-bearing liabilities:Deposits:Retail and commercial
            deposits
        
        $
        31,253,414
        
        
        $
        744,856
        
        
        
        2.38
        %
        
        $
        31,228,313
        
        
        $
        968,509
        
        
        
        3.10
        %
        
        $
        28,083,633
        
        
        $
        711,033
        
        
        
        2.53
        %Wholesale deposits
        
        
        3,529,553
        
        
        
        89,404
        
        
        
        2.53
        
        
        
        6,751,606
        
        
        
        357,603
        
        
        
        5.29
        
        
        
        7,809,654
        
        
        
        404,648
        
        
        
        5.18Government deposits
        
        
        3,181,711
        
        
        
        81,288
        
        
        
        2.55
        
        
        
        3,826,924
        
        
        
        193,066
        
        
        
        5.05
        
        
        
        3,632,773
        
        
        
        182,046
        
        
        
        5.01Customer repurchase
            agreements
        
        
        2,346,152
        
        
        
        36,040
        
        
        
        1.54
        
        
        
        2,545,304
        
        
        
        108,137
        
        
        
        4.25
        
        
        
        1,639,453
        
        
        
        74,470
        
        
        
        4.54Total deposits
        
        
        40,310,830
        
        
        
        951,588
        
        
        
        2.36
        
        
        
        44,352,147
        
        
        
        1,627,315
        
        
        
        3.67
        
        
        
        41,165,513
        
        
        
        1,372,197
        
        
        
        3.33Total borrowings and
            other debt obligations
        
        
        22,740,672
        
        
        
        1,068,265
        
        
        
        4.70
        
        
        
        22,247,100
        
        
        
        1,164,919
        
        
        
        5.24
        
        
        
        23,377,692
        
        
        
        1,132,659
        
        
        
        4.85Total interest bearing
            liabilities
        
        
        63,051,502
        
        
        
        2,019,853
        
        
        
        3.20
        
        
        
        66,599,247
        
        
        
        2,792,234
        
        
        
        4.19
        
        
        
        64,543,205
        
        
        
        2,504,856
        
        
        
        3.88Non-interest-bearing
            DDA
        
        
        6,548,894
        
        
        
        
        
        
        
        
        
        
        
        6,386,359
        
        
        
        
        
        
        
        
        
        
        
        6,020,184
        
        
        
        
        
        
        
        Non-interest-bearing
            liabilities
        
        
        1,563,748
        
        
        
        
        
        
        
        
        
        
        
        1,568,869
        
        
        
        
        
        
        
        
        
        
        
        1,412,368
        
        
        
        
        
        
        
        Total liabilities
        
        
        71,164,144
        
        
        
        2,019,853
        
        
        
        2.84
        
        
        
        74,554,475
        
        
        
        2,792,234
        
        
        
        3.75
        
        
        
        71,975,757
        
        
        
        2,504,856
        
        
        
        3.48Stockholders
            equity
        
        
        7,517,755
        
        
        
        
        
        
        
        
        
        
        
        8,761,557
        
        
        
        
        
        
        
        
        
        
        
        7,519,638
        
        
        
        
        
        
        
        Total liabilities and
            stockholders equity
        
        $
        78,681,899
        
        
        $
        2,019,853
        
        
        
        2.57
        %
        
        $
        83,316,032
        
        
        $
        2,792,234
        
        
        
        3.35
        %
        
        $
        79,495,395
        
        
        $
        2,504,856
        
        
        
        3.15
        %Net interest spread(3)
        
        
        
        
        
        
        
        
        
        
        2.66
        %
        
        
        
        
        
        
        
        
        
        
        2.44
        %
        
        
        
        
        
        
        
        
        
        
        2.48
        %Taxable equivalent
            interest income/net interest margin
        
        
        
        
        
        
        1,985,345
        
        
        
        2.91
        %
        
        
        
        
        
        
        1,959,133
        
        
        
        2.73
        %
        
        
        
        
        
        
        1,906,394
        
        
        
        2.75
        %Tax equivalent basis
            adjustment
        
        
        
        
        
        
        (82,032
        )
        
        
        
        
        
        
        
        
        
        
        (95,111
        )
        
        
        
        
        
        
        
        
        
        
        (84,846
        )Net interest income
        
        
        
        
        
        $
        1,903,311
        
        
        
        
        
        
        
        
        
        
        $
        1,864,022
        
        
        
        
        
        
        
        
        
        
        $
        1,821,548Ratio of interest-earning
            assets to interest-bearing liabilities
        
        
        
        
        
        
        
        
        
        
        1.08
        x
        
        
        
        
        
        
        
        
        
        
        1.08
        x
        
        
        
        
        
        
        
        
        
        
        1.07
        x
 
 (1)
    
    The average balance of our non-taxable investment securities for the year-ended December 31, 2008, 2007 and
2006 were $2.5 billion, $3.1 billion and $2.9 billion, respectively. Tax equivalent adjustments to interest
on investment securities available for sale for the years ended December 31, 2008, 2007 and 2006 were $66.0
million, $80.5 million and $75.4 million, respectively. Tax equivalent adjustments to loans for the years
ended December 31, 2008, 2007 and 2006, were $16.0 million, $14.7 million and $9.5 million, respectively. Tax
equivalent interest income is based upon an effective tax rate of 35%.(2)
    
    Amortization of premiums and discounts on purchased loans and amortization of deferred loan fees, net of
origination costs, of $2.8 million, $14.1 million and $97.6 million for the years ended December 31, 2008,
2007 and 2006, respectively, are included in interest income. Average loan balances include non-accrual loans
and loans held for sale.(3)
    
    Represents the difference between the yield on total earning assets and the cost of total funding liabilities. 19




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##### Table of Contents



Table 2: Volume/Rate Analysis
 YEAR ENDED DECEMBER 31,2008 VS. 2007
    
    
    2007 VS. 2006INCREASE/(DECREASE)
    
    
    INCREASE/(DECREASE)Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest-earning assets:Interest-earning deposits
    
    $
    (2,392
    )
    
    $
    (9,885
    )
    
    $
    (12,277
    )
    
    $
    1,130
    
    
    $
    1,535
    
    
    $
    2,665Investment securities available for sale
    
    
    (147,782
    )
    
    
    (34,337
    )
    
    
    (182,119
    )
    
    
    107,239
    
    
    
    37,820
    
    
    
    145,059Investment securities held to maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,943
    )
    
    
    (62,943
    )
    
    
    (125,886
    )Investment securities other
    
    
    1,651
    
    
    
    (29,510
    )
    
    
    (27,859
    )
    
    
    3,068
    
    
    
    (2,837
    )
    
    
    231Net loans(1)
    
    
    (55,954
    )
    
    
    (467,960
    )
    
    
    (523,914
    )
    
    
    182,149
    
    
    
    135,899
    
    
    
    318,048Total interest-earning assets
    
    
    
    
    
    
    
    
    
    
    (746,169
    )
    
    
    
    
    
    
    
    
    
    
    340,117Interest-bearing liabilities:Deposits
    
    
    (137,518
    )
    
    
    (538,209
    )
    
    
    (675,727
    )
    
    
    110,871
    
    
    
    144,246
    
    
    
    255,117Borrowings
    
    
    25,373
    
    
    
    (122,027
    )
    
    
    (96,654
    )
    
    
    (56,435
    )
    
    
    88,696
    
    
    
    32,261Total interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    (772,381
    )
    
    
    
    
    
    
    
    
    
    
    287,378Net change in net interest income
    
    $
    (92,332
    )
    
    $
    118,544
    
    
    $
    26,212
    
    
    $
    176,207
    
    
    $
    (123,468
    )
    
    $
    52,739
 
 (1)
    
    Includes non-accrual loans and loans held for sale. Provision for Credit Losses.
     20




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Table 3: Reconciliation of the Allowance for Credit Losses
 2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Allowance for loan losses, beginning
of period
    
    $
    709,444
    
    
    $
    471,030
    
    
    $
    419,599
    
    
    $
    391,003
    
    
    $
    315,790Allowance acquired in acquisitions
    
    
    
    
    
    
    
    
    
    
    97,824
    
    
    
    28,778
    
    
    
    64,105Provision for loan losses (2)
    
    
    874,140
    
    
    
    394,646
    
    
    
    487,418
    
    
    
    89,501
    
    
    
    121,391Allowance released in connection
with loan sales or securitizations
    
    
    (3,745
    )
    
    
    (12,409
    )
    
    
    (4,728
    )
    
    
    (8,010
    )
    
    
    Charge-offs:Commercial
    
    
    238,470
    
    
    
    65,670
    
    
    
    56,916
    
    
    
    40,935
    
    
    
    77,499Consumer secured by real estate
    
    
    75,978
    
    
    
    26,809
    
    
    
    463,902
    
    
    
    24,125
    
    
    
    12,219Consumer not secured by real estate
    
    
    277,266
    
    
    
    126,385
    
    
    
    73,958
    
    
    
    71,906
    
    
    
    63,530Total charge-offs (1)
    
    
    591,714
    
    
    
    218,864
    
    
    
    594,776
    
    
    
    136,966
    
    
    
    153,248Recoveries:Commercial
    
    
    13,378
    
    
    
    15,187
    
    
    
    14,097
    
    
    
    13,100
    
    
    
    12,825Consumer secured by real estate
    
    
    9,027
    
    
    
    11,193
    
    
    
    9,933
    
    
    
    7,085
    
    
    
    5,395Consumer not secured by real estate
    
    
    92,223
    
    
    
    48,661
    
    
    
    41,663
    
    
    
    35,108
    
    
    
    24,745Total recoveries
    
    
    114,628
    
    
    
    75,041
    
    
    
    65,693
    
    
    
    55,293
    
    
    
    42,965Charge-offs, net of recoveries
    
    
    477,086
    
    
    
    143,823
    
    
    
    529,083
    
    
    
    81,673
    
    
    
    110,283Allowance for loan losses, end of
period
    
    $
    1,102,753
    
    
    $
    709,444
    
    
    $
    471,030
    
    
    $
    419,599
    
    
    $
    391,003Reserve for unfunded lending
commitments, beginning of period
    
    
    28,301
    
    
    
    15,255
    
    
    
    18,212
    
    
    
    17,713
    
    
    
    12,104Provision for unfunded lending
commitments (2)
    
    
    36,860
    
    
    
    13,046
    
    
    
    (2,957
    )
    
    
    499
    
    
    
    5,609Reserve for unfunded lending
commitments, end of period (3)
    
    
    65,161
    
    
    
    28,301
    
    
    
    15,255
    
    
    
    18,212
    
    
    
    17,713Total Allowance for credit losses
    
    $
    1,167,914
    
    
    $
    737,745
    
    
    $
    486,285
    
    
    $
    437,811
    
    
    $
    408,716Net charge-offs to average loans (1)
    
    
    .83
    %
    
    
    .25
    %
    
    
    .96
    %
    
    
    .20
    %
    
    
    .36
    %
 
 (1)
    
    The 2006 consumer secured by real estate charge-offs included $389.6 million of
charge-offs or 71 basis points related to the lower of cost or market valuation adjustment
recorded for the correspondent home equity loans ($382.5 million) and purchased residential
mortgage loans ($7.1 million) that were classified as held for sale at December 31, 2006.(2)
    
    The provision for credit losses on the consolidated statement of operations consists of
the sum of the provision for loan losses and the provision for unfunded lending
commitments.(3)
    
    The reserve for unfunded commitments is classified in other liabilities on the
consolidated balance sheet.  21




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##### Table of Contents



Non-interest Income/(Loss).
   Twelve-months ended December 31,2008
    
    
    2007Impairments to mortgage servicing rights
    
    $
    (47,342
    )
    
    $
    (1,415
    )Impairments to multi-family servicing rights
    
    
    (5,916
    )
    
    
    Residential mortgage and multi-family servicing fees
    
    
    50,002
    
    
    
    42,197Amortization of mortgage and multi-family servicing rights
    
    
    (36,259
    )
    
    
    (36,806
    )Net gains under SFAS 133
    
    
    6,205
    
    
    
    51Net gain recorded on commercial mortgage backed securitization
    
    
    
    
    
    
    4,475Gain on sales of mortgages
    
    
    18,985
    
    
    
    18,295Gain on sales of multi-family loans
    
    
    1,099
    
    
    
    26,203Loss related to correspondent home equity portfolio
    
    
    
    
    
    
    (120,792
    )Total
    
    $
    (13,226
    )
    
    $
    (67,792
    )
     December 31, 2008
    
    December 31, 2007
    
    December 31, 2006CPR speed
    
    
    29.65
    %
    
    
    14.70
    %
    
    
    14.23
    %Escrow credit spread
    
    
    4.35
    %
    
    
    5.12
    %
    
    
    4.85
    %
   22




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General and Administrative Expenses.
 Other Expenses.
   23




---



##### Table of Contents



Income Tax Expense/(Benefit).
   Line of Business Results.
   24




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25




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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
 YEAR ENDED DECEMBER 31,(Dollars in thousands, except per share data)
    
    2007
    
    
    2006Net interest income
    
    $
    1,864,022
    
    
    $
    1,821,548Provision for credit losses
    
    
    407,692
    
    
    
    484,461Total non-interest income
    
    
    354,396
    
    
    
    285,574General and administrative expenses
    
    
    1,345,838
    
    
    
    1,289,989Other expenses
    
    
    1,874,600
    
    
    
    313,541Net income
    
    $
    (1,349,262
    )
    
    $
    136,911Basic earnings per share
    
    $
    (2.85
    )
    
    $
    0.30Diluted earnings per share
    
    $
    (2.85
    )
    
    $
    0.30
  
    
    Net interest income increased 2% during 2007 due to the full year impact of the Independence
acquisition as well as organic balance sheet growth, which was offset by the impact of our balance
sheet restructuring in the first quarter of 2007.
    
    Included in non-interest income:
 (1)
    
    Net losses on investment securities of $176.4 million and $312.0 million in 2007 and
2006, respectively. Our 2007 and 2006 results included other-than-temporary impairment
charges of $180.5 million and $67.5 million, respectively, on FNMA and FHLMC preferred
stock. Net losses on investment securities in 2006 also included losses of $238.3 million
on the sale of investment securities in the second quarter of 2006 and a $43.0 million loss
on the sale of $1.5 billion of available for sale investments as part of the balance sheet
restructuring in the fourth quarter of 2006. See Note 6 for additional details.(2)
    
    An increase in consumer and commercial fee income in 2007 of $43.1 million. The
continued growth in fee income in consumer and commercial banking is due to loan and
deposit growth as a result of the full year impact of the Independence acquisition as well
as strong growth in commercial loans.(3)
    
    A decrease in capital markets revenues of $36.8 million due to charges of $46.9 million
related to customers who defaulted on repurchase agreements and other financing obligations
during 2007.(4)
    
    A decrease in mortgage banking revenues in 2007 of $92.0 million due to a $119.9
million lower of cost or market adjustment related to the previously mentioned
correspondent home equity loan transactions in the first quarter of 2007. In 2006,
Sovereign also sold $2.9 billion of residential real estate loans and recorded a lower of
cost or market adjustment of $28.2 million.
 
    
    Other expenses have increased due primarily to non-deductible goodwill impairment charges of
$943 million in our Metro New York reporting unit and $634 million in our Shared Services Consumer
reporting unit. See Note 4 for additional details on this charge. Sovereign also recorded
restructuring and ESOP termination charges of $102.1 million in 2007 compared to $78.7 million in
2006. Additionally, merger-related charges of $2.2 million were incurred in 2007 compared to $42.4
million in 2006.
    
    The decrease in provision for credit losses in 2007 is related to the previously mentioned $296
million lower of cost or market adjustment for the correspondent home equity portfolio in the
fourth quarter of 2006. This decline was partially offset by incremental provision for credit
losses in 2007 for our indirect auto, correspondent home equity loans and commercial lending
portfolios.
    
    Sovereign recorded an income tax benefit of $60.5 million in 2007 compared to a benefit of
$117.8 million in 2006. Both 2007 and 2006 taxes were significantly impacted by the aforementioned
restructuring and other significant charges which have magnified the impact of our favorable
permanent tax-free items. See a later section of the MD&A for further discussion
    
    Increases in general and administrative expenses were due primarily to the full year impact of
the Independence acquisition which closed on June 1, 2006, partially offset by cost savings from
our expense reduction initiatives that were implemented in 2007.
 26




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Net Interest Income.
     Provision for Credit Losses.
    Non-interest Income.
   27




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##### Table of Contents



Twelve-months ended December 31,2007
    
    
    2006Impairments to mortgage servicing rights
    
    $
    (1,415
    )
    
    $
    (7,123
    )Residential Mortgage and multi-family servicing fees
    
    
    42,197
    
    
    
    30,799Amortization of mortgage and multi-family servicing rights
    
    
    (36,806
    )
    
    
    (19,987
    )Net gains under SFAS 133
    
    
    51
    
    
    
    825Net gain recorded on commercial mortgage backed securitization
    
    
    4,475
    
    
    
    Gain on sales of mortgages
    
    
    18,295
    
    
    
    1,965Gain on sales of multi-family loans
    
    
    26,203
    
    
    
    17,760Loss related to correspondent home equity portfolio
    
    
    (120,792
    )
    
    
    Total
    
    $
    (67,792
    )
    
    $
    24,239
      General and Administrative Expenses.
 Other Expenses.
 28




---



##### Table of Contents



Income Tax Provision/(Benefit).
 Line of Business Results.
     29




---



##### Table of Contents



Critical Accounting Policies
   Allowance for Loan Losses and Reserve for Unfunded Lending Commitments.
 Securitizations.
    Goodwill.
   30




---



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Derivatives and Hedging Activities
   31




---



##### Table of Contents



Income Taxes.
      Recent Acquisitions
  32




---



##### Table of Contents



Financial Condition
 Loan Portfolio.
      Table 4: Composition of Loan Portfolio
 AT DECEMBER 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004BALANCE
    
    
    PERCENT
    
    
    BALANCE
    
    
    PERCENT
    
    
    BALANCE
    
    
    PERCENT
    
    
    BALANCE
    
    
    PERCENT
    
    
    BALANCE
    
    
    PERCENTCommercial real estate loans
    
    $
    13,181,623
    
    
    
    23.7
    %
    
    $
    12,306,914
    
    
    
    21.3
    %
    
    $
    11,514,983
    
    
    
    18.4
    %
    
    $
    7,209,180
    
    
    
    16.5
    %
    
    $
    5,824,133
    
    
    
    15.9
    %Commercial and industrial loans
    
    
    14,078,893
    
    
    
    25.2
    
    
    
    14,359,688
    
    
    
    24.9
    
    
    
    13,188,909
    
    
    
    21.1
    
    
    
    9,426,466
    
    
    
    21.5
    
    
    
    8,040,107
    
    
    
    21.9Multi-family (1)
    
    
    4,526,111
    
    
    
    8.1
    
    
    
    4,246,370
    
    
    
    7.3
    
    
    
    5,768,451
    
    
    
    9.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Commercial Loans
    
    
    31,786,627
    
    
    
    57.0
    
    
    
    30,912,972
    
    
    
    53.5
    
    
    
    30,472,343
    
    
    
    48.7
    
    
    
    16,635,646
    
    
    
    38.0
    
    
    
    13,864,240
    
    
    
    37.8Residential mortgages
    
    
    11,417,108
    
    
    
    20.5
    
    
    
    13,341,193
    
    
    
    23.1
    
    
    
    17,404,730
    
    
    
    27.8
    
    
    
    12,462,802
    
    
    
    28.4
    
    
    
    8,497,496
    
    
    
    23.2Home equity loans and lines of credit
    
    
    6,891,918
    
    
    
    12.4
    
    
    
    6,197,148
    
    
    
    10.7
    
    
    
    9,443,560
    
    
    
    15.1
    
    
    
    9,793,124
    
    
    
    22.4
    
    
    
    9,577,656
    
    
    
    26.2Total Consumer Loans secured by real estate
    
    
    18,309,026
    
    
    
    32.9
    
    
    
    19,538,341
    
    
    
    33.8
    
    
    
    26,848,290
    
    
    
    42.9
    
    
    
    22,255,926
    
    
    
    50.8
    
    
    
    18,075,152
    
    
    
    49.4Auto loans
    
    
    5,344,325
    
    
    
    9.6
    
    
    
    7,028,894
    
    
    
    12.2
    
    
    
    4,848,204
    
    
    
    7.7
    
    
    
    4,434,021
    
    
    
    10.1
    
    
    
    4,205,547
    
    
    
    11.5Other
    
    
    290,725
    
    
    
    0.5
    
    
    
    299,572
    
    
    
    0.5
    
    
    
    419,759
    
    
    
    0.7
    
    
    
    478,254
    
    
    
    1.1
    
    
    
    486,140
    
    
    
    1.3Total Consumer Loans
    
    
    23,944,076
    
    
    
    43.0
    
    
    
    26,866,807
    
    
    
    46.5
    
    
    
    32,116,253
    
    
    
    51.3
    
    
    
    27,168,201
    
    
    
    62.0
    
    
    
    22,766,839
    
    
    
    62.2Total Loans
    
    $
    55,730,703
    
    
    
    100.0
    %
    
    $
    57,779,779
    
    
    
    100.0
    %
    
    $
    62,588,596
    
    
    
    100.0
    %
    
    $
    43,803,847
    
    
    
    100.0
    %
    
    $
    36,631,079
    
    
    
    100.0
    %Total Loans with:Fixed rates
    
    $
    29,756,577
    
    
    
    53.4
    %
    
    $
    33,450,767
    
    
    
    57.9
    %
    
    $
    39,716,958
    
    
    
    63.5
    %
    
    $
    26,141,411
    
    
    
    59.7
    %
    
    $
    21,145,915
    
    
    
    57.7
    %Variable rates
    
    
    25,974,126
    
    
    
    46.6
    
    
    
    24,329,012
    
    
    
    42.1
    
    
    
    22,871,638
    
    
    
    36.5
    
    
    
    17,662,436
    
    
    
    40.3
    
    
    
    15,485,164
    
    
    
    42.3Total Loans
    
    $
    55,730,703
    
    
    
    100.0
    %
    
    $
    57,779,779
    
    
    
    100.0
    %
    
    $
    62,588,596
    
    
    
    100.0
    %
    
    $
    43,803,847
    
    
    
    100.0
    %
    
    $
    36,631,079
    
    
    
    100.0
    %
 
 (1)
    
    Effective with the acquisition of Independence on June 1, 2006,
Sovereign acquired $5.6 billion of multi-family loans. As this was
primarily a new asset class for Sovereign we have disclosed these
loans separately in the table above. At December 31, 2005 and 2004,
Sovereigns multi-family loan portfolio totaled approximately $475
million and $463 million, respectively, which were classified as
commercial real estate loans. 33




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##### Table of Contents



Table 5: Commercial Loan Maturity Schedule
 AT DECEMBER 31, 2008, MATURINGIn One Year
    
    
    One To
    
    
    AfterOr Less
    
    
    Five Years
    
    
    Five Years
    
    
    TotalCommercial real estate loans
    
    $
    2,116,321
    
    
    $
    6,015,913
    
    
    $
    5,049,389
    
    
    $
    13,181,623Commercial and industrial loans
    
    
    4,144,092
    
    
    
    7,193,138
    
    
    
    2,741,663
    
    
    
    14,078,893Multi-family loans
    
    
    279,787
    
    
    
    2,663,112
    
    
    
    1,583,212
    
    
    
    4,526,111Total
    
    $
    6,540,200
    
    
    $
    15,872,163
    
    
    $
    9,374,264
    
    
    $
    31,786,627Loans with:Fixed rates
    
    $
    908,882
    
    
    $
    7,054,582
    
    
    $
    5,037,364
    
    
    $
    13,000,828Variable rates
    
    
    5,631,318
    
    
    
    8,817,581
    
    
    
    4,336,900
    
    
    
    18,785,799Total
    
    $
    6,540,200
    
    
    $
    15,872,163
    
    
    $
    9,374,264
    
    
    $
    31,786,627
 Investment Securities.
       34




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##### Table of Contents



Investment Securities Available for Sale.
  Table 6: Investment Securities by Obligor
 AT DECEMBER 31,2008
    
    
    2007
    
    
    2006Investment securities available for sale:U.S. Treasury and government agencies
    
    $
    258,030
    
    
    $
    2,341,770
    
    
    $
    1,606,905FNMA, FHLMC, and FHLB securities
    
    
    5,122,097
    
    
    
    4,959,380
    
    
    
    4,791,355State and municipal securities
    
    
    1,629,113
    
    
    
    2,502,424
    
    
    
    2,554,806Other securities
    
    
    2,292,099
    
    
    
    4,138,273
    
    
    
    4,921,562Total investment securities available for sale
    
    $
    9,301,339
    
    
    $
    13,941,847
    
    
    $
    13,874,628FHLB stock
    
    
    674,498
    
    
    
    942,651
    
    
    
    1,003,012Other investments
    
    
    44,273
    
    
    
    257,894
    
    
    
    Total investment portfolio
    
    $
    10,020,110
    
    
    $
    15,142,392
    
    
    $
    14,877,640
 Table 7: Investment Securities of Single Issuers
 AT DECEMBER 31, 2008Amortized
    
    
    FairCost
    
    
    ValueFNMA
    
    $
    2,004,963
    
    
    $
    2,000,025FHLMC
    
    
    1,795,967
    
    
    
    1,782,163FHLB
    
    
    1,314,473
    
    
    
    1,323,395Total
    
    $
    5,115,403
    
    
    $
    5,105,583
 35




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##### Table of Contents



Goodwill and Intangible Assets.
  Other Assets.
 Deposits and Other Customer Accounts.
 Borrowings and Other Debt Obligations.
 36




---



##### Table of Contents



Table 8: Details of Borrowings
 DECEMBER 31,2008
    
    2007
    
    2006Securities sold under repurchase agreements:Balance
    
    $
    
    
    
    $
    76,526
    
    
    $
    199,671Weighted average interest rate at year-end
    
    
    0.00
    %
    
    
    4.12
    %
    
    
    3.85
    %Maximum amount outstanding at any month-end during the year
    
    $
    77,000
    
    
    $
    200,775
    
    
    $
    1,740,824Average amount outstanding during the year
    
    $
    38,172
    
    
    $
    122,801
    
    
    $
    596,583Weighted average interest rate during the year
    
    
    5.44
    %
    
    
    5.56
    %
    
    
    5.21
    %Federal Funds Purchased:Balance
    
    $
    2,000,000
    
    
    $
    2,720,000
    
    
    $
    1,700,000Weighted average interest rate at year-end
    
    
    0.60
    %
    
    
    4.22
    %
    
    
    5.22
    %Maximum amount outstanding at any month-end during the year
    
    $
    2,830,000
    
    
    $
    2,720,000
    
    
    $
    1,915,000Average amount outstanding during the year
    
    $
    1,406,335
    
    
    $
    1,074,294
    
    
    $
    998,867Weighted average interest rate during the year
    
    
    1.81
    %
    
    
    5.19
    %
    
    
    5.17
    %Advances from Discount Window:Balance
    
    $
    
    
    
    $
    
    
    
    $
    Weighted average interest rate at year-end
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Maximum amount outstanding at any month-end during the year
    
    $
    4,120,000
    
    
    $
    
    
    
    $
    Average amount outstanding during the year
    
    $
    510,109
    
    
    $
    
    
    
    $
    Weighted average interest rate during the year
    
    
    1.75
    %
    
    
    0.00
    %
    
    
    0.00
    %FHLB advances:Balance
    
    $
    13,267,834
    
    
    $
    19,705,438
    
    
    $
    19,563,985Weighted average interest rate at year-end
    
    
    4.71
    %
    
    
    4.64
    %
    
    
    4.81
    %Maximum amount outstanding at any month-end during the year
    
    $
    23,981,010
    
    
    $
    21,074,719
    
    
    $
    20,409,561Average amount outstanding during the year
    
    $
    16,911,308
    
    
    $
    16,557,692
    
    
    $
    16,727,311Weighted average interest rate during the year
    
    
    4.70
    %
    
    
    4.99
    %
    
    
    4.61
    %Senior Credit Facility:Balance
    
    $
    
    
    
    $
    180,000
    
    
    $
    Weighted average interest rate at year-end
    
    
    0.00
    %
    
    
    5.55
    %
    
    
    0.00
    %Maximum amount outstanding at any month-end during the year
    
    $
    180,000
    
    
    $
    180,000
    
    
    $
    100,000Average amount outstanding during the year
    
    $
    68,361
    
    
    $
    128,274
    
    
    $
    12,466Weighted average interest rate during the year
    
    
    4.40
    %
    
    
    6.27
    %
    
    
    11.71
    %Asset-Backed Floating Rate Notes:Balance
    
    $
    
    
    
    $
    
    
    
    $
    1,971,000Weighted average interest rate at year-end
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    3.58
    %Maximum amount outstanding at any month-end during the year
    
    $
    
    
    
    $
    1,971,000
    
    
    $
    1,971,000Average amount outstanding during the year
    
    $
    
    
    
    $
    904,537
    
    
    $
    1,971,000Weighted average interest rate during the year
    
    
    0.00
    %
    
    
    5.19
    %
    
    
    3.87
    %Bank Senior Notes:Balance
    
    $
    1,344,702
    
    
    $
    
    
    
    $
    Weighted average interest rate at year-end
    
    
    3.92
    %
    
    
    0.00
    %
    
    
    0.00
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,344,702
    
    
    $
    
    
    
    $
    Average amount outstanding during the year
    
    $
    36,738
    
    
    $
    
    
    
    $
    Weighted average interest rate during the year
    
    
    3.35
    %
    
    
    0.00
    %
    
    
    0.00
    %Bancorp Senior Notes:Balance
    
    $
    1,293,859
    
    
    $
    1,042,527
    
    
    $
    740,334Weighted average interest rate at year-end
    
    
    3.56
    %
    
    
    5.14
    %
    
    
    5.13
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,293,859
    
    
    $
    1,042,527
    
    
    $
    1,039,210Average amount outstanding during the year
    
    $
    1,050,728
    
    
    $
    974,605
    
    
    $
    833,577Weighted average interest rate during the year
    
    
    4.55
    %
    
    
    5.61
    %
    
    
    5.62
    %Bank Subordinated Notes:Balance
    
    $
    1,653,684
    
    
    $
    1,148,813
    
    
    $
    1,139,511Weighted average interest rate at year-end
    
    
    5.87
    %
    
    
    4.65
    %
    
    
    4.68
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,653,684
    
    
    $
    1,148,813
    
    
    $
    1,139,511Average amount outstanding during the year
    
    $
    1,464,616
    
    
    $
    1,143,874
    
    
    $
    981,397Weighted average interest rate during the year
    
    
    6.29
    %
    
    
    5.49
    %
    
    
    5.60
    %Junior Subordinated Debentures to Capital Trusts:Balance
    
    $
    1,256,145
    
    
    $
    1,252,778
    
    
    $
    1,535,216Weighted average interest rate at year-end
    
    
    7.23
    %
    
    
    7.30
    %
    
    
    7.65
    %Maximum amount outstanding at any month-end during the year
    
    $
    1,256,145
    
    
    $
    1,433,534
    
    
    $
    1,535,216Average amount outstanding during the year
    
    $
    1,254,303
    
    
    $
    1,340,564
    
    
    $
    1,256,491Weighted average interest rate during the year
    
    
    7.35
    %
    
    
    7.68
    %
    
    
    7.88
    %
 37




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##### Table of Contents




    
    A junior subordinated debentures issued by Sovereign, each of which
will have a principal amount at maturity of $50, and which have a
stated maturity of March 1, 2034; and
 
    
    Warrants to purchase shares of common stock from Sovereign at any time
prior to the close of business on March 1, 2034, by delivering junior
subordinated debentures (or, in the case of warrant exercises before
March 5, 2007, cash equal to the accreted principal amount of a junior
subordinated debenture).
 38




---



##### Table of Contents



Off-Balance Sheet Arrangements.
  Minority Interests.
 39




---



##### Table of Contents



Preferred Stock.
  Credit Risk Management
    Commercial Loans.
   Consumer Loans Secured by Real Estate.
 Consumer Loans Not Secured by Real Estate.
 40




---



##### Table of Contents



Collections.
 Non-performing Assets.
   Table 9: Non-Performing Assets
 AT DECEMBER 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Non-accrual loans:ConsumerResidential
    
    $
    233,176
    
    
    $
    90,881
    
    
    $
    47,687
    
    
    $
    30,393
    
    
    $
    33,656Home equity loans and lines of credit
    
    
    69,247
    
    
    
    56,099
    
    
    
    10,312
    
    
    
    55,543
    
    
    
    26,801Auto loans and other consumer loans
    
    
    3,777
    
    
    
    3,446
    
    
    
    2,955
    
    
    
    2,389
    
    
    
    1,220Total consumer loans
    
    
    306,200
    
    
    
    150,426
    
    
    
    60,954
    
    
    
    88,325
    
    
    
    61,677Commercial
    
    
    244,847
    
    
    
    85,406
    
    
    
    69,207
    
    
    
    68,572
    
    
    
    54,042Commercial real estate
    
    
    319,565
    
    
    
    61,750
    
    
    
    75,710
    
    
    
    31,800
    
    
    
    26,757Multi-family
    
    
    42,795
    
    
    
    6,336
    
    
    
    1,486
    
    
    
    
    
    
    
    Total non-accrual loans
    
    
    913,407
    
    
    
    303,918
    
    
    
    207,357
    
    
    
    188,697
    
    
    
    142,476Restructured loans
    
    
    268
    
    
    
    370
    
    
    
    557
    
    
    
    777
    
    
    
    1,097Total non-performing loans (1)
    
    
    913,675
    
    
    
    304,288
    
    
    
    207,914
    
    
    
    189,474
    
    
    
    143,573Real estate owned
    
    
    49,900
    
    
    
    43,226
    
    
    
    22,562
    
    
    
    11,411
    
    
    
    12,276Other repossessed assets
    
    
    21,836
    
    
    
    14,062
    
    
    
    5,126
    
    
    
    4,678
    
    
    
    4,247Total other real estate owned and other repossessed assets
    
    
    71,736
    
    
    
    57,288
    
    
    
    27,688
    
    
    
    16,089
    
    
    
    16,523Total non-performing assets
    
    $
    985,411
    
    
    $
    361,576
    
    
    $
    235,602
    
    
    $
    205,563
    
    
    $
    160,096Past due 90 days or more as to interest or principal and
accruing interest
    
    $
    123,301
    
    
    $
    68,770
    
    
    $
    40,103
    
    
    $
    54,794
    
    
    $
    38,914Net loan charge-off rate to average loans (3)
    
    
    .83
    %
    
    
    .25
    %
    
    
    .96
    %
    
    
    .20
    %
    
    
    .36
    %Non-performing assets as a percentage of total assets,
excluding loans held for sale
    
    
    1.28
    
    
    
    .43
    
    
    
    .29
    
    
    
    .32
    
    
    
    .29Non-performing loans as a percentage of total loans
    
    
    1.64
    
    
    
    .53
    
    
    
    .38
    
    
    
    .44
    
    
    
    .39Non-performing assets as a percentage of total loans held
for investment, real estate owned and repossessed assets
    
    
    1.77
    
    
    
    .63
    
    
    
    .43
    
    
    
    .47
    
    
    
    .44Allowance for credit losses as a percentage of total
non-performing assets (2)
    
    
    118.5
    
    
    
    204.0
    
    
    
    206.4
    
    
    
    213.0
    
    
    
    255.3Allowance for credit losses as a percentage of total
non-performing loans (2)
    
    
    127.8
    
    
    
    242.4
    
    
    
    233.9
    
    
    
    231.1
    
    
    
    284.7
 
 (1)
    
    Non-performing loans at December 31, 2006 exclude $21.5 million of residential non-accrual
loans and $66.0 million of home equity non-accrual loans that are classified as held for sale.
These loans were excluded at that time since they were all anticipated to be sold.(2)
    
    Allowance for credit losses is comprised of the allowance for loan losses and the reserve for
unfunded commitments, which is included in other liabilities.(3)
    
    2006 includes lower of cost of market adjustments resulting in a charge-off of $382.5 million
on the correspondent home equity loans and a charge-off of approximately $7.1 million on the
purchased residential mortgage portfolio both of which were classified as held for sale at December
31, 2006. These charge-offs accounted for 71 basis points of the total 96 basis points above. 41




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##### Table of Contents



Potential Problem Loans
 Delinquencies.
 Allowance for Credit Losses
 Allowance for Loan Losses.
        42




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##### Table of Contents



Reserve for Unfunded Lending Commitments
    Table 10: Allocation of the Allowance for Credit Losses by Product Type
 AT DECEMBER 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofLoans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans toTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansAllocated
allowances:Commercial loans
    
    $
    752,835
    
    
    
    57
    %
    
    $
    433,951
    
    
    
    54
    %
    
    $
    375,014
    
    
    
    49
    %
    
    $
    220,314
    
    
    
    38
    %
    
    $
    209,587
    
    
    
    38
    %Consumer loans
secured by real
estate
    
    
    193,430
    
    
    
    33
    
    
    
    117,380
    
    
    
    34
    
    
    
    45,521
    
    
    
    43
    
    
    
    142,728
    
    
    
    51
    
    
    
    121,311
    
    
    
    49Consumer loans not
secured by real
estate
    
    
    149,099
    
    
    
    10
    
    
    
    149,768
    
    
    
    12
    
    
    
    45,730
    
    
    
    8
    
    
    
    50,557
    
    
    
    11
    
    
    
    50,167
    
    
    
    13Unallocated
allowance
    
    
    7,389
    
    
    
    n/a
    
    
    
    8,345
    
    
    
    n/a
    
    
    
    4,765
    
    
    
    n/a
    
    
    
    6,000
    
    
    
    n/a
    
    
    
    9,938
    
    
    
    n/aTotal allowance for
loan losses
    
    $
    1,102,753
    
    
    
    100
    %
    
    $
    709,444
    
    
    
    100
    %
    
    $
    471,030
    
    
    
    100
    %
    
    $
    419,599
    
    
    
    100
    %
    
    $
    391,003
    
    
    
    100
    %Reserve for
unfunded lending
commitments
    
    
    65,162
    
    
    
    
    
    
    
    28,301
    
    
    
    
    
    
    
    15,255
    
    
    
    
    
    
    
    18,212
    
    
    
    
    
    
    
    17,713Total allowance for
credit losses
    
    $
    1,167,915
    
    
    
    
    
    
    $
    737,745
    
    
    
    
    
    
    $
    486,285
    
    
    
    
    
    
    $
    437,811
    
    
    
    
    
    
    $
    408,716
 Commercial Portfolio.
 Consumer Loans Secured by Real Estate Portfolio.
 43




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##### Table of Contents



Consumer Loans Not Secured by Real Estate Portfolio.
 Unallocated Allowance.
 Bank Regulatory Capital
   Table 11: Regulatory Capital Ratios
 OTS  REGULATIONSSovereignBank
    
    
    
    
    
    WellDecember 31,
    
    Minimum
    
    Capitalized2008
    
    Requirement
    
    RequirementTier 1 leverage capital to tangible assets
    
    
    5.95
    %
    
    
    4.00
    %
    
    
    5.00
    %Tier 1 risk-based capital to risk
adjusted assets
    
    
    6.59
    
    
    
    4.00
    
    
    
    6.00Total risk-based capital to risk adjusted
assets
    
    
    10.20
    
    
    
    8.00
    
    
    
    10.00
 Sovereign Bancorp
    
    Sovereign BancorpDecember 31, 2008(1)
    
    December 31, 2007(1)Tier 1 leverage capital ratio
    
    
    5.73
    %
    
    
    5.89
    %Tangible common equity to
tangible assets, including
AOCI(2)
    
    
    2.57
    %
    
    
    4.04
    %
 
 (1)
    
    OTS capital regulations do not apply to savings and loan holding companies. These ratios are
computed as if those regulations did apply to Sovereign Bancorp.(2)
    
    Accumulated other comprehensive income 44




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##### Table of Contents



Liquidity and Capital Resources
         45




---



##### Table of Contents



Contractual Obligations and Other Commitments
  Contractual Obligations
 PAYMENTS DUE BY PERIODLess Than
    
    
    
    
    
    
    
    
    
    
    After(Dollars in thousands)
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsBorrowings and other debt obligations:FHLB advances(1)
    
    $
    15,420,340
    
    
    $
    7,693,610
    
    
    $
    1,827,727
    
    
    $
    900,177
    
    
    $
    4,998,826Fed Funds(1)
    
    
    2,000,953
    
    
    
    2,000,953
    
    
    
    
    
    
    
    
    
    
    
    Other debt obligations(1)(2)
    
    
    5,214,255
    
    
    
    352,357
    
    
    
    1,160,174
    
    
    
    2,750,161
    
    
    
    951,563Junior subordinated debentures to Capital
Trusts(1)(2)
    
    
    3,821,134
    
    
    
    86,114
    
    
    
    167,891
    
    
    
    172,694
    
    
    
    3,394,435Certificates of deposit(1)
    
    
    17,054,346
    
    
    
    15,811,110
    
    
    
    972,997
    
    
    
    211,124
    
    
    
    59,115Investment partnership commitments(3)
    
    
    10,288
    
    
    
    6,547
    
    
    
    3,648
    
    
    
    26
    
    
    
    67Operating leases
    
    
    833,156
    
    
    
    101,323
    
    
    
    187,332
    
    
    
    153,873
    
    
    
    390,628Total contractual cash obligations
    
    $
    44,354,472
    
    
    $
    26,052,014
    
    
    $
    4,319,769
    
    
    $
    4,188,055
    
    
    $
    9,794,634
 
 (1)
    
    Includes interest on both fixed and variable rate obligations. The interest associated with
variable rate obligations is based upon interest rates in effect at December 31, 2008. The
contractual amounts to be paid on variable rate obligations are affected by changes in market
interest rates. Future changes in market interest rates could materially affect the contractual
amounts to be paid.(2)
    
    Includes all carrying value adjustments, such as unamortized premiums or discounts and hedge
basis adjustments.(3)
    
    The commitments to fund investment partnerships represent future cash outlays for the
construction and development of properties for low-income housing and historic tax credit projects.
The timing and amounts of these commitments are projected based upon the financing arrangements
provided in each projects partnership or operating agreement and could change due to variances in
the construction schedule, project revisions, or the cancellation of the project.    46




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##### Table of Contents



OTHER COMMERCIAL COMMITMENTS
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTotalAmounts
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    Over(Dollars in thousands)
    
    Committed
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsCommitments to extend credit
    
    $
    16,279,059
    
    
    $
    6,029,196
    
    
    $
    3,657,128
    
    
    $
    1,668,736
    
    
    $
    4,923,999
    (1)Standby letters of credit
    
    
    2,801,433
    
    
    
    638,391
    
    
    
    1,011,405
    
    
    
    812,146
    
    
    
    339,491Loans sold with recourse
    
    
    985,418
    
    
    
    692,767
    
    
    
    35,650
    
    
    
    81,315
    
    
    
    175,686Forward buy commitments
    
    
    895,285
    
    
    
    873,051
    
    
    
    22,234
    
    
    
    
    
    
    
    Total commercial commitments
    
    $
    20,961,195
    
    
    $
    8,233,405
    
    
    $
    4,726,417
    
    
    $
    2,562,197
    
    
    $
    5,439,176
 
 (1)
    
    Of this amount, $4.6 billion represents the unused portion of home equity lines of
credit.  Asset and Liability Management
     The following estimated percentageIf interest rates changed in parallel by the
    
    increase/(decrease) toamounts below at December 31, 2008
    
    net interest income would result
    
    Policy LimitsUp 100 basis points
    
    
    (3.12
    )%
    
    
    (5.00
    )%Down 100 basis points
    
    
    3.31
    %
    
    
    (5.00
    )%
  47




---



##### Table of Contents



The following estimated percentageincrease/(decrease) to MVE would resultIf interest rates changed in parallel by
    
    December 31, 2008
    
    December 31, 2007
    
    Policy limitsBase (in thousands)
    
    $
    6,735,655
    
    
    $
    6,939,602
    
    
    
    N/AUp 200 basis points
    
    
    (5.80
    )%
    
    
    (12.50
    )%
    
    
    (15.00
    )%Up 100 basis points
    
    
    (2.51
    )%
    
    
    (5.99
    )%
    
    
    (7.50
    )%Down 100 basis points
    
    
    (1.34
    )%
    
    
    3.42
    %
    
    
    7.50
    %
       48




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##### Table of Contents



Table 12: Selected Quarterly Consolidated Financial Data
 THREE MONTHS ENDEDDec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007Total interest income
    
    $
    885,353
    
    
    $
    959,822
    
    
    $
    1,001,820
    
    
    $
    1,076,169
    
    
    $
    1,139,340
    
    
    $
    1,150,142
    
    
    $
    1,139,435
    
    
    $
    1,227,339Total interest expense
    
    
    461,506
    
    
    
    468,668
    
    
    
    495,690
    
    
    
    593,989
    
    
    
    673,316
    
    
    
    693,381
    
    
    
    686,051
    
    
    
    739,486Net interest income
    
    
    423,847
    
    
    
    491,154
    
    
    
    506,130
    
    
    
    482,180
    
    
    
    466,024
    
    
    
    456,761
    
    
    
    453,384
    
    
    
    487,853Provision for credit losses
    
    
    340,000
    
    
    
    304,000
    
    
    
    132,000
    
    
    
    135,000
    
    
    
    148,192
    
    
    
    162,500
    
    
    
    51,000
    
    
    
    46,000Net interest income after
provision for credit loss
    
    
    83,847
    
    
    
    187,154
    
    
    
    374,130
    
    
    
    347,180
    
    
    
    317,832
    
    
    
    294,261
    
    
    
    402,384
    
    
    
    441,853(Loss)/gain on investment
securities, net
    
    
    (312,646
    )
    
    
    (1,158,578
    )
    
    
    1,908
    
    
    
    14,135
    
    
    
    (179,209
    )
    
    
    1,884
    
    
    
    
    
    
    
    970Total fees and other income
    
    
    110,762
    
    
    
    162,842
    
    
    
    205,209
    
    
    
    157,625
    
    
    
    153,183
    
    
    
    141,389
    
    
    
    190,297
    
    
    
    45,882General and administrative
and other expenses
    
    
    552,840
    
    
    
    432,949
    
    
    
    424,688
    
    
    
    396,725
    
    
    
    1,971,969
    
    
    
    385,654
    
    
    
    416,049
    
    
    
    446,766Income before income taxes
    
    
    (670,877
    )
    
    
    (1,241,531
    )
    
    
    156,559
    
    
    
    122,215
    
    
    
    (1,680,163
    )
    
    
    51,880
    
    
    
    176,632
    
    
    
    41,939Income tax (benefit)/provision
    
    
    932,316
    
    
    
    (259,940
    )
    
    
    29,120
    
    
    
    22,080
    
    
    
    (77,180
    )
    
    
    (6,330
    )
    
    
    29,180
    
    
    
    (6,120
    )Net (loss)/income
    
    $
    (1,603,193
    )
    
    $
    (981,591
    )
    
    $
    127,439
    
    
    $
    100,135
    
    
    $
    (1,602,983
    )
    
    $
    58,210
    
    
    $
    147,452
    
    
    $
    48,059Dividends on preferred stock
    
    
    (3,650
    )
    
    
    (3,650
    )
    
    
    (3,650
    )
    
    
    (3,650
    )
    
    
    (3,650
    )
    
    
    (3,650
    )
    
    
    (3,650
    )
    
    
    (3,650
    )Contingently convertible debt
expense, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,413
    
    
    
    Net (loss)/income for EPS
purposes
    
    $
    (1,606,843
    )
    
    $
    (985,241
    )
    
    $
    123,789
    
    
    $
    96,485
    
    
    $
    (1,606,633
    )
    
    $
    54,560
    
    
    $
    150,215
    
    
    $
    44,409Earnings per share:Basic
    
    $
    (2.42
    )
    
    $
    (1.48
    )
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    (3.34
    )
    
    $
    0.11
    
    
    $
    0.30
    
    
    $
    0.09Diluted
    
    $
    (2.42
    )
    
    $
    (1.48
    )
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    (3.34
    )
    
    $
    0.11
    
    
    $
    0.29
    
    
    $
    0.09Market prices:High
    
    $
    5.84
    
    
    $
    10.69
    
    
    $
    9.89
    
    
    $
    13.07
    
    
    $
    17.73
    
    
    $
    21.94
    
    
    $
    25.16
    
    
    $
    26.42Low
    
    
    1.63
    
    
    
    2.33
    
    
    
    7.14
    
    
    
    9.28
    
    
    
    10.08
    
    
    
    16.58
    
    
    
    21.14
    
    
    
    24.07Dividends declared per common
share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.080
    
    
    
    0.080
    
    
    
    0.080
    
    
    
    0.080
 49




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##### Table of Contents



2008 Fourth Quarter Results
        RECENT ACCOUNTING PRONOUNCEMENT
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 Index to Financial Statements and Supplementary Data
    
    PageReport of Management
    
    
    51Reports of Independent Registered Public Accounting Firm
    
    
    52-53Consolidated Balance Sheet
    
    
    54Consolidated Statements of Operations
    
    
    55Consolidated Statements of Stockholders Equity
    
    
    56-57Consolidated Statements of Cash Flow
    
    
    58-59Notes to Consolidated Financial Statements
    
    
    60-108
 50




---



##### Table of Contents



Report of Managements Assessment of
Internal Control Over Financial Reporting
    /s/ Gabriel Jaramillo
    
    
    
    /s/ Kirk W. WaltersGabriel Jaramillo
    
    
    
    Kirk W. WaltersChairman and
Chief Executive Officer
    
    
    
    Chief Financial Officer and
Executive Vice President
  51




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 THE BOARD OF DIRECTORS AND STOCKHOLDERS OF  SOVEREIGN BANCORP, INC.
     /s/ Ernst & Young LLP 
 52




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 THE BOARD OF DIRECTORS AND SHAREHOLDERS OF  SOVEREIGN BANCORP, INC.
     .
  /s/ Ernst & Young LLP 
 53




---



##### Table of Contents



Consolidated Balance Sheets
 AT DECEMBER 31,(IN THOUSANDS, EXCEPT SHARE DATA)
    
    2008
    
    
    2007AssetsCash and amounts due from depository institutions
    
    $
    3,754,523
    
    
    $
    3,130,770Investment securities available for sale
    
    
    9,301,339
    
    
    
    13,941,847Other investments
    
    
    718,771
    
    
    
    1,200,545Loans held for investment
    
    
    55,403,371
    
    
    
    57,232,019Allowance for loan losses
    
    
    (1,102,753
    )
    
    
    (709,444
    )Net loans held for investment
    
    
    54,300,618
    
    
    
    56,522,575Loans held for sale
    
    
    327,332
    
    
    
    547,760Premises and equipment
    
    
    550,150
    
    
    
    562,332Accrued interest receivable
    
    
    251,612
    
    
    
    350,534Goodwill
    
    
    3,431,481
    
    
    
    3,426,246Core deposit and other intangibles, net of accumulated amortization of
$858,578 in 2008 and $754,935 in 2007
    
    
    268,472
    
    
    
    372,116Bank owned life insurance
    
    
    1,847,688
    
    
    
    1,794,099Other assets
    
    
    2,341,682
    
    
    
    2,897,572Total Assets
    
    $
    77,093,668
    
    
    $
    84,746,396LiabilitiesDeposits and other customer accounts
    
    $
    48,438,573
    
    
    $
    49,915,905Borrowings and other debt obligations
    
    
    20,816,224
    
    
    
    26,126,082Advance payments by borrowers for taxes and insurance
    
    
    93,225
    
    
    
    83,091Other liabilities
    
    
    2,000,971
    
    
    
    1,482,563Total Liabilities
    
    
    71,348,993
    
    
    
    77,607,641Minority interest-preferred securities of subsidiaries
    
    
    147,961
    
    
    
    146,430Stockholders EquityPreferred stock; no par value; $25,000 liquidation preference; 7,500,000
shares authorized; 8,000 shares outstanding in 2008 and 8,000 shares issued
and outstanding in 2007
    
    
    195,445
    
    
    
    195,445Common stock; no par value; 800,000,000 shares authorized; 666,161,708 issued
in 2008 and 482,773,610 issued in 2007
    
    
    7,718,771
    
    
    
    6,295,572Warrants and employee stock options issued
    
    
    350,572
    
    
    
    348,365Treasury stock (2,217,811 shares in 2008 and 1,369,453 shares in 2007, at cost)
    
    
    (9,379
    )
    
    
    (19,853
    )Accumulated other comprehensive loss
    
    
    (785,814
    )
    
    
    (326,133
    )Retained (deficit)/earnings
    
    
    (1,872,881
    )
    
    
    498,929Total Stockholders Equity
    
    
    5,596,714
    
    
    
    6,992,325Total Liabilities and Stockholders Equity
    
    $
    77,093,668
    
    
    $
    84,746,396
  54




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##### Table of Contents



Consolidated Statements of Operations
 FOR THE YEAR ENDED DECEMBER 31,(IN THOUSANDS, EXCEPT PER SHARE DATA)
    
    2008
    
    
    2007
    
    
    2006Interest Income:Interest-earning deposits
    
    $
    5,820
    
    
    $
    19,112
    
    
    $
    16,752Investment securities:Available for sale
    
    
    554,351
    
    
    
    721,015
    
    
    
    602,575Held to maturity
    
    
    
    
    
    
    
    
    
    
    104,026Other
    
    
    23,786
    
    
    
    51,645
    
    
    
    51,414Interest on loans
    
    
    3,339,207
    
    
    
    3,864,484
    
    
    
    3,551,637Total interest income
    
    
    3,923,164
    
    
    
    4,656,256
    
    
    
    4,326,404Interest Expense:Deposits and other customer accounts
    
    
    951,588
    
    
    
    1,627,315
    
    
    
    1,372,197Borrowings and other debt obligations
    
    
    1,068,265
    
    
    
    1,164,919
    
    
    
    1,132,659Total interest expense
    
    
    2,019,853
    
    
    
    2,792,234
    
    
    
    2,504,856Net interest income
    
    
    1,903,311
    
    
    
    1,864,022
    
    
    
    1,821,548Provision for credit losses
    
    
    911,000
    
    
    
    407,692
    
    
    
    484,461Net interest income after provision for credit losses
    
    
    992,311
    
    
    
    1,456,330
    
    
    
    1,337,087Non-interest Income:Consumer banking fees
    
    
    312,627
    
    
    
    295,815
    
    
    
    275,952Commercial banking fees
    
    
    213,945
    
    
    
    202,304
    
    
    
    179,060Mortgage banking (expense)/revenue
    
    
    (13,226
    )
    
    
    (67,792
    )
    
    
    24,239Capital markets revenue/(expense)
    
    
    23,810
    
    
    
    (19,266
    )
    
    
    17,569Bank-owned life insurance
    
    
    75,990
    
    
    
    85,855
    
    
    
    67,039Miscellaneous income
    
    
    23,292
    
    
    
    33,835
    
    
    
    33,677Total fees and other income
    
    
    636,438
    
    
    
    530,751
    
    
    
    597,536Net loss on investment securities
    
    
    (1,455,181
    )
    
    
    (176,355
    )
    
    
    (311,962
    )Total non-interest income
    
    
    (818,743
    )
    
    
    354,396
    
    
    
    285,574General and administrative expenses:Compensation and benefits
    
    
    774,976
    
    
    
    673,528
    
    
    
    652,703Occupancy and equipment
    
    
    310,535
    
    
    
    308,698
    
    
    
    290,163Technology expense
    
    
    102,591
    
    
    
    96,265
    
    
    
    95,488Outside services
    
    
    64,474
    
    
    
    67,509
    
    
    
    69,195Marketing expense
    
    
    78,995
    
    
    
    56,101
    
    
    
    55,053Other administrative
    
    
    209,838
    
    
    
    143,737
    
    
    
    127,387Total general and administrative expenses
    
    
    1,541,409
    
    
    
    1,345,838
    
    
    
    1,289,989Other Expenses:Amortization of intangibles
    
    
    103,643
    
    
    
    126,717
    
    
    
    109,838Goodwill impairment
    
    
    
    
    
    
    1,576,776
    
    
    
    Minority interest expense and equity method investments
    
    
    149,399
    
    
    
    67,263
    
    
    
    56,891Loss on economic hedges
    
    
    
    
    
    
    
    
    
    
    11,387Transaction related and integration charges, net
    
    
    12,751
    
    
    
    2,242
    
    
    
    42,420Loss on debt extinguishment and other restructuring costs
    
    
    
    
    
    
    61,999
    
    
    
    78,668ESOP expense related to freezing of plan
    
    
    
    
    
    
    40,119
    
    
    
    Proxy and related professional fees
    
    
    
    
    
    
    (516
    )
    
    
    14,337Total other expenses
    
    
    265,793
    
    
    
    1,874,600
    
    
    
    313,541(Loss)/Income before income taxes
    
    
    (1,633,634
    )
    
    
    (1,409,712
    )
    
    
    19,131Income tax provision/(benefit)
    
    
    723,576
    
    
    
    (60,450
    )
    
    
    (117,780
    )NET (LOSS)/INCOME
    
    $
    (2,357,210
    )
    
    $
    (1,349,262
    )
    
    $
    136,911(Loss)/Earnings per share:Basic
    
    $
    (3.98
    )
    
    $
    (2.85
    )
    
    $
    0.30Diluted
    
    $
    (3.98
    )
    
    $
    (2.85
    )
    
    $
    0.30Dividends Declared Per Common Share
    
    $
    
    
    
    $
    .32
    
    
    $
    .30
  55




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##### Table of Contents



Consolidated Statements of Stockholders Equity
 Common
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    UnallocatedShares
    
    
    Preferred
    
    
    Common
    
    
    and Stock
    
    
    Stock Held(IN THOUSANDS)
    
    Outstanding
    
    
    Stock
    
    
    Stock
    
    
    Options
    
    
    by ESOPBalance, December 31, 2005
    
    
    358,018
    
    
    $
    
    
    
    $
    3,657,543
    
    
    $
    337,346
    
    
    $
    (21,396
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment to initially apply SFAS 158, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
    
    
    90,182
    
    
    
    
    
    
    
    2,031,857
    
    
    
    
    
    
    
    Issuance of preferred stock
    
    
    
    
    
    
    195,445
    
    
    
    
    
    
    
    
    
    
    
    Stock issued in connection with employee benefit and
incentive compensation plans
    
    
    3,197
    
    
    
    
    
    
    
    19,319
    
    
    
    (3,923
    )
    
    
    2,377Employee stock options issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,968
    
    
    
    Stock dividend
    
    
    22,607
    
    
    
    
    
    
    
    474,562
    
    
    
    
    
    
    
    Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock repurchased
    
    
    (249
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2006
    
    
    473,755
    
    
    $
    195,445
    
    
    $
    6,183,281
    
    
    $
    343,391
    
    
    $
    (19,019
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension liabilitiesCash flow hedge derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative transition adjustment related to the
adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
    
    
    980
    
    
    
    
    
    
    
    21,885
    
    
    
    
    
    
    
    Stock issued in connection with employee benefit and
incentive compensation plans
    
    
    5,874
    
    
    
    
    
    
    
    71,426
    
    
    
    (1,614
    )
    
    
    11,425Employee stock options issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,588
    
    
    
    ESOP shares sold in conjunction with plan termination
    
    
    1,102
    
    
    
    
    
    
    
    18,980
    
    
    
    
    
    
    
    7,594Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock repurchased
    
    
    (307
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2007
    
    
    481,404
    
    
    $
    195,445
    
    
    $
    6,295,572
    
    
    $
    348,365
    
    
    $
    Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension liabilitiesCash flow hedge derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
    
    
    180,548
    
    
    
    
    
    
    
    21,275
    
    
    
    
    
    
    
    Stock issued in connection with employee benefit and
incentive compensation plans
    
    
    2,283
    
    
    
    
    
    
    
    1,401,924
    
    
    
    (1,349
    )
    
    
    Employee stock options issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,556
    
    
    
    Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock repurchased
    
    
    (289
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2008
    
    
    663,946
    
    
    $
    195,445
    
    
    $
    7,718,771
    
    
    $
    350,572
    
    
    $
    
  56




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##### Table of Contents



Consolidated Statements of Stockholders Equity (continued)
 AccumulatedOther
    
    
    Retained
    
    
    TotalTreasury
    
    
    Comprehensive
    
    
    (Deficit)/
    
    
    StockholdersStock
    
    
    Income/(Loss)
    
    
    Earnings
    
    
    EquityBalance, December 31, 2005
    
    $
    (478,734
    )
    
    $
    (170,798
    )
    
    $
    2,486,738
    
    
    $
    5,810,699Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    136,911
    
    
    
    136,911Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    169,518
    
    
    
    
    
    
    
    169,518Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    (17,355
    )
    
    
    
    
    
    
    (17,355
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    289,074Adjustment to initially apply SFAS 158, net of tax
    
    
    
    
    
    
    (6,111
    )
    
    
    
    
    
    
    (6,111
    )Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282,963Issuance of common stock
    
    
    389,956
    
    
    
    
    
    
    
    
    
    
    
    2,421,813Issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,445Stock issued in connection with employee benefit and incentive
compensation plans
    
    
    45,038
    
    
    
    
    
    
    
    
    
    
    
    62,811Employee stock option issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,968Stock dividend
    
    
    
    
    
    
    
    
    
    
    (474,562
    )
    
    
    Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    (126,104
    )
    
    
    (126,104
    )Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    (7,908
    )
    
    
    (7,908
    )Stock repurchased
    
    
    (5,288
    )
    
    
    
    
    
    
    
    
    
    
    (5,288
    )Balance, December 31, 2006
    
    $
    (49,028
    )
    
    $
    (24,746
    )
    
    $
    2,015,075
    
    
    $
    8,644,399Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (1,349,262
    )
    
    
    (1,349,262
    )Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    (191,795
    )
    
    
    
    
    
    
    (191,795
    )Pension liabilities
    
    
    
    
    
    
    1,908
    
    
    
    
    
    
    
    1,908Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    (111,500
    )
    
    
    
    
    
    
    (111,500
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,650,649
    )Cumulative transition adjustment related to the adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    952
    
    
    
    952Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,885Stock issued in connection with employee benefit and incentive
compensation plans
    
    
    36,743
    
    
    
    
    
    
    
    
    
    
    
    117,980Employee stock option issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,588ESOP shares sold in conjunction with plan termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,574Dividends paid on common stock
    
    
    
    
    
    
    
    
    
    
    (153,236
    )
    
    
    (153,236
    )Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    (14,600
    )
    
    
    (14,600
    )Stock repurchased
    
    
    (7,568
    )
    
    
    
    
    
    
    
    
    
    
    (7,568
    )Balance, December 31, 2007
    
    $
    (19,853
    )
    
    $
    (326,133
    )
    
    $
    498,929
    
    
    $
    6,992,325Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (2,357,210
    )
    
    
    (2,357,210
    )Change in unrealized gain/(loss), net of tax:Investments available for sale
    
    
    
    
    
    
    (352,423
    )
    
    
    
    
    
    
    (352,423
    )Pension liabilities
    
    
    
    
    
    
    (16,831
    )
    
    
    
    
    
    
    (16,831
    )Cash flow hedge derivative financial instruments
    
    
    
    
    
    
    (90,427
    )
    
    
    
    
    
    
    (90,427
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,816,891
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,275Stock issued in connection with employee benefit and incentive
compensation plans
    
    
    13,874
    
    
    
    
    
    
    
    
    
    
    
    1,414,449Employee stock options issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,556Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    (14,600
    )
    
    
    (14,600
    )Stock repurchased
    
    
    (3,400
    )
    
    
    
    
    
    
    
    
    
    
    (3,400
    )Balance, December 31, 2008
    
    
    (9,379
    )
    
    
    (785,814
    )
    
    
    (1,872,881
    )
    
    
    5,596,714
  57




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##### Table of Contents



Consolidated Statements of Cash Flow
 FOR THE YEAR ENDED DECEMBER 31,(IN THOUSANDS)
    
    2008
    
    
    2007
    
    
    2006Cash Flows From Operating Activities:Net (loss)/ income
    
    $
    (2,357,210
    )
    
    $
    (1,349,262
    )
    
    $
    136,911Adjustments to reconcile net income to net cash provided by (used in) operating activities:Provision for credit losses
    
    
    911,000
    
    
    
    407,692
    
    
    
    484,461Deferred taxes
    
    
    837,028
    
    
    
    (171,565
    )
    
    
    (226,432
    )Depreciation and amortization
    
    
    225,913
    
    
    
    266,715
    
    
    
    220,959Impairment on goodwill
    
    
    
    
    
    
    1,576,776
    
    
    
    Impairment on equity method investment
    
    
    95,000
    
    
    
    
    
    
    
    Net amortization/accretion of investment securities and loan premiums and discounts
    
    
    (4,961
    )
    
    
    48,019
    
    
    
    126,417Net (gain)/loss on the sale of loans
    
    
    (38,761
    )
    
    
    (16,178
    )
    
    
    (30,078
    )Net (gain)/loss on investment securities
    
    
    1,455,181
    
    
    
    176,355
    
    
    
    311,962Net loss on real estate owned and premises and equipment
    
    
    12,379
    
    
    
    6,132
    
    
    
    2,049Loss on debt extinguishments
    
    
    
    
    
    
    14,714
    
    
    
    Loss on economic hedges
    
    
    
    
    
    
    
    
    
    
    11,387Stock based compensation
    
    
    23,337
    
    
    
    28,011
    
    
    
    35,475Allocation of Employee Stock Ownership Plan
    
    
    
    
    
    
    40,119
    
    
    
    2,377Origination and purchase of loans held for sale, net of repayments
    
    
    (5,569,238
    )
    
    
    (5,113,911
    )
    
    
    (2,980,514
    )Proceeds from the sale of loans held for sale
    
    
    6,246,226
    
    
    
    4,966,782
    
    
    
    3,421,425Net change in:Accrued interest receivable
    
    
    98,922
    
    
    
    72,367
    
    
    
    (57,765
    )Other assets and bank owned life insurance
    
    
    (403,846
    )
    
    
    (286,585
    )
    
    
    (585,389
    )Other liabilities
    
    
    461,028
    
    
    
    (34,712
    )
    
    
    114,240Net cash provided by operating activities
    
    
    1,991,998
    
    
    
    631,469
    
    
    
    987,485Cash Flows From Investing Activities:Proceeds from sales investment securities:Available for sale
    
    
    5,203,297
    
    
    
    669,053
    
    
    
    12,052,450Held to maturity
    
    
    
    
    
    
    
    
    
    
    1,774,475Proceeds from repayments and maturities of investment securities:Available for sale
    
    
    4,539,052
    
    
    
    4,203,214
    
    
    
    1,847,294Held to maturity
    
    
    
    
    
    
    
    
    
    
    186,845Net change in other investments
    
    
    481,774
    
    
    
    (197,533
    )
    
    
    (351,713
    )Net change in securities available for sale
    
    
    2,000,000
    
    
    
    (1,800,620
    )
    
    
    371,695Purchases of investment securities:Available for sale
    
    
    (8,299,508
    )
    
    
    (3,593,836
    )
    
    
    (14,591,166
    )Held to maturity
    
    
    
    
    
    
    
    
    
    
    (557,704
    )Proceeds from sales of loans
    
    
    177,739
    
    
    
    9,461,279
    
    
    
    4,848,438Purchase of loans
    
    
    (411,488
    )
    
    
    (290,720
    )
    
    
    (6,828,628
    )Net change in loans other than purchases and sales
    
    
    380,216
    
    
    
    (4,384,354
    )
    
    
    (4,616,040
    )Proceeds from sales of premises and equipment and real estate owned
    
    
    37,424
    
    
    
    47,691
    
    
    
    21,155Purchases of premises and equipment
    
    
    (74,161
    )
    
    
    (70,254
    )
    
    
    (115,162
    )Net cash (paid) received from business combinations
    
    
    
    
    
    
    
    
    
    
    (2,713,208
    )Net cash provided by/(used in) investing activities
    
    
    4,034,345
    
    
    
    4,043,920
    
    
    
    (8,671,269
    )Cash Flows From Financing Activities:Net change in deposits and other customer accounts
    
    
    (1,479,576
    )
    
    
    (2,478,869
    )
    
    
    3,368,642Net increase (decrease) in borrowings and other debt obligations
    
    
    (7,230,785
    )
    
    
    1,024,006
    
    
    
    2,271,801Proceeds from senior credit facility and senior notes, net of issuance costs
    
    
    2,088,452
    
    
    
    580,000
    
    
    
    875,000Repayments of borrowings and other debt obligations
    
    
    (180,000
    )
    
    
    (2,347,090
    )
    
    
    (550,000
    )Net increase (decrease) in advance payments by borrowers for taxes and insurance
    
    
    10,134
    
    
    
    (14,950
    )
    
    
    (60,532
    )Maturity of minority interest
    
    
    
    
    
    
    (11,822
    )
    
    
    (54,000
    )Proceeds from issuance of preferred stock, net of issuance costs
    
    
    
    
    
    
    
    
    
    
    195,445Proceeds from issuance of common stock, net of issuance costs
    
    
    1,405,993
    
    
    
    35,627
    
    
    
    2,043,009Sale of unallocated ESOP shares
    
    
    
    
    
    
    26,574
    
    
    
    Treasury stock repurchases, net of proceeds
    
    
    (2,208
    )
    
    
    5,624
    
    
    
    400,612Cash dividends paid to preferred stockholders
    
    
    (14,600
    )
    
    
    (14,600
    )
    
    
    (7,908
    )Cash dividends paid to common stockholders
    
    
    
    
    
    
    (153,236
    )
    
    
    (126,104
    )Net cash (used in)/provided by financing activities
    
    
    (5,402,590
    )
    
    
    (3,348,736
    )
    
    
    8,355,965Net change in cash and cash equivalents
    
    
    623,753
    
    
    
    1,326,653
    
    
    
    672,181Cash and cash equivalents at beginning of year
    
    
    3,130,770
    
    
    
    1,804,117
    
    
    
    1,131,936Cash and cash equivalents at end of year
    
    $
    3,754,523
    
    
    $
    3,130,770
    
    
    $
    1,804,117
  58




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##### Table of Contents



Supplemental Disclosures:
 AT DECEMBER 31,(IN THOUSANDS)
    
    2008
    
    2007
    
    2006Income taxes paid / (refund received)
    
    $
    (5,429
    )
    
    $
    204,090
    
    
    $
    155,963Interest paid
    
    
    2,097,222
    
    
    
    2,984,896
    
    
    
    2,327,659
       59




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies
   a. Principles of Consolidation 
 b. Use of Estimates 
 c. Per Share Information 
 d. Revenue Recognition 
 e. Investment Securities and Other Investments 
  f. Loans Held for Sale 
 g. Mortgage Servicing Rights 
 60




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (continued)
   h. Allowance for Loan Losses and Reserve for Unfunded Lending Commitments 
         i. Loans 
 61




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (continued)
    j. Premises and Equipment 
 Office buildings
    
    10 to 30 yearsLeasehold improvements
    
    Remaining lease termFurniture, fixtures and equipment
    
    3 to 10 yearsAutomobiles
    
    5 years
  k. Other Real Estate Owned 
 l. Bank Owned Life Insurance
 m. Income Taxes 
  th
   62




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (continued)
  n. Derivative Instruments and Hedging Activity 
      o. Forward Exchange 
 p. Consolidated Statement of Cash Flows 
 63




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (continued)
 q. Goodwill and Core Deposit Intangibles 
  r. Asset Securitizations 
   s. Marketing expense 
 t. Stock Based Compensation 
  GRANT DATE YEAR2008
    
    2007
    
    2006Expected volatility
    
    
    .280 - .468
    
    
    
    .214 - .235
    
    
    
    .262 - .278Expected life in years
    
    
    6.00
    
    
    
    6.00
    
    
    
    6.00Stock price on date of grant
    
    $
    4.77 - 7.73
    
    
    $
    17.62 - 25.76
    
    
    $
    19.98 - 25.77Exercise price
    
    $
    4.77 - 7.73
    
    
    $
    17.62 - 25.76
    
    
    $
    19.98 - 25.77Weighted average exercise price
    
    $
    5.27
    
    
    $
    22.74
    
    
    $
    20.30Weighted average fair value
    
    $
    2.54
    
    
    $
    6.24
    
    
    $
    6.42Expected dividend yield
    
    
    N/A
    
    
    
    1.24% - 1.82
    %
    
    
    1.11% - 1.50
    %Risk-free interest rate
    
    
    2.84% - 3.51
    %
    
    
    4.07% - 5.04
    %
    
    
    4.28% - 5.13
    %Vesting period in years
    
    
    3-5
    
    
    
    3-5
    
    
    
    2-5
   64




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies (continued)
 u. Equity Method Investments 
  Note 2  Recent Accounting Pronouncements
        65




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 2  Recent Accounting Pronouncements (continued)
  
    
    Acquisition costs will be generally expensed as incurred;
    
    Non-controlling interests (formerly known as minority interests) will be valued at fair value
at the acquisition date;
    
    Acquired contingent liabilities will be recorded at fair value at the acquisition date and
subsequently measured at the higher of such amount
determined under existing guidance for non-acquired contingencies. Changes in the value of these
contingent liabilities will be recorded through earnings;
    
    In process research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date;
    
    Restructuring costs associated with a business combination will be generally expensed subsequent
to the acquisition date; and
    
    Changes in deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense.
    Note 3  Business Combinations
  66




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 3  Business Combinations (continued)
  AssetsInvestments
    
    $
    3,126.5Loans:Multi-family
    
    
    5,571.2Commercial
    
    
    5,313.3Consumer
    
    
    517.2Residential
    
    
    1,829.0Total loans
    
    
    13,230.7Less allowance for loan losses
    
    
    (97.8
    )Total loans, net
    
    
    13,132.9Cash acquired, net of cash paid
    
    
    (2,713.2
    )Premises and equipment, net
    
    
    167.9Bank Owned Life Insurance
    
    
    343.3Other assets
    
    
    370.5Core deposit and other intangibles
    
    
    394.2Goodwill
    
    
    2,280.6Total assets
    
    $
    17,102.7LiabilitiesDeposits:Core
    
    $
    6,960.8Time
    
    
    4,070.1Total deposits
    
    
    11,030.9Borrowings and other debt obligations
    
    
    5,488.8Other liabilities (1)
    
    
    583.0Total liabilities
    
    $
    17,102.7
 
 (1)
    
    Includes liabilities of $26.2 million directly associated with the
transaction which were recorded as part of the purchase price which is
primarily comprised of $14.4 million of termination penalties for
canceling certain long-term Independence contracts related to
redundant services and $2.8 million related to branch consolidation.   2007
    
    
    2006Branch and office consolidations
    
    $
    
    
    
    $
    2,330System conversions
    
    
    985
    
    
    
    9,414Retail banking conversion costs
    
    
    
    
    
    
    10,059Marketing
    
    
    577
    
    
    
    12,504Retention bonuses and other employee-related costs
    
    
    
    
    
    
    5,663Other
    
    
    680
    
    
    
    2,781Total
    
    $
    2,242
    
    
    $
    42,751
   67




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 3  Business Combinations (continued)
  Other
    
    
    Independenceacquisitions
    
    
    acquisition
    
    
    TotalReserve balance at December 31, 2007
    
    $
    12,961
    
    
    $
    10,073
    
    
    $
    23,034Payments
    
    
    (10,887
    )
    
    
    (6,266
    )
    
    
    (17,153
    )Reserve balance as of December 31, 2008
    
    $
    2,074
    
    
    $
    3,807
    
    
    $
    5,881
 Note 4  Goodwill and Other Intangible Assets
       68




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 4  Goodwill and Other Intangible Assets (continued)
  YEAR
    
    AMOUNT2009
    
    $
    71,3412010
    
    
    56,6172011
    
    
    44,9632012
    
    
    33,1082013
    
    
    23,630
  Note 5  Restrictions on Cash and Amounts Due From Depository Institutions
  69




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 6  Investment Securities
  AT DECEMBER 31,2008
    
    
    2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Appreciation
    
    
    Depreciation
    
    
    Value
    
    
    Cost
    
    
    Appreciation
    
    
    Depreciation
    
    
    ValueInvestment Securities
Available for sale:U.S. Treasury and
government agency
securities
    
    $
    243,796
    
    
    $
    991
    
    
    $
    
    
    
    $
    244,787
    
    
    $
    85,948
    
    
    $
    480
    
    
    $
    
    
    
    $
    86,428Debentures of FHLB,
FNMA and FHLMC
    
    
    4,597,607
    
    
    
    21,175
    
    
    
    64
    
    
    
    4,618,718
    
    
    
    186,482
    
    
    
    5,918
    
    
    
    1
    
    
    
    192,399Corporate debt and
asset-backed securities
    
    
    164,648
    
    
    
    9
    
    
    
    18,861
    
    
    
    145,796
    
    
    
    947,992
    
    
    
    10
    
    
    
    194,239
    
    
    
    753,763Equity securities
    
    
    63,317
    
    
    
    533
    
    
    
    36,757
    
    
    
    27,093
    
    
    
    638,881
    
    
    
    4,282
    
    
    
    1
    
    
    
    643,162State and municipal
securities
    
    
    1,840,080
    
    
    
    
    
    
    
    210,967
    
    
    
    1,629,113
    
    
    
    2,505,772
    
    
    
    23,055
    
    
    
    26,403
    
    
    
    2,502,424Mortgage-backed
Securities:U.S. government agencies
    
    
    13,329
    
    
    
    78
    
    
    
    164
    
    
    
    13,243
    
    
    
    2,251,022
    
    
    
    4,376
    
    
    
    56
    
    
    
    2,255,342FHLMC and FNMA
securities
    
    
    470,522
    
    
    
    8,508
    
    
    
    2,744
    
    
    
    476,286
    
    
    
    4,099,515
    
    
    
    46,484
    
    
    
    1,597
    
    
    
    4,144,402Non-agencies
    
    
    2,698,673
    
    
    
    1
    
    
    
    552,371
    
    
    
    2,146,303
    
    
    
    3,459,284
    
    
    
    2,797
    
    
    
    98,154
    
    
    
    3,363,927Total investment
securities available
for sale
    
    $
    10,091,972
    
    
    $
    31,295
    
    
    $
    821,928
    
    
    $
    9,301,339
    
    
    $
    14,174,896
    
    
    $
    87,402
    
    
    $
    320,451
    
    
    $
    13,941,847
     70




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 6  Investment Securities (continued)
   AT DECEMBER 31, 2008Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesInvestment SecuritiesAvailable for sale investment securities:Debentures of FHLB, FNMA and FHLMC
    
    $
    99,762
    
    
    $
    (64
    )
    
    $
    
    
    
    $
    
    
    
    $
    99,762
    
    
    $
    (64
    )Corporate debt and asset-backed securities
    
    
    11
    
    
    
    
    
    
    
    43,896
    
    
    
    (18,861
    )
    
    
    43,907
    
    
    
    (18,861
    )Equity Securities
    
    
    19,892
    
    
    
    (36,756
    )
    
    
    253
    
    
    
    (1
    )
    
    
    20,145
    
    
    
    (36,757
    )State and municipal securities
    
    
    259,702
    
    
    
    (20,875
    )
    
    
    1,367,975
    
    
    
    (190,092
    )
    
    
    1,627,677
    
    
    
    (210,967
    )Mortgage-backed Securities:U.S. government agencies
    
    
    10,197
    
    
    
    (142
    )
    
    
    879
    
    
    
    (22
    )
    
    
    11,076
    
    
    
    (164
    )FHLMC and FNMA securities
    
    
    228,474
    
    
    
    (2,196
    )
    
    
    13,970
    
    
    
    (548
    )
    
    
    242,444
    
    
    
    (2,744
    )Non-agencies
    
    
    467,437
    
    
    
    (139,985
    )
    
    
    1,331,833
    
    
    
    (412,386
    )
    
    
    1,799,270
    
    
    
    (552,371
    )Total investment securities available for sale
    
    $
    1,085,475
    
    
    $
    (200,018
    )
    
    $
    2,758,806
    
    
    $
    (621,910
    )
    
    $
    3,844,281
    
    
    $
    (821,928
    )
 AT DECEMBER 31, 2007Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesInvestment SecuritiesAvailable for sale investment securities:Debentures of FHLB, FNMA and FHLMC
    
    $
    
    
    
    $
    
    
    
    $
    1,009
    
    
    $
    (1
    )
    
    $
    1,009
    
    
    $
    (1
    )Corporate debt and asset-backed securities
    
    
    223,813
    
    
    
    (81,066
    )
    
    
    398,924
    
    
    
    (113,173
    )
    
    
    622,737
    
    
    
    (194,239
    )Equity Securities
    
    
    253
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    253
    
    
    
    (1
    )State and municipal securities
    
    
    1,510,114
    
    
    
    (25,880
    )
    
    
    18,697
    
    
    
    (523
    )
    
    
    1,528,811
    
    
    
    (26,403
    )Mortgage-backed Securities:U.S. government agencies
    
    
    26
    
    
    
    
    
    
    
    1,392
    
    
    
    (56
    )
    
    
    1,418
    
    
    
    (56
    )FHLMC and FNMA securities
    
    
    11,020
    
    
    
    (46
    )
    
    
    91,600
    
    
    
    (1,551
    )
    
    
    102,620
    
    
    
    (1,597
    )Non-agencies
    
    
    1,511,132
    
    
    
    (41,875
    )
    
    
    1,475,522
    
    
    
    (56,279
    )
    
    
    2,986,654
    
    
    
    (98,154
    )Total investment securities available for sale
    
    $
    3,256,358
    
    
    $
    (148,868
    )
    
    $
    1,987,144
    
    
    $
    (171,583
    )
    
    $
    5,243,502
    
    
    $
    (320,451
    )
 71




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 6  Investment Securities (continued)
   YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Proceeds from sales
    
    $
    5,203,297
    
    
    $
    669,053
    
    
    $
    13,826,925Gross realized gains
    
    
    50,316
    
    
    
    4,821
    
    
    
    37,668Gross realized losses
    
    
    (617,767
    )
    
    
    (627
    )
    
    
    (282,842
    )Net realized (losses)/gains
    
    $
    (567,451
    )
    
    $
    4,194
    
    
    $
    (245,174
    )
   72




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 6  Investment Securities (continued)
  INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 2008(1)Due After
    
    
    
    
    
    
    WeightedDue Within
    
    
    Due After 1
    
    
    Due After 5
    
    
    10 Years/No
    
    
    
    
    
    
    AverageOne Year
    
    
    Within 5 Yrs
    
    
    Within 10 Yrs
    
    
    Maturity
    
    
    Total
    
    
    Yield(3)U.S. Treasury and government agency
    
    $
    244,787
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    244,787
    
    
    
    1.14
    %Debentures of FHLB, FNMA and FHLMC
    
    
    4,598,718
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    4,618,718
    
    
    
    2.20
    %Corporate debt and asset backed
securities
    
    
    757
    
    
    
    54,153
    
    
    
    1,489
    
    
    
    89,397
    
    
    
    145,796
    
    
    
    6.48
    %Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,093
    
    
    
    27,093
    
    
    
    
    %State and Municipal securities
    
    
    23
    
    
    
    1,320
    
    
    
    93
    
    
    
    1,627,677
    
    
    
    1,629,113
    
    
    
    3.95
    %Mortgage-backed Securities(2):U.S. government agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,243
    
    
    
    13,243
    
    
    
    4.96
    %FHLMC and FNMA securities
    
    
    2,644
    
    
    
    203,094
    
    
    
    41,136
    
    
    
    229,412
    
    
    
    476,286
    
    
    
    4.32
    %Non-agencies
    
    
    
    
    
    
    
    
    
    
    189,534
    
    
    
    1,956,769
    
    
    
    2,146,303
    
    
    
    4.29
    %Total Fair Value
    
    $
    4,846,929
    
    
    $
    258,567
    
    
    $
    252,252
    
    
    $
    3,943,591
    
    
    $
    9,301,339
    
    
    
    3.11
    %Weighted average yield
    
    
    2.13
    %
    
    
    3.91
    %
    
    
    5.42
    %
    
    
    4.12
    %
    
    
    3.11
    %Total Amortized Cost
    
    $
    4,825,905
    
    
    $
    258,817
    
    
    $
    252,055
    
    
    $
    4,740,284
    
    
    $
    10,077,061
 
 (1)
    
    The maturities above do not represent the effective duration of Sovereigns portfolio since the amounts above are based on
contractual maturities and do not contemplate anticipated prepayments, with the exception of the securities identified in
Note 2 below.(2)
    
    Mortgage-backed and state and municipal securities are assigned to maturity categories based on their estimated average lives.(3)
    
    Weighted-average yields are based on amortized cost. Yields on tax-exempt securities are calculated on a tax equivalent basis
and are based on an effective tax rate of 35%.  73




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 7  Loans
  AT DECEMBER 31,2008
    
    
    2007Commercial real estate loans(1)
    
    $
    13,181,623
    
    
    $
    12,306,914Commercial and industrial loans
    
    
    12,428,069
    
    
    
    12,594,652Multi-family loans
    
    
    4,512,608
    
    
    
    4,088,992Other
    
    
    1,650,824
    
    
    
    1,765,036Total Commercial Loans Held for Investment
    
    
    31,773,124
    
    
    
    30,755,594Residential mortgages
    
    
    11,103,279
    
    
    
    12,950,811Home equity loans and lines of credit
    
    
    6,891,918
    
    
    
    6,197,148Total consumer loans secured by real estate
    
    
    17,995,197
    
    
    
    19,147,959Auto loans
    
    
    5,344,325
    
    
    
    7,028,894Other
    
    
    290,725
    
    
    
    299,572Total Consumer Loans Held for Investment
    
    
    23,630,247
    
    
    
    26,476,425Total Loans Held for Investment (2)
    
    $
    55,403,371
    
    
    $
    57,232,019Total Loans Held for Investment with:Fixed rate
    
    $
    29,429,245
    
    
    $
    32,903,007Variable rate
    
    
    25,974,126
    
    
    
    24,329,012Total Loans Held for Investment(2)
    
    $
    55,403,371
    
    
    $
    57,232,019
 
 (1)
    
    Includes residential and commercial construction loans of $2.7 billion and $2.3 billion at December 31, 2008 and 2007, respectively.(2)
    
    Loan totals include deferred loan origination costs, net of deferred loan fees and unamortized purchase premiums, net of discounts.
These items resulted in a net increase in loans of $11.9 million and a net decrease in loans of $7.2 million at December 31, 2008
and 2007, respectively. Loans pledged as collateral for borrowings totaled $42.7 billion and $31.3 billion at December 31, 2008 and
2007.   AT DECEMBER 31,2008
    
    
    2007Multi-family
    
    $
    13,503
    
    
    $
    157,378Residential mortgages
    
    
    313,829
    
    
    
    390,382Total Loans Held for Sale
    
    $
    327,332
    
    
    $
    547,760Total Loans Held for Sale with:Fixed rate
    
    $
    327,332
    
    
    $
    547,760Variable rate
    
    
    
    
    
    
    Total Loans Held for Sale
    
    $
    327,332
    
    
    $
    547,760
  74




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 7  Loans (continued)
  YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Allowance for loan losses balance, beginning of
period
    
    $
    709,444
    
    
    $
    471,030
    
    
    $
    419,599Allowance acquired from acquisitions
    
    
    
    
    
    
    
    
    
    
    97,824Provision for loan losses (1)
    
    
    874,140
    
    
    
    394,646
    
    
    
    487,418Allowance released in connection with loan
sales or securitizations
    
    
    (3,745
    )
    
    
    (12,409
    )
    
    
    (4,728
    )Charge-offs:Commercial
    
    
    238,470
    
    
    
    65,670
    
    
    
    56,916Consumer secured by real estate (1)
    
    
    75,978
    
    
    
    26,809
    
    
    
    463,902Consumer not secured by real estate
    
    
    277,266
    
    
    
    126,385
    
    
    
    73,958Total charge-offs
    
    
    591,714
    
    
    
    218,864
    
    
    
    594,776Recoveries:Commercial
    
    
    13,378
    
    
    
    15,187
    
    
    
    14,097Consumer secured by real estate
    
    
    9,027
    
    
    
    11,193
    
    
    
    9,933Consumer not secured by real estate
    
    
    92,223
    
    
    
    48,661
    
    
    
    41,663Total recoveries
    
    
    114,628
    
    
    
    75,041
    
    
    
    65,693Charge-offs, net of recoveries
    
    
    477,086
    
    
    
    143,823
    
    
    
    529,083Allowance for loan losses balance, end of period
    
    $
    1,102,753
    
    
    $
    709,444
    
    
    $
    471,030Reserve for unfunded lending commitments,
beginning of period
    
    
    28,301
    
    
    
    15,255
    
    
    
    18,212Provision for unfunded lending commitments
    
    
    36,860
    
    
    
    13,046
    
    
    
    (2,957
    )Reserve for unfunded lending commitments, end
of period
    
    
    65,161
    
    
    
    28,301
    
    
    
    15,255Total allowance for credit losses
    
    $
    1,167,914
    
    
    $
    737,745
    
    
    $
    486,285
 
 (1)
    
    Our 2006 provision for loan loss and charge-offs included $296.0
million and $382.5 million, respectively, related to the previously
discussed loss on the correspondent home equity loans that were
classified as held for sale as of December 31, 2006. Additionally,
Sovereign recorded an additional $12.5 million of provisions to cover
the inherent losses in the multi-family loan portfolio acquired from
Independence in the second quarter of 2006. Finally, as previously
discussed, we recorded a charge-off of $7.1 million on $2.9 billion of
residential mortgage loans that were classified as held for sale as of
December 31, 2006.  AT DECEMBER 31,2008
    
    
    2007Impaired loans with a related allowance
    
    $
    469,363
    
    
    $
    316,014Impaired loans without a related allowance
    
    
    
    
    
    
    Total impaired loans
    
    $
    469,363
    
    
    $
    316,014Allowance for impaired loans
    
    $
    106,176
    
    
    $
    66,879Total non-accrual loans
    
    $
    913,407
    
    
    $
    304,289Total loans past due 90 days as to interest or principal and accruing interest
    
    $
    123,301
    
    
    $
    68,770
 75




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 8  Mortgage Servicing Rights
  YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Gross balance, beginning of year
    
    $
    141,076
    
    
    $
    118,637
    
    
    $
    91,073Residential mortgage servicing assets recognized
    
    
    48,750
    
    
    
    51,139
    
    
    
    41,626Servicing rights acquired
    
    
    
    
    
    
    
    
    
    
    7,640Amortization of residential mortgage servicing rights
    
    
    (28,538
    )
    
    
    (26,063
    )
    
    
    (15,785
    )Write-off of servicing assets
    
    
    
    
    
    
    (1,164
    )
    
    
    (5,917
    )Gross balance, end of year
    
    
    161,288
    
    
    
    142,549
    
    
    
    118,637Valuation allowance
    
    
    (48,815
    )
    
    
    (1,473
    )
    
    
    (1,222
    )Balance, end of year
    
    $
    112,473
    
    
    $
    141,076
    
    
    $
    117,415
   December 31, 2008
    
    December 31, 2007
    
    December 31, 2006CPR speed
    
    
    29.65
    %
    
    
    14.70
    %
    
    
    14.23
    %Escrow credit spread
    
    
    4.35
    %
    
    
    5.12
    %
    
    
    4.85
    %
  YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Balance, beginning of year
    
    $
    1,473
    
    
    $
    1,222
    
    
    $
    16Write-offs of reserves
    
    
    
    
    
    
    (1,164
    )
    
    
    (5,917
    )Increase in valuation
allowance for residential
mortgage servicing rights
    
    
    47,342
    
    
    
    1,415
    
    
    
    7,123Balance, end of year
    
    $
    48,815
    
    
    $
    1,473
    
    
    $
    1,222
  76




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 8  Mortgage Servicing Rights (continued)
     77




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 9  Premises and Equipment
  AT DECEMBER 31,2008
    
    
    2007Land
    
    $
    63,198
    
    
    $
    63,268Office buildings
    
    
    236,102
    
    
    
    228,583Furniture, fixtures, and equipment
    
    
    399,040
    
    
    
    376,782Leasehold improvements
    
    
    302,159
    
    
    
    267,753Automobiles and other
    
    
    6,877
    
    
    
    13,5021,007,376
    
    
    
    949,888Less accumulated depreciation
    
    
    (457,226
    )
    
    
    (387,556
    )Total premises and equipment
    
    $
    550,150
    
    
    $
    562,332
  Note 10  Accrued Interest Receivable
  AT DECEMBER 31,2008
    
    
    2007Accrued interest receivable on:Investment securities
    
    $
    42,196
    
    
    $
    88,803Loans
    
    
    209,416
    
    
    
    261,731Total interest receivable
    
    $
    251,612
    
    
    $
    350,534
 78




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 11  Deposits
  AT DECEMBER 31,2008
    
    
    
    
    
    
    
    
    
    
    2007Balance
    
    
    Percent
    
    
    Rate
    
    
    Balance
    
    
    Percent
    
    
    RateDemand deposit accounts
    
    $
    6,684,232
    
    
    
    13.8
    %
    
    
    
    %
    
    $
    6,444,338
    
    
    
    12.9
    %
    
    
    
    %NOW accounts
    
    
    5,031,748
    
    
    
    10.4
    
    
    
    0.56
    
    
    
    5,546,280
    
    
    
    11.1
    
    
    
    1.02Money market accounts
    
    
    10,483,151
    
    
    
    21.6
    
    
    
    2.39
    
    
    
    10,655,978
    
    
    
    21.3
    
    
    
    3.39Savings accounts
    
    
    3,582,150
    
    
    
    7.4
    
    
    
    0.46
    
    
    
    3,831,636
    
    
    
    7.7
    
    
    
    0.68Certificates of deposit
    
    
    13,559,146
    
    
    
    28.0
    
    
    
    3.37
    
    
    
    11,872,400
    
    
    
    23.8
    
    
    
    4.59Total retail and commercial deposits
    
    
    39,340,427
    
    
    
    81.2
    
    
    
    1.91
    
    
    
    38,350,632
    
    
    
    76.8
    
    
    
    2.58Wholesale NOW accounts
    
    
    67,213
    
    
    
    0.2
    
    
    
    2.27
    
    
    
    15,082
    
    
    
    0.0
    
    
    
    4.68Wholesale money market accounts
    
    
    1,701,734
    
    
    
    3.5
    
    
    
    0.46
    
    
    
    1,761,693
    
    
    
    3.5
    
    
    
    4.50Wholesale certificates of deposit
    
    
    3,004,958
    
    
    
    6.2
    
    
    
    3.54
    
    
    
    3,030,594
    
    
    
    6.1
    
    
    
    4.85Total wholesale deposits
    
    
    4,773,905
    
    
    
    9.9
    
    
    
    2.43
    
    
    
    4,807,369
    
    
    
    9.6
    
    
    
    4.72Total government deposits
    
    
    2,633,859
    
    
    
    5.4
    
    
    
    1.01
    
    
    
    4,003,224
    
    
    
    8.1
    
    
    
    4.37Customer repurchase agreements &
Eurodollar deposits
    
    
    1,690,382
    
    
    
    3.5
    
    
    
    0.41
    
    
    
    2,754,680
    
    
    
    5.5
    
    
    
    3.27Total deposits (1)
    
    $
    48,438,573
    
    
    
    100.0
    %
    
    
    1.86
    
    
    $
    49,915,905
    
    
    
    100.0
    %
    
    
    2.97
    %
 
 (1)
    
    Includes foreign deposits of $0.9 billion and $1.8 billion at December 31, 2008 and December 31, 2007, respectively.  YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006NOW accounts
    
    $
    41,227
    
    
    $
    56,110
    
    
    $
    70,302Money market accounts
    
    
    253,548
    
    
    
    347,077
    
    
    
    225,166Savings accounts
    
    
    24,785
    
    
    
    33,328
    
    
    
    29,660Certificates of deposit
    
    
    425,295
    
    
    
    531,993
    
    
    
    405,216Wholesale NOW accounts
    
    
    2,356
    
    
    
    10,535
    
    
    
    33,660Wholesale money market accounts
    
    
    32,979
    
    
    
    130,617
    
    
    
    137,653Wholesale certificates of deposit
    
    
    54,070
    
    
    
    216,451
    
    
    
    233,335Total government deposits
    
    
    81,288
    
    
    
    193,067
    
    
    
    182,047Customer repurchase agreements & Eurodollar deposits
    
    
    36,040
    
    
    
    108,137
    
    
    
    55,158Total interest expense on deposits
    
    $
    951,588
    
    
    $
    1,627,315
    
    
    $
    1,372,197
  Three months or less
    
    $
    1,548,309Over three through six months
    
    
    1,060,883Over six through twelve months
    
    
    2,867,813Over twelve months
    
    
    590,656Total
    
    $
    6,067,661
  2009
    
    $
    15,423,1152010
    
    
    777,8562011
    
    
    131,5192012
    
    
    100,9762013
    
    
    75,660Thereafter
    
    
    54,978Total
    
    $
    16,564,104
  79




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 12  Borrowings and Other Debt Obligations
  AT DECEMBER 31,2008
    
    
    2007EFFECTIVE
    
    
    
    
    
    
    EFFECTIVEBALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATESovereign Bank borrowings and other debt obligationsSecurities sold under repurchase agreements
    
    $
    
    
    
    
    
    %
    
    $
    76,526
    
    
    
    4.12
    %Overnight federal funds purchased
    
    
    2,000,000
    
    
    
    0.60
    
    
    
    2,720,000
    
    
    
    4.22Federal Home Loan Bank (FHLB) advances, maturing through
February 2018
    
    
    13,267,834
    
    
    
    4.71
    
    
    
    19,705,438
    
    
    
    4.642.75% senior notes, due January 2012
    
    
    1,344,702
    
    
    
    3.92
    
    
    
    
    
    
    
    3.500% subordinated debentures, due June 2013
    
    
    145,518
    
    
    
    3.61
    
    
    
    144,510
    
    
    
    3.633.750% subordinated debentures, due March 2014
    
    
    240,753
    
    
    
    3.89
    
    
    
    238,991
    
    
    
    3.925.125% subordinated debentures, due March 2013
    
    
    472,056
    
    
    
    5.43
    
    
    
    465,487
    
    
    
    5.514.375% subordinated debentures, due August 2013
    
    
    299,853
    
    
    
    4.38
    
    
    
    299,825
    
    
    
    4.388.750% subordinated debentures, due May 2018
    
    
    495,504
    
    
    
    8.83
    
    
    
    
    
    
    
    Holding company borrowings and other debt obligationsSenior revolving credit facility, due August 2008
    
    
    
    
    
    
    
    
    
    
    180,000
    
    
    
    5.554.80% senior notes, due September 2010
    
    
    299,470
    
    
    
    4.81
    
    
    
    299,152
    
    
    
    4.81Floating rate senior notes, due March 2009
    
    
    199,976
    
    
    
    2.48
    
    
    
    199,850
    
    
    
    5.42Floating rate senior notes, due March 2010
    
    
    299,755
    
    
    
    1.73
    
    
    
    299,549
    
    
    
    5.374.900% senior notes, due September 2010
    
    
    246,184
    
    
    
    4.98
    
    
    
    243,976
    
    
    
    5.022.50% senior notes, due June 2012
    
    
    248,474
    
    
    
    3.73
    
    
    
    
    
    
    
    Junior subordinated debentures due to Capital Trust Entities
    
    
    1,256,145
    
    
    
    7.23
    
    
    
    1,252,778
    
    
    
    7.30Total borrowings and other debt obligations
    
    $
    20,816,224
    
    
    
    4.44
    %
    
    $
    26,126,082
    
    
    
    4.75
    %
       80




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 12  Borrowings and Other Debt Obligations (continued)
      
    
    Junior subordinated debentures issued by Sovereign with a distribution rate of 4.375% per
annum on the $50.00 issue price, and each of which will have a principal amount at maturity of
$50 and a stated maturity of March 1, 2034; and
    
    Warrants to purchase shares of Sovereign common stock from Sovereign at any time prior to
the close of business on March 1, 2034, by delivering junior subordinated debentures (or, in
the case of warrant exercises before March 5, 2007, cash equal to the accreted principal
amount of a junior subordinated debenture).
   81




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 12  Borrowings and Other Debt Obligations (continued)
    2009
    
    $
    9,537,6452010
    
    
    2,035,4092011
    
    
    45,0002012
    
    
    1,593,3412013
    
    
    1,287,427Thereafter
    
    
    6,317,402Total
    
    $
    20,816,224
 Note 13  Minority Interests
   82




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 14  Stockholders Equity
          Note 15  Regulatory Matters
     83




---



##### Table of Contents



Notes to Consolidated Financial Statements
 Note 15  Regulatory Matters (continued)
  REGULATORY CAPITAL (IN THOUSANDS)Tier 1
    
    
    Tier 1
    
    
    TotalLeverage
    
    
    Risk-Based
    
    
    Risk-BasedCapital To
    
    
    Capital To
    
    
    Capital ToTangible
    
    
    Risk Adjusted
    
    
    Risk AdjustedAssets
    
    
    Assets
    
    
    AssetsSovereign Bank at December 31, 2008:Regulatory capital
    
    $
    4,434,350
    
    
    $
    4,166,510
    
    
    $
    6,449,472Minimum capital requirement(1)
    
    
    2,979,778
    
    
    
    2,528,501
    
    
    
    5,057,002Excess
    
    $
    1,454,572
    
    
    $
    1,638,009
    
    
    $
    1,392,470Capital ratio
    
    
    5.95
    %
    
    
    6.59
    %
    
    
    10.20
    %Sovereign Bank at December 31, 2007:Regulatory capital
    
    $
    5,289,889
    
    
    $
    5,030,620
    
    
    $
    6,939,602Minimum capital requirement(1)
    
    
    3,237,187
    
    
    
    2,668,712
    
    
    
    5,337,424Excess
    
    $
    2,052,702
    
    
    $
    2,361,908
    
    
    $
    1,602,178Capital ratio
    
    
    6.54
    %
    
    
    7.54
    %
    
    
    10.40
    %
 
 (1)
    
    As defined by OTS Regulations.  84




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note
16  Stock-Based Compensation
   Shares
    
    
    Price per shareOptions outstanding December 31, 2005 (10,249,285 exercisable)
    
    
    14,840,809
    
    
    $
    2.95 - 22.95Granted
    
    
    1,878,225
    
    
    $
    19.98 - 25.77Exercised
    
    
    (1,615,277
    )
    
    $
    2.95 - 17.05Forfeited
    
    
    (319,754
    )
    
    $
    6.67 - 22.95Expired
    
    
    (16,293
    )
    
    $
    6.39 - 17.05Options outstanding December 31, 2006 (9,111,666 exercisable)
    
    
    14,767,710
    
    
    $
    2.95 - 25.77Granted
    
    
    115,077
    
    
    $
    17.62 - 25.76Exercised
    
    
    (2,466,307
    )
    
    $
    2.95 - 22.32Forfeited
    
    
    (356,235
    )
    
    $
    6.67 - 25.77Expired
    
    
    (143,847
    )
    
    $
    6.40 - 22.32Options outstanding December 31, 2007 (7,075,060 exercisable)
    
    
    11,916,398
    
    
    $
    2.95 - 25.77Granted
    
    
    305,500
    
    
    $
    4.77 - 7.73Exercised
    
    
    (875,735
    )
    
    $
    6.39 - 12.16Forfeited
    
    
    (342,761
    )
    
    $
    6.40 - 24.30Expired
    
    
    (2,022,919
    )
    
    $
    6.40 - 22.32Options outstanding December 31, 2008 (6,468,629 exercisable)
    
    
    8,980,483
    
    
    $
    2.95 - 25.77
   OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWeightedWeighted
    
    
    Average
    
    
    
    
    
    
    WeightedAverage
    
    
    Remaining
    
    
    
    
    
    
    AverageExercise
    
    
    Contractual
    
    
    
    
    
    
    ExerciseExercise Prices
    
    
    Shares
    
    
    Price
    
    
    Life
    
    
    Shares
    
    
    Price$
    2.95 - 4.34
    
    
    
    29,604
    
    
    $
    3.57
    
    
    
    1.15
    
    
    
    29,604
    
    
    $
    3.57$
    5.29 - 7.35
    
    
    
    1,033,031
    
    
    
    6.18
    
    
    
    3.66
    
    
    
    730,531
    
    
    
    6.57$
    7.44 - 10.30
    
    
    
    887,429
    
    
    
    7.94
    
    
    
    2.07
    
    
    
    884,429
    
    
    
    7.94$
    10.78 - 14.38
    
    
    
    4,633,424
    
    
    
    12.18
    
    
    
    3.16
    
    
    
    4,633,424
    
    
    
    12.18$
    15.10 - 21.10
    
    
    
    1,345,036
    
    
    
    20.01
    
    
    
    7.05
    
    
    
    102,130
    
    
    
    19.04$
    21.21 - 25.77
    
    
    
    1,051,959
    
    
    
    22.21
    
    
    
    5.96
    
    
    
    88,511
    
    
    
    22.71Total
    
    
    8,980,483
    
    
    $
    13.39
    
    
    
    4.02
    
    
    
    6,468,629
    
    
    $
    11.18
 th
 85




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 16  Stock-Based Compensation (continued)
   Shares
    
    
    Weighted average(in thousands)
    
    
    grant date fair valueTotal
non-vested restricted stock at December 31, 2007
    
    
    3,267,377
    
    
    $
    22.99Restricted stock granted in 2008
    
    
    3,128,624
    
    
    
    10.89Vested restricted stock in 2008
    
    
    (613,725
    )
    
    
    23.98Non-vested shares forfeited during 2008
    
    
    (752,381
    )
    
    
    17.33Total
non-vested restricted stock at December 31, 2008
    
    
    5,029,895
    
    
    $
    16.54
  Note 17  Employee Benefit Plans
      86




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 17  Employee Benefit Plans (continued)
  Year ended December 31,2008
    
    
    2007Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    80,994
    
    
    $
    84,067Service cost
    
    
    
    
    
    
    830Interest cost
    
    
    4,910
    
    
    
    4,569Actuarial gain
    
    
    773
    
    
    
    (2,035
    )Annuity payments
    
    
    (4,733
    )
    
    
    (4,154
    )Settlements
    
    
    
    
    
    
    (45
    )Curtailments
    
    
    
    
    
    
    (2,238
    )Projected benefit obligation at year end
    
    $
    81,944
    
    
    $
    80,994Change in plan assets:Fair value at beginning of year
    
    $
    89,885
    
    
    $
    88,190Actual return on plan assets
    
    
    (22,729
    )
    
    
    5,894Employer contributions
    
    
    
    
    
    
    Annuity payments
    
    
    (4,733
    )
    
    
    (4,154
    )Settlements
    
    
    
    
    
    
    (45
    )Fair value at year end
    
    $
    62,423
    
    
    $
    89,885Components of net periodic pension expense:Service cost
    
    $
    --
    
    
    $
    830Interest cost
    
    
    4,532
    
    
    
    4,569Expected Return on plan assets
    
    
    (7,894
    )
    
    
    (7,889
    )Amortization of prior period service benefit
    
    
    
    
    
    
    Amortization of unrecognized actuarial loss
    
    
    
    
    
    
    Net periodic pension expense
    
    $
    (3,362
    )
    
    $
    (2,490
    )
  2008
    
    2007Discount rate
    
    
    5.75
    %
    
    
    5.75
    %Expected long-term return on plan assets
    
    
    9.00
    %
    
    
    9.00
    %Salary increase rate
    
    
    0.00
    %
    
    
    3.00
    %
  2009
    
    $
    4,392,7772010
    
    
    4,436,8102011
    
    
    4,444,8562012
    
    
    4,508,2812013
    
    
    4,638,6882014 to 2018
    
    
    26,083,164Total
    
    $
    48,504,576
  87




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 18  Income Taxes
  YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Current:Foreign (1)
    
    $
    104
    
    
    $
    22,929
    
    
    $
    87,593Federal
    
    
    (121,006
    )
    
    
    83,194
    
    
    
    16,844State
    
    
    7,450
    
    
    
    4,992
    
    
    
    4,195(113,452
    )
    
    
    111,115
    
    
    
    108,632Deferred:Federal
    
    
    837,412
    
    
    
    (171,565
    )
    
    
    (226,432
    )State
    
    
    (384
    )
    
    
    
    
    
    
    Total income tax (benefit)/expense
    
    $
    723,576
    
    
    $
    (60,450
    )
    
    $
    (117,800
    )
 
 (1)
    
    Current foreign income tax expense in 2007 and 2006 relates to interest income on assets that
Sovereign transferred to a consolidated foreign special purpose entity to support a borrowing
arrangement that Sovereign has with an international bank. Foreign taxes paid on this income are
credited against United States income taxes for federal income tax purposes. See Note 12 for
further discussion.  YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Federal income tax at statutory rate
    
    
    (35.0
    )%
    
    
    (35.0
    )%
    
    
    35.0
    %Increase/(decrease) in taxes resulting from:Valuation allowance
    
    
    87.7
    
    
    
    
    
    
    
    Tax-exempt income
    
    
    (3.1
    )
    
    
    (4.2
    )
    
    
    (293.4
    )Bank owned life insurance
    
    
    (1.6
    )
    
    
    (2.1
    )
    
    
    (122.6
    )State income taxes, net of federal tax benefit
    
    
    (2.4
    )
    
    
    0.2
    
    
    
    16.5Credit for synthetic fuels
    
    
    
    
    
    
    (1.2
    )
    
    
    (94.1
    )Low income housing credits
    
    
    (2.5
    )
    
    
    (2.8
    )
    
    
    (189.5
    )Goodwill impairment charge
    
    
    
    
    
    
    39.1
    
    
    
    Other
    
    
    1.2
    
    
    
    1.7
    
    
    
    32.3Effective tax rate
    
    
    44.3
    %
    
    
    (4.3
    )%
    
    
    (615.8
    )%
 88




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 18  Income Taxes (continued)
  AT DECEMBER 31,2008
    
    
    2007Deferred tax assets:Allowance for loan losses
    
    $
    369,617
    
    
    $
    256,369Unrealized loss on available for sale portfolio
    
    
    285,488
    
    
    
    82,517Unrealized loss on derivatives
    
    
    119,693
    
    
    
    73,196Net operating loss carry forwards
    
    
    190,472
    
    
    
    592Non-solicitation payments
    
    
    52,483
    
    
    
    58,206Employee benefits
    
    
    26,105
    
    
    
    51,831General Business credit carry forwards
    
    
    173,805
    
    
    
    92,727Foreign tax credit carry forwards
    
    
    72,903
    
    
    
    50,417Broker commissions paid on originated mortgage loans
    
    
    33,543
    
    
    
    34,653Minimum tax credit carry forward
    
    
    36,455
    
    
    
    Capital loss on loans sold
    
    
    
    
    
    
    129,123Other than temporary impairment on investments and equity method investments
    
    
    459,359
    
    
    
    99,162Deferred interest expense
    
    
    64,901
    
    
    
    50,483Other
    
    
    203,573
    
    
    
    102,673Total gross deferred tax assets
    
    
    2,088,397
    
    
    
    1,081,949Deferred tax liabilities:Purchase accounting adjustments
    
    
    55,073
    
    
    
    62,443Deferred income
    
    
    27,173
    
    
    
    25,397Originated mortgage servicing rights
    
    
    64,721
    
    
    
    55,277Depreciation and amortization
    
    
    112,425
    
    
    
    101,812Other
    
    
    162,412
    
    
    
    120,136Total gross deferred tax liabilities
    
    
    421,804
    
    
    
    365,065Valuation allowance
    
    
    (1,432,771
    )
    
    
    Net deferred tax asset
    
    $
    233,822
    
    
    $
    716,884
  th
  89




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 18  Income Taxes (continued)
  (in thousands)Gross unrecognized tax benefits at January 1, 2008
    
    $
    87,461Additions based on tax positions related to the current year
    
    
    4,094Additions for tax positions of prior years
    
    
    16,542Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations
    
    
    (2,392
    )Gross unrecognized tax benefits at December 31, 2008
    
    
    105,705Less: Federal, state and local income tax benefits
    
    
    (18,971
    )Net unrecognized tax benefits that if recognized would impact the effective tax rate at December 31, 2008
    
    
    86,734
     90




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 19  Commitments and Contingencies
 Financial Instruments.
  CONTRACT OR NOTIONALAMOUNT AT DECEMBER 31,2008
    
    2007Financial instruments whose contract amounts represent credit risk:Commitments to extend credit
    
    $
    16,279,059
    
    
    $
    20,998,851Standby letters of credit
    
    
    2,801,433
    
    
    
    2,980,472Loans sold with recourse
    
    
    985,418
    
    
    
    269,396Forward buy commitments
    
    
    895,285
    
    
    
    762,499
      Litigation.
  91




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 19  Commitments and Contingencies (continued)
   Leases.
 AT DECEMBER 31, 2008Future MinimumLease
    
    
    Expected Sublease
    
    
    NetPayments
    
    
    Income
    
    
    Payments2009
    
    $
    101,323
    
    
    $
    (11,065
    )
    
    $
    90,2582010
    
    
    97,076
    
    
    
    (9,411
    )
    
    
    87,6652011
    
    
    90,256
    
    
    
    (8,755
    )
    
    
    81,5012012
    
    
    81,289
    
    
    
    (7,565
    )
    
    
    73,7242013
    
    
    72,584
    
    
    
    (3,745
    )
    
    
    68,839Thereafter
    
    
    390,628
    
    
    
    (8,315
    )
    
    
    382,313Total
    
    $
    833,156
    
    
    $
    (48,856
    )
    
    $
    784,300
  92




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 20  Fair Value Disclosures
         Fair Value Measurements at Reporting Date Using:Quoted Prices in Active
    
    
    Significant Other
    
    
    Significant
    
    
    Balance atMarkets for Identical
    
    
    Observable Inputs
    
    
    Unobservable Inputs
    
    
    December 31,Assets (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    2008Assets:US Treasury and government agency securities
    
    $
    
    
    
    $
    244,787
    
    
    $
    
    
    
    $
    244,787Debentures of FHLB, FNMA and FHLMC
    
    
    
    
    
    
    4,618,718
    
    
    
    
    
    
    
    4,618,718Corporate debt and asset-backed securities
    
    
    
    
    
    
    52,257
    
    
    
    93,539
    
    
    
    145,796Equity securities
    
    
    
    
    
    
    16,514
    
    
    
    10,579
    
    
    
    27,093State and municipal securities
    
    
    
    
    
    
    1,629,113
    
    
    
    
    
    
    
    1,629,113Mortgage backed securities
    
    
    
    
    
    
    1,549,082
    
    
    
    1,086,750
    
    
    
    2,635,832Total investment securities available for sale
    
    
    
    
    
    
    8,110,471
    
    
    
    1,190,868
    
    
    
    9,301,339Loans held for sale
    
    
    
    
    
    
    327,332
    
    
    
    
    
    
    
    327,332Derivatives
    
    
    
    
    
    
    (293,016
    )
    
    
    
    
    
    
    (293,016
    )Mortgage servicing rights
    
    
    
    
    
    
    
    
    
    
    127,811
    
    
    
    127,811Other assets
    
    
    
    
    
    
    38,520
    
    
    
    3,474
    
    
    
    41,994Total
    
    $
    
    
    
    $
    8,183,307
    
    
    $
    1,322,153
    
    
    $
    9,505,460
 93




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 20  Fair Value Disclosures (continued)
   Investments
    
    
    Mortgage
    
    
    OtherAvailable for Sale
    
    
    Servicing Rights
    
    
    Assets
    
    
    TotalBalance at December 31, 2007
    
    $
    2,755,692
    
    
    $
    162,623
    
    
    $
    7,104
    
    
    $
    2,925,419Gains/(losses) in other
comprehensive income
    
    
    (182,820
    )
    
    
    
    
    
    
    
    
    
    
    (182,820
    )Gains/(losses) in earnings
    
    
    (1,397,529
    )
    
    
    (53,258
    )
    
    
    
    
    
    
    (1,450,787
    )Purchases/Additions
    
    
    335,811
    
    
    
    56,682
    
    
    
    
    
    
    
    392,493Repayments
    
    
    (320,286
    )
    
    
    
    
    
    
    (735
    )
    
    
    (321,021
    )Sales/Amortization
    
    
    
    
    
    
    (38,236
    )
    
    
    (2,895
    )
    
    
    (41,131
    )Balance at December 31, 2008
    
    $
    1,190,868
    
    
    $
    127,811
    
    
    $
    3,474
    
    
    $
    1,322,153
 Note 21  Fair Value of Financial Instruments
   AT DECEMBER 31,2008
    
    2007Carrying
    
    
    
    
    
    CarryingValue
    
    Fair Value
    
    Value
    
    Fair ValueFinancial Assets:Cash and amounts due from depository institutions
    
    $
    3,754,523
    
    
    $
    3,754,523
    
    
    $
    3,130,770
    
    
    $
    3,130,770Investment securities:Available for sale
    
    
    9,301,339
    
    
    
    9,301,339
    
    
    
    13,941,847
    
    
    
    13,941,847Other investments
    
    
    718,711
    
    
    
    718,711
    
    
    
    1,200,545
    
    
    
    1,200,545Loans held for investment, net
    
    
    54,300,618
    
    
    
    51,693,533
    
    
    
    56,522,575
    
    
    
    57,215,194Loans held for sale
    
    
    327,332
    
    
    
    327,332
    
    
    
    547,760
    
    
    
    547,760Mortgage servicing rights
    
    
    127,811
    
    
    
    128,558
    
    
    
    162,623
    
    
    
    172,917Mortgage banking forward commitments
    
    
    (9,598
    )
    
    
    (9,598
    )
    
    
    (4,711
    )
    
    
    (4,711
    )Mortgage interest rate lock commitments
    
    
    8,573
    
    
    
    8,573
    
    
    
    2,085
    
    
    
    2,085Financial Liabilities:Deposits
    
    
    48,438,573
    
    
    
    48,906,511
    
    
    
    49,915,905
    
    
    
    48,779,402Borrowings and other debt obligations
    
    
    20,816,224
    
    
    
    21,005,248
    
    
    
    26,126,082
    
    
    
    26,508,385Interest rate derivative instruments
    
    
    291,991
    
    
    
    291,991
    
    
    
    179,658
    
    
    
    179,658Precious metal forward sale
agreements
    
    
    (1,227
    )
    
    
    (1,227
    )
    
    
    (34,234
    )
    
    
    (34,234
    )Precious metal forward  arrangements
    
    
    1,227
    
    
    
    1,227
    
    
    
    35,247
    
    
    
    35,247Unrecognized Financial Instruments:(1)Commitments to extend credit
    
    
    113,175
    
    
    
    113,085
    
    
    
    166,226
    
    
    
    166,093
 
 (1)
    
    The amounts shown under carrying value represent accruals or deferred income arising from those unrecognized financial instruments.  Cash and amounts due from depository institutions and interest-earning deposits.
 94




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Notes to Consolidated Financial Statements
 Note 21  Fair Value of Financial Instruments (continued)
 Investment securities available for sale.
 Loans.
 Mortgage servicing rights.
 Mortgage interest rate lock commitments.
 Deposits.
 Borrowings and other debt obligations.
 Commitments to extend credit.
 Precious metals customer forward settlement arrangements and precious metals forward sale
agreements.
 Interest rate derivative instruments.
 95




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Notes to Consolidated Financial Statements
 Note 22  Derivative Instruments and Hedging Activities
    Fair Value Hedges.
   Cash Flow Hedges.
 Other Derivative Activities.
 96




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 22  Derivative Instruments and Hedging Activities (continued)
   Weighted AverageNotional
    
    
    
    
    
    
    
    
    
    
    Receive
    
    
    Pay
    
    
    LifeAmount
    
    
    Asset
    
    
    Liability
    
    
    Rate
    
    
    Rate
    
    
    (Years)December 31, 2008Fair value hedges:Receive fixed  pay variable interest rate swaps
    
    $
    678,000
    
    
    $
    6,262
    
    
    $
    369
    
    
    
    6.02
    %
    
    
    5.02
    %
    
    
    7.7Cash flow hedges:Pay fixed  receive floating interest rate swaps
    
    
    6,800,000
    
    
    
    4,154
    
    
    
    342,823
    
    
    
    2.45
    %
    
    
    5.13
    %
    
    
    1.5Total derivatives used in SFAS 133 hedging
relationships
    
    $
    7,478,000
    
    
    $
    10,416
    
    
    $
    343,192
    
    
    
    2.77
    %
    
    
    5.12
    %
    
    
    2.1December 31, 2007Fair value hedges:Receive fixed  pay variable interest rate swaps
    
    $
    925,000
    
    
    $
    413
    
    
    $
    2,220
    
    
    
    4.29
    %
    
    
    4.87
    %
    
    
    0.9Cash flow hedges:Pay fixed  receive floating interest rate swaps
    
    
    8,100,000
    
    
    
    
    
    
    
    214,548
    
    
    
    5.02
    %
    
    
    5.15
    %
    
    
    2.2Total derivatives used in SFAS 133 hedging
relationships
    
    $
    9,025,000
    
    
    $
    413
    
    
    $
    216,768
    
    
    
    4.94
    %
    
    
    5.12
    %
    
    
    2.1
  AT DECEMBER 31,2008
    
    
    2007Net Asset
    
    
    Net Asset(Liability)
    
    
    (Liability)Mortgage banking derivatives:Forward commitmentsTo sell loans
    
    $
    (9,598
    )
    
    $
    (4,711
    )Interest rate lock commitments
    
    
    8,573
    
    
    
    2,085Total mortgage banking risk management
    
    
    (1,025
    )
    
    
    (2,626
    )Swaps receive fixed
    
    
    511,581
    
    
    
    134,764Swaps pay fixed
    
    
    (478,398
    )
    
    
    (100,713
    )Market value hedge
    
    
    (134
    )
    
    
    740Net Customer related swaps
    
    
    33,049
    
    
    
    34,791Precious metals forward sale agreements
    
    
    (1,227
    )
    
    
    (35,247
    )Precious metals forward arrangements
    
    
    1,227
    
    
    
    34,234Foreign exchange
    
    
    7,736
    
    
    
    1,906Total activity
    
    $
    39,760
    
    
    $
    33,058
 97




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Notes to Consolidated Financial Statements
 Note 22  Derivative Instruments and Hedging Activities (continued)
  Balance Sheet Effect
    
    Income Statement Effect Forat
    
    The Twelve Months EndedDerivative Activity
    
    December 31, 2008
    
    December 31, 2008Fair value hedges:Receive fixed-pay variable 
interest rate swaps
    
    Increases to borrowings, CDs, other assets,
and other liabilities of $6.1 million, $1.4
million, $6.3 million and $0.4 million,
respectively.
    
    Resulted in an
increase of net
interest income of
$8.3 million.Cash flow hedges:Pay fixed-receive floating 
interest rate swaps
    
    Increases to other assets, other liabilities,
and deferred taxes of $4.2 million, $342.8
million, and $123.6 million, respectively and
a net decrease to stockholders equity of
$215.0 million.
    
    Resulted in a
decrease in net
interest income of
$140.8 million.Forward commitments to sell loans
    
    Increase to other liabilities of $9.6 million.
    
    Decrease to
mortgage banking
revenues of $4.9
million.Interest rate lock commitments
    
    Increase to mortgage loans of $8.6 million.
    
    Increase to
mortgage banking
revenues of $6.5
million.Net customer related hedges
    
    Increase to other assets of $33.0 million.
    
    Decrease in capital
markets revenue of
$1.7 million.Forward commitments to sell
precious metals inventory
    
    Increase to other liabilities of $0 million.
    
    Increase to
commercial banking
revenues of $1.0
million.Foreign Exchange
    
    Increase to other assets of $7.7 million.
    
    Increase in
commercial banking
revenue of $5.8
million.
  Balance Sheet Effect
    
    Income Statement Effect Forat
    
    The Twelve Months EndedDerivative Activity
    
    December 31, 2007
    
    December 31, 2007Fair value hedges:Receive fixed-pay variable 
interest rate swaps
    
    Decrease to CDs of $1.8 million and an
increase to other assets and other
liabilities of $0.4 million and $2.2 million,
respectively.
    
    Resulted in a
decrease of net
interest income of
$10.5 million.Cash flow hedges:Pay fixed-receive floating 
interest rate swaps
    
    Increase to other liabilities and deferred
taxes of $214.5 million and $75.1 million,
respectively and a decrease to stockholders
equity of $139.5 million.
    
    Resulted in an
increase in net
interest income of
$19.0 million.Forward commitments to sell loans
    
    Increase to other liabilities of $4.7 million.
    
    Decrease to
mortgage banking
revenues of $5.0
million.Interest rate lock commitments
    
    Increase to mortgage loans of $2.1 million.
    
    Increase to
mortgage banking
revenues of $2.1
million.Net customer related hedges
    
    Increase to other assets of $34.8 million.
    
    Decrease in capital
markets revenue of
$7.3 million.Forward commitments to sell
precious metals inventory
    
    Increase to other liabilities of $1.0 million.
    
    Decrease to
commercial banking
revenues of $1.3
million.Foreign Exchange
    
    Increase to other assets of $1.9 million.
    
    Increase in
commercial banking
revenue of $1.7
million.
 98




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Notes to Consolidated Financial Statements
 Note 23  Interests that Continue to be Held by Sovereign in Asset Securitizations
     2008PrincipalTotal
    
    
    90 Days
    
    
    Net CreditPrincipal
    
    
    Past Due
    
    
    LossesHome Equity Loans and Lines of Credit
    
    $
    6,979,236
    
    
    $
    103,089
    
    
    $
    43,138Commercial Real Estate and Multi-family Loans
    
    
    18,654,325
    
    
    
    255,865
    
    
    
    56,068Automotive Floor Plan Loans
    
    
    1,243,146
    
    
    
    620
    
    
    
    1,603Total Owned and Securitized
    
    $
    26,876,707
    
    
    $
    359,574
    
    
    $
    100,809Less:Securitized Home Equity Loans
    
    
    87,318
    
    
    
    15,588
    
    
    
    2,433Securitized Commercial Real Estate and Multi-family Loans
    
    
    946,591
    
    
    
    25,189
    
    
    
    Securitized Automotive Floor Plan Loans and other assets
    
    
    855,000
    
    
    
    
    
    
    
    1,464Total Securitized Loans
    
    
    1,888,909
    
    
    
    40,777
    
    
    
    3,897Net Loans
    
    $
    24,987,798
    
    
    $
    318,797
    
    
    $
    96,912
 99




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 23  Interests that Continue to be Held by Sovereign in Asset Securitizations (continued)
 2007PrincipalTotal
    
    
    90 Days
    
    
    Net CreditPrincipal
    
    
    Past Due
    
    
    LossesMortgage Loans
    
    $
    13,397,822
    
    
    $
    130,101
    
    
    $
    7,498Home Equity Loans and Lines of Credit
    
    
    6,300,558
    
    
    
    88,848
    
    
    
    11,063Commercial Real Estate and Multi-family Loans
    
    
    17,526,885
    
    
    
    57,623
    
    
    
    15,540Automotive Floor Plan Loans
    
    
    1,255,729
    
    
    
    
    
    
    
    335Total Owned and Securitized
    
    $
    38,480,994
    
    
    $
    276,572
    
    
    $
    34,436Less:Securitized Mortgage Loans
    
    
    56,629
    
    
    
    638
    
    
    
    30Securitized Home Equity Loans
    
    
    103,410
    
    
    
    15,764
    
    
    
    2,915Securitized Commercial Real Estate and Multi-family Loans
    
    
    973,601
    
    
    
    
    
    
    
    Securitized Automotive Floor Plan Loans and other assets
    
    
    855,000
    
    
    
    
    
    
    
    335Total Securitized Loans
    
    
    1,988,640
    
    
    
    16,402
    
    
    
    3,280Net Loans
    
    $
    36,492,354
    
    
    $
    260,170
    
    
    $
    31,156
  AT DECEMBER 31, 2008Commercial Real Estate
    
    
    Automotiveand Multi-family Loans
    
    
    Floor PlanComponents of Retained Interest and Servicing Rights:Accrued interest receivable
    
    $
    
    
    
    $
    3,474Subordinated interest retained
    
    
    455
    
    
    
    43,996Interest only strips
    
    
    
    
    
    
    1,010Cash reserve
    
    
    
    
    
    
    4,381Total Retained Interests and Servicing Rights
    
    $
    455
    
    
    $
    52,861Key Economic Assumptions:Weighted average life (in years)
    
    
    
    
    
    
    0.48Expected credit losses
    
    
    
    
    
    
    0.25
    %Residual cash flows discount rate
    
    
    
    
    
    
    8
    %
  FOR THE YEAR ENDEDDECEMBER 31,2008
    
    2007Proceeds from collections reinvested in revolving-period securitizations
    
    $
    4,478,464
    
    
    $
    5,443,600Servicing fees received
    
    
    9,184
    
    
    
    9,844Other cash flows received on retained interests
    
    
    7,585
    
    
    
    17,863Purchases of delinquent or foreclosed assets
    
    
    2,356
    
    
    
    
 100




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 23  Interests that Continue to be Held by Sovereign in Asset Securitizations (continued)
  Home Equity
    
    
    
    
    
    
    CommercialLoans &
    
    
    Auto
    
    
    LoansLines
    
    
    Floor
    
    
    Secured byof Credit
    
    
    Plan Loans
    
    
    Real Estate
    
    
    
    TotalInterests that continue to be held by Sovereign:Accrued interest receivable
    
    $
    
    
    
    $
    3,474
    
    
    $
    
    
    
    $
    3,474Subordinated interest retained
    
    
    
    
    
    
    43,996
    
    
    
    455
    
    
    
    44,451Servicing rights
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest only strips
    
    
    1,859
    
    
    
    1,010
    
    
    
    
    
    
    
    2,869Cash reserve
    
    
    
    
    
    
    4,381
    
    
    
    
    
    
    
    4,381Total Interests that continue to be held by
Sovereign
    
    $
    1,859
    
    
    $
    52,861
    
    
    $
    455
    (1)
    
    $
    55,175As of December 31, 2008Weighted-average life (in yrs)
    
    
    3.33
    
    
    
    0.48Prepayment speed assumption (annual rate)As of December 31, 2008
    
    
    14
    %
    
    
    36
    %As of December 31, 2007
    
    
    17
    %
    
    
    49
    %As of the date of the securitization
    
    
    22
    %
    
    
    50
    %Impact on fair value of 10% adverse change
    
    $
    (140
    )
    
    $
    (109
    )Impact on fair value of 20% adverse change
    
    $
    (285
    )
    
    $
    (145
    )Expected credit losses (Cumulative rate for all
except for Auto Floor Plan Loans which is an
annual rate)As of December 31, 2008
    
    
    3.72
    %
    
    
    .25
    %As of December 31, 2007
    
    
    5.25
    %
    
    
    .25
    %As of the date of the securitization
    
    
    0.75
    %
    
    
    .25
    %Impact on fair value of 10% adverse change
    
    $
    (364
    )
    
    $
    (39
    )Impact on fair value of 20% adverse change
    
    $
    (713
    )
    
    $
    (85
    )Residual cash flows discount rate (annual)As of December 31, 2008
    
    
    12
    %
    
    
    8
    %As of December 31, 2007
    
    
    12
    %
    
    
    8
    %As of the date of the securitization
    
    
    12
    %
    
    
    8
    %Impact on fair value of 10% adverse change
    
    $
    (116
    )
    
    $
    (87
    )Impact on fair value of 20% adverse change
    
    $
    (224
    )
    
    $
    (180
    )
 
 (1)
    
    During 2008, the credit spreads on CMBS investment securities widened
significantly which had a severe negative impact on our retained interest. Additionally the
credit quality of these assets weakened and losses are now projected to be substantially
worse than a year ago. Due to these events, Sovereign wrote down its retained interest by
$15.2 million during 2008. A sensitivity analysis was not performed on the remaining CMBS
asset of $0.5 million at year end since it is not material.   101




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Notes to Consolidated Financial Statements
 Note 24  (Loss)/Earnings Per Share
  YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Calculation of (loss)/income for EPS:Net (Loss)/Income as reported and for basic EPS
    
    $
    (2,357,210
    )
    
    $
    (1,349,262
    )
    
    $
    136,911Less preferred dividend
    
    
    14,600
    
    
    
    14,600
    
    
    
    7,908Net (loss)/income available to common stockholders
    
    
    (2,371,810
    )
    
    
    (1,363,862
    )
    
    
    129,003Contingently convertible trust preferred interest expense, net of tax (1)
    
    
    
    
    
    
    
    
    
    
    Net (loss)/income for diluted EPS available to common stockholders
    
    $
    (2,371,810
    )
    
    $
    (1,363,862
    )
    
    $
    129,003Calculation of shares:Weighted average basic shares
    
    
    596,350
    
    
    
    478,726
    
    
    
    433,908Dilutive effect of:Stock-based compensation (1)
    
    
    
    
    
    
    
    
    
    
    Warrants on contingently convertible debt (1)
    
    
    
    
    
    
    
    
    
    
    Weighted average fully diluted shares
    
    
    596,350
    
    
    
    478,726
    
    
    
    433,908(Loss)/Earnings per share:Basic
    
    $
    (3.98
    )
    
    $
    (2.85
    )
    
    $
    0.30Diluted
    
    $
    (3.98
    )
    
    $
    (2.85
    )
    
    $
    0.30
 
 (1)
    
    At December 31, 2008, 2007 and 2006, Sovereign excluded the after-tax add back of
the contingently convertible trust preferred interest expense and the conversion of warrants and
equity awards since the result would have been anti-dilutive. Note 25  Comprehensive (Loss)/Income
  YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Net (loss)/income
    
    $
    (2,357,210
    )
    
    $
    (1,349,262
    )
    
    $
    136,911Net unrealized gain/(loss) on derivative instruments for the period
    
    
    (102,947
    )
    
    
    (121,056
    )
    
    
    (29,403
    )Net unrealized gain/(loss) on investment securities available-for-sale for the period
    
    
    (1,276,463
    )
    
    
    (306,413
    )
    
    
    (7,633
    )Add unrealized loss resulting from HTM to AFS reclass, net of tax
    
    
    
    
    
    
    
    
    
    
    (25,625
    )Less reclassification adjustments:Derivative instruments
    
    
    (12,520
    )
    
    
    (9,556
    )
    
    
    (12,049
    )Pension plans
    
    
    16,831
    
    
    
    (1,908
    )
    
    
    Investments available for sale
    
    
    (924,040
    )
    
    
    (114,618
    )
    
    
    (202,775
    )Net unrealized gain/(loss) recognized in other comprehensive income
    
    
    (459,681
    )
    
    
    (301,387
    )
    
    
    152,163Comprehensive (loss)/income
    
    $
    (2,816,891
    )
    
    $
    (1,650,649
    )
    
    $
    289,074
  102




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 26  Parent Company Financial Information
  BALANCE SHEET
 AT DECEMBER 31,2008
    
    
    2007AssetsCash and due from banks
    
    $
    599,725
    
    
    $
    11,504Available for sale investment securities
    
    
    46,998
    
    
    
    46,998Loans to non-bank subsidiaries
    
    
    275,513
    
    
    
    276,963Investment in subsidiaries:Bank subsidiary
    
    
    3,651,917
    
    
    
    5,316,751Non-bank subsidiaries
    
    
    3,363,294
    
    
    
    3,473,494Other assets
    
    
    222,514
    
    
    
    292,074Total Assets
    
    $
    8,159,961
    
    
    $
    9,417,784Liabilities and Stockholders EquityBorrowings:Borrowings and other debt obligations
    
    $
    2,303,725
    
    
    $
    2,231,152Borrowings from non-bank subsidiaries
    
    
    132,909
    
    
    
    91,669Other liabilities
    
    
    126,613
    
    
    
    102,638Total liabilities
    
    
    2,563,247
    
    
    
    2,425,459Stockholders Equity
    
    
    5,596,714
    
    
    
    6,992,325Total Liabilities and Stockholders Equity
    
    $
    8,159,961
    
    
    $
    9,417,784
 STATEMENT OF OPERATIONS
 YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Dividends from Bank subsidiary
    
    $
    24,252
    
    
    $
    194,018
    
    
    $
    600,000Dividends from non-bank subsidiaries
    
    
    5,000
    
    
    
    7,664
    
    
    
    57,896Interest income
    
    
    24,024
    
    
    
    18,874
    
    
    
    12,240Other income
    
    
    279
    
    
    
    567
    
    
    
    259Total income
    
    
    53,555
    
    
    
    221,123
    
    
    
    670,395Interest expense
    
    
    133,144
    
    
    
    158,366
    
    
    
    145,264Other expense
    
    
    137,769
    
    
    
    50,637
    
    
    
    92,010Total expense
    
    
    270,913
    
    
    
    209,003
    
    
    
    237,274Income/(loss) before income taxes and equity in earnings of subsidiaries
    
    
    (217,358
    )
    
    
    12,120
    
    
    
    433,121Income tax benefit
    
    
    35,122
    
    
    
    (89,247
    )
    
    
    (98,073
    )Income before equity in earnings of subsidiaries
    
    
    (252,480
    )
    
    
    101,367
    
    
    
    531,194Dividends in excess of current year earnings:Bank subsidiary
    
    
    (2,113,668
    )
    
    
    (1,434,026
    )
    
    
    (363,473
    )Non-bank subsidiaries
    
    
    8,938
    
    
    
    (16,603
    )
    
    
    (30,810
    )Equity in undistributed earnings/(loss) of:Bank subsidiary
    
    
    
    
    
    
    
    
    
    
    Non-bank subsidiaries
    
    
    
    
    
    
    
    
    
    
    Net (loss)/income
    
    $
    (2,357,210
    )
    
    $
    (1,349,262
    )
    
    $
    136,911
 103




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 26  Parent Company Financial Information (continued)
 STATEMENT OF CASH FLOWS
 YEAR ENDED DECEMBER 31,2008
    
    
    2007
    
    
    2006Cash Flows from Operating Activities:Net income/(loss)
    
    $
    (2,357,210
    )
    
    $
    (1,349,262
    )
    
    $
    136,911Adjustments to reconcile net income to net cash provided by operating activities:Undistributed (earnings)/loss of:Bank subsidiary
    
    
    
    
    
    
    
    
    
    
    Non-bank subsidiaries
    
    
    
    
    
    
    
    
    
    
    Dividends in excess of current year earnings:Bank subsidiary
    
    
    2,113,668
    
    
    
    1,434,026
    
    
    
    363,473Non-bank subsidiaries
    
    
    (8,938
    )
    
    
    16,603
    
    
    
    30,810Loss on retirement borrowings and other debt obligations
    
    
    
    
    
    
    7,561
    
    
    
    Loss on economic hedges
    
    
    
    
    
    
    
    
    
    
    11,387Stock based compensation expense
    
    
    23,337
    
    
    
    28,011
    
    
    
    35,475Allocation of Employee Stock Ownership Plan
    
    
    
    
    
    
    40,119
    
    
    
    2,377Other, net
    
    
    106,401
    
    
    
    19,826
    
    
    
    (28,454
    )Net cash (used in)/provided by operating activities
    
    
    (122,742
    )
    
    
    196,884
    
    
    
    551,979Cash Flows from Investing Activities:Net capital returned from/(contributed to) subsidiaries
    
    
    (789,377
    )
    
    
    (930
    )
    
    
    212,545Net decrease/(increase) in loans to subsidiaries
    
    
    1,450
    
    
    
    (276,963
    )
    
    
    Net cash (paid)/received from acquisitions
    
    
    
    
    
    
    
    
    
    
    (3,595,673
    )Net purchases and sales of investment securities
    
    
    
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (787,927
    )
    
    
    (277,893
    )
    
    
    (3,383,128
    )Cash Flows from Financing Activities:Net change in borrowings:Repayment of other debt obligations
    
    
    (180,000
    )
    
    
    (377,637
    )
    
    
    (400,000
    )Net proceeds received from senior notes and senior credit facility
    
    
    248,465
    
    
    
    580,000
    
    
    
    725,000Net change in borrowings from non-bank subsidiaries
    
    
    41,240
    
    
    
    (26,365
    )
    
    
    (131
    )Treasury stock repurchases, net of proceeds
    
    
    (2,208
    )
    
    
    5,624
    
    
    
    400,612Cash dividends paid to preferred stockholders
    
    
    (14,600
    )
    
    
    (14,600
    )
    
    
    (7,908
    )Cash dividends paid to common stockholders
    
    
    
    
    
    
    (153,236
    )
    
    
    (126,105
    )Sale of unallocated ESOP shares
    
    
    
    
    
    
    26,574
    
    
    
    Net proceeds from the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    195,445Net proceeds from issuance of common stock
    
    
    1,405,993
    
    
    
    35,627
    
    
    
    2,043,009Net cash provided by/(used in) financing activities
    
    
    1,498,890
    
    
    
    75,987
    
    
    
    2,829,922Increase/(Decrease) in cash and cash equivalents
    
    
    588,221
    
    
    
    (5,022
    )
    
    
    (1,227
    )Cash and cash equivalents at beginning of period
    
    
    11,504
    
    
    
    16,526
    
    
    
    17,753Cash and cash equivalents at end of period
    
    $
    599,725
    
    
    $
    11,504
    
    
    $
    16,526
 104




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Notes to Consolidated Financial Statements
 Note 27  Business Segment Information
     DECEMBER 31, 2008Retail
    
    CorporateBanking
    
    Specialty
    
    CommercialDivision
    
    Group
    
    Lending
    
    Other
    
    TotalNet interest income/(expense)
    
    $
    1,039,641
    
    
    $
    385,137
    
    
    $
    520,149
    
    
    $
    (41,616
    )
    
    $
    1,903,311Fees and other income
    
    
    389,776
    
    
    
    39,377
    
    
    
    121,938
    
    
    
    85,347
    
    
    
    636,438Provision for credit losses
    
    
    93,430
    
    
    
    403,475
    
    
    
    414,095
    
    
    
    
    
    
    
    911,000General and administrative expenses
    
    
    1,100,070
    
    
    
    182,992
    
    
    
    211,691
    
    
    
    46,656
    
    
    
    1,541,409Depreciation/amortization
    
    
    42,897
    
    
    
    40,928
    
    
    
    2,653
    
    
    
    139,435
    
    
    
    225,913Income/(loss) before income taxes(1)
    
    
    235,917
    
    
    
    (182,179
    )
    
    
    9,799
    
    
    
    (1,697,171
    )
    
    
    (1,633,634
    )Intersegment revenue/(expense) (2)
    
    
    1,496,471
    
    
    
    (1,305,769
    )
    
    
    (733,904
    )
    
    
    543,202
    
    
    
    Total average assets
    
    $
    6,931,984
    
    
    $
    29,554,013
    
    
    $
    22,154,984
    
    
    $
    20,040,918
    
    
    $
    78,681,899
 DECEMBER 31, 2007Retail
    
    CorporateBanking
    
    Specialty
    
    CommercialDivision
    
    Group
    
    Lending
    
    Other
    
    TotalNet interest income/(expense)
    
    $
    1,222,865
    
    
    $
    439,354
    
    
    $
    431,754
    
    
    $
    (229,951
    )
    
    $
    1,864,022Fees and other income
    
    
    339,148
    
    
    
    (41,349
    )
    
    
    125,728
    
    
    
    107,224
    
    
    
    530,751Provision for credit losses
    
    
    33,552
    
    
    
    252,987
    
    
    
    121,153
    
    
    
    
    
    
    
    407,692General and administrative expenses
    
    
    1,069,741
    
    
    
    172,475
    
    
    
    182,720
    
    
    
    (79,098
    )
    
    
    1,345,838Depreciation/amortization
    
    
    43,605
    
    
    
    43,906
    
    
    
    3,182
    
    
    
    176,022
    
    
    
    266,715Income/(loss) before income taxes(1)
    
    
    (484,044
    )
    
    
    (661,990
    )
    
    
    258,534
    
    
    
    (522,212
    )
    
    
    (1,409,712
    )Intersegment revenue/(expense) (2)
    
    
    2,035,435
    
    
    
    (1,509,202
    )
    
    
    (1,046,611
    )
    
    
    520,378
    
    
    
    Total average assets
    
    $
    6,178,887
    
    
    $
    32,912,349
    
    
    $
    20,530,195
    
    
    $
    23,694,601
    
    
    $
    83,316,032
 105




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Notes to Consolidated Financial Statements
 Note 27  Business Segment Information (continued)
 DECEMBER 31, 2006Retail
    
    CorporateBanking
    
    Specialty
    
    CommercialDivision
    
    Group
    
    Lending
    
    Other
    
    TotalNet interest income/(expense)
    
    $
    1,128,278
    
    
    $
    426,581
    
    
    $
    370,809
    
    
    $
    (104,120
    )
    
    $
    1,821,548Fees and other income
    
    
    303,188
    
    
    
    74,696
    
    
    
    113,855
    
    
    
    105,797
    
    
    
    597,536Provision for credit losses
    
    
    14,751
    
    
    
    427,945
    
    
    
    41,765
    
    
    
    
    
    
    
    484,461General and administrative expenses
    
    
    929,402
    
    
    
    155,967
    
    
    
    162,452
    
    
    
    42,168
    
    
    
    1,289,989Depreciation/amortization
    
    
    37,036
    
    
    
    29,603
    
    
    
    2,213
    
    
    
    152,107
    
    
    
    220,959Income/(loss) before income taxes
    
    
    487,314
    
    
    
    (149,141
    )
    
    
    280,446
    
    
    
    (599,488
    )
    
    
    19,131Intersegment revenue/(expense) (2)
    
    
    1,682,518
    
    
    
    (1,372,987
    )
    
    
    (846,895
    )
    
    
    537,364
    
    
    
    Total average assets
    
    $
    4,967,182
    
    
    $
    30,837,154
    
    
    $
    17,369,221
    
    
    $
    26,321,838
    
    
    $
    79,495,395
 
 (1)
    
    Intersegment revenues/(expense) represent charges or credits for funds
used or provided by each of the segments and are included in net
interest income/(expense).(2)
    
    Included in Other in 2008 were other-than-temporary impairment charges
of $575.3 million on FNMA and FHLMC preferred stock,
other-than-temporary impairment charges of $307.9 million on
non-agency mortgage backed securities and a loss of $602.3 million on
the sale of our CDO investment portfolio. 2007 and 2006 included
other-than-temporary impairment charges of $180.5 million and $67.5
million on FNMA and FHLMC preferred stock, respectively. Included in
Other in 2008, 2007 and 2006 were net transaction and integration
charges of $12.8 million, $2.2 million and $42.4 million,
respectively. The 2008, 2007 and 2006 results also include $23.4
million, $62.0 million and $78.7 million of restructuring and other
employee severance. The 2008 results also included a deferred tax
valuation allowance of $1.43 billion and a $95 million equity method
investment impairment charge. The 2007 results included a
non-deductible, non-cash ESOP termination charge of $40.1 million
based on the value of its common stock on the date that the ESOP was
repaid. See Note 29 for further details.  Retail Banking
    
    Corporate
    
    CommercialDivision
    
    Specialty Group
    
    Lending Group
    
    TotalGoodwill at December 31, 2008
    
    $
    3,089,880
    
    
    $
    
    $
    341,601
    
    
    $
    3,431,481
  Note 28  Transaction Related and Integration Charges, Net
  2008
    
    2007
    
    2006Transaction related and integration charges
    
    $
    12,751
    
    
    $
    2,242
    
    
    $
    42,420
    106




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Notes to Consolidated Financial Statements
 Note 29  Employee Severance Charges and Other Restructuring Costs
    Contracttermination
    
    
    Severance
    
    
    Other
    
    
    TotalAccrued at December 31, 2006
    
    $
    7,043
    
    
    $
    45,930
    
    
    $
    5,906
    
    
    $
    58,879Payments
    
    
    (13,877
    )
    
    
    (48,472
    )
    
    
    (9,999
    )
    
    
    (72,348
    )Charges recorded in earnings
    
    
    16,007
    
    
    
    13,668
    
    
    
    6,093
    
    
    
    35,768Accrued at December 31, 2007
    
    $
    9,173
    
    
    $
    11,126
    
    
    $
    2,000
    
    
    $
    22,299Payments
    
    
    (2,165
    )
    
    
    (6,127
    )
    
    
    (2,000
    )
    
    
    (10,292
    )Charges recorded in earnings
    
    
    
    
    
    
    23,353
    
    
    
    
    
    
    
    23,353Accrued at December 31, 2008
    
    $
    7,008
    
    
    $
    28,352
    
    
    $
    
    
    
    $
    35,360
  Note 30  Related Party Transactions
  Related party loans at December 31, 2007
    
    $
    13,963Loan fundings
    
    
    5,045Resignation of executive officers
    
    
    (1,637
    )Loan repayments
    
    
    (3,090
    )Related party loans at December 31, 2008
    
    $
    14,281
     107




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Notes to Consolidated Financial Statements
 Note 30  Related Party Transactions (continued)
   Note 31  Subsequent Event
   108




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
  Internal Control  Integrated Framework Internal Control  Integrated Framework,
 
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
 Directors of Sovereign
       109




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Executive Officers of the Registrant
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
 www.sovereignbank.com
 Procedures for Nominations to the Sovereign Board
  Matters Relating to the Audit Committee of the Board
  110




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Item 11. Executive Compensation.
 Compensation Discussion and Analysis
 Explanatory Note
  Periods Ending On or Prior to December 31, 2008
  General Philosophy and Objectives
    
    
    A substantial portion of executive officer compensation was contingent
upon achievement of objective corporate and/or individual performance objectives,
with awards ranging depending on the levels of advancement.
    
    The Compensation Committee believed that total compensation should
generally increase with position, responsibility, and greater ability to influence
our achievement of targeted results and strategic initiatives.
    
    As position and responsibility increased, a greater portion of the
executive officers total compensation became performance-based and contingent on
the achievement of performance objectives.
    
    Equity-based compensation was higher for persons with higher levels of
responsibility, making a significant portion of their total compensation dependent
on long-term appreciation in the value of our common stock.
 The Parties Involved in Determining Executive Compensation During and Prior to 2008
 The Role of the Compensation Committee
         111




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The Role of Management During and Prior to 2008
         The Role of Outside Independent Compensation Advisors During and Prior to 2008
         The Compensation Committees Process During and Prior to 2008
  112




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The Rationale Behind Our Executive Compensation During and Prior to 2008
 Business Context
  Benchmarking
   113




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BB&T Corporation
    
    Marshall & Isley CorporationFifth Third Bancorp
    
    The PNC Financial Services Group, IncHuntington Bancshares Incorporated
    
    UnionBanCal CorporationKeyCorp
    
    Regions Financial CorporationM&T Bank Corporation
    
    Zions Bancorporation
 Internal Pay Equity
  Maximization of the Tax Deductibility of Compensation Where Appropriate
  Components of Our Executive Compensation During and Prior to 2008
  Base Salary During and Prior to 2008
           114




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Short-Term Incentive Compensation During and Prior to 2008
   i.e. e.g.
   115




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Percentage Payout of CompanyPercentage Achievement of Target RORWA
    
    Portion of Award>= 110%
    
    
    150
    %>=105% and < 110%
    
    
    125
    %>=100% and < 105%
    
    
    100
    %>=95% and < 100%
    
    
    75
    %>= 90% and < 95%
    
    
    50
    %< 90%
    
    Board Discretion
      116




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Named Executive Officer
    
    Short-Term Incentive AwardKirk W. Walters
    
    $
    1,100,000Salvatore J. Rinaldi
    
    $
    311,590Roy J. Lever
    
    $
    302,974Patrick J. Sullivan
    
    $
    263,915Joseph P. Campanelli
    
    $
    965,913
  Long-Term Incentive Compensation During and Prior to 2008
           117




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2008 Long-Term Incentive Awards
       118




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##### Table of Contents



Additional Commentary on Equity Compensation
  Delegation of Administration
 Value of Equity Awards
 Timing of Stock Option Grants
 Employment Agreements
  Period Following the Santander Transaction
  Matters Relating to the Compensation Committee of the Board
 Compensation Committee Report
   
 The foregoing Compensation Committee Report shall not be deemed to be filed with the SEC or to
the liabilities of Section 18 of the Exchange Act, and notwithstanding anything to the contrary set
forth in any of Sovereigns previous filings under the Securities Act or the Exchange Act, that
incorporate future filings, including this Form 10-K, in whole or in part, the foregoing
Compensation Committee Report shall not be incorporated by reference into any such filings.
 119




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Compensation Committee Interlocks and Insider Participation
  120




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Summary Compensation Table  2008
 Change in PensionValue andNon-EquityNonqualifiedNon-Equity
    
    DeferredOption
    
    Incentive Plan
    
    Compensation
    
    All otherSalary
    
    Bonus
    
    Stock Awards
    
    Awards
    
    Compensation
    
    Earnings
    
    Compensation
    
    TotalName and Principal Position
    
    Year
    
    ($)(2)
    
    ($)(3)
    
    ($)(4)
    
    ($)(4)
    
    ($)
    
    ($)(5)
    
    ($)(6)
    
    ($)Kirk W. Walters(1)
    
    
    2008
    
    
    $
    449,615
    
    
    $
    1,100,000
    
    
    $
    235,015
    
    
    $
    62,794
    
    
    $
    0
    
    
    $
    0
    
    
    $
    143,121
    
    
    $
    1,990,546Interim President, Interim
Chief Executive Officer and
Chief Financial OfficerSalvatore J. Rinaldi
    
    
    2008
    
    
    $
    407,885
    
    
    $
    311,590
    
    
    $
    272,330
    
    
    $
    3,223
    
    
    $
    0
    
    
    $
    0
    
    
    $
    25,922
    
    
    $
    1,020,949Chief of Staff to the Chief
Executive Officer
    
    
    2007
    
    
    $
    329,039
    
    
    $
    90,450
    
    
    $
    152,043
    
    
    $
    24,885
    
    
    $
    0
    
    
    $
    0
    
    
    $
    25,322
    
    
    $
    621,739Roy J. Lever
    
    
    2008
    
    
    $
    343,270
    
    
    $
    602,974
    
    
    $
    79,801
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    18,400
    
    
    $
    1,044,446Managing Director of Retail
BankingPatrick J. Sullivan
    
    
    2008
    
    
    $
    398,186
    
    
    $
    263,915
    
    
    $
    286,924
    
    
    $
    3,223
    
    
    $
    0
    
    
    $
    0
    
    
    $
    42,044
    
    
    $
    994,291Chief Executive Officer of
Sovereign BankNew England
Division
    
    
    2007
    
    
    $
    323,465
    
    
    $
    106,313
    
    
    $
    160,529
    
    
    $
    24,885
    
    
    $
    0
    
    
    $
    0
    
    
    $
    24,617
    
    
    $
    639,809Joseph P. Campanelli
    
    
    2008
    
    
    $
    747,115
    
    
    $
    965,913
    
    
    $
    (460,387
    )
    
    $
    296,367
    
    
    $
    0
    
    
    $
    490,112
    
    
    $
    4,243,884
    
    
    $
    6,283,004Former President and Chief
Executive
Officer(7)
    
    
    2007
    
    
    $
    826,923
    
    
    $
    1,250,000
    
    
    $
    860,106
    
    
    $
    128,043
    
    
    $
    0
    
    
    $
    1,298,807
    
    
    $
    73,159
    
    
    $
    4,437,0382006
    
    
    $
    565,000
    
    
    $
    36,500
    
    
    $
    261,413
    
    
    $
    261,413
    
    
    $
    0
    
    
    $
    2,682,951
    
    
    $
    38,019
    
    
    $
    3,621,598Mark R. McCollom
Former Chief Financial
Officer(7)
    
    
    2008
    
    
    $
    271,827
    
    
    $
    0
    
    
    $
    (177,005
    )
    
    $
    (194,275
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    2,958,845
    
    
    $
    2,859,3922007
    
    
    $
    543,270
    
    
    $
    0
    
    
    $
    210,810
    
    
    $
    157,564
    
    
    $
    0
    
    
    $
    0
    
    
    $
    33,682
    
    
    $
    945,3262006
    
    
    $
    477,885
    
    
    $
    55,000
    
    
    $
    91,460
    
    
    $
    91,460
    
    
    $
    0
    
    
    $
    38,808
    
    
    $
    39,270
    
    
    $
    740,138
 Footnotes:
 
 (1)
    
    Effective September 30, 2008, Kirk W. Walters, then our Chief Financial Officer, was
appointed to also serve as Interim President and Interim Chief Executive Officer of Sovereign,
until the earlier of January 3, 2009 and Paul Perraults commencement of employment as Chief
Executive Officer, following which Mr. Walters began serving as our Senior Executive Vice
President and Chief Administrative Officer and continued to serve as Chief Financial Officer.
Mr. Walters succeeded Joseph P. Campanelli, who agreed to step down as Chief Executive Officer
effective September 30, 2008 pursuant to the terms and conditions of a Separation and
Consulting Agreement with Mr. Campanelli. See Description of Employment and Related
Agreements.(2)
    
    Base salary is based on actual compensation paid through December 31, 2008.(3)
    
    The amounts in this column reflect actual cash bonuses that we paid in 2009 for 2008
performance, 2008 for 2007 performance and 2007 for 2006 performance. 
    
    Mr. Walters received a bonus of $1,100,000 for 2008 performance, which we paid in
cash.
    
    For 2006 performance, we paid a bonus of $225,000 to Mr. Campanelli in accordance
with the terms of his employment agreement, of which one-third we paid in cash and
two-thirds we paid in restricted stock. In addition, because Mr. Campanelli was
employed on October 9, 2007, in accordance with the terms of his employment agreement,
we paid Mr. Campanelli a stay bonus of $1,250,000 as of that date. Mr. Campanelli did
not receive a bonus for 2007 performance. For 2008, in accordance with the terms of his
Separation Agreement, described in the section entitled  Separation Agreements, Mr.
Campanelli received a bonus which was calculated using a target bonus percentage for the
year of 133%, but prorated to reflect his period of employment in 2008.
 
 121




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
    
    Mr. McCollom received a bonus of $200,000 for 2006, which we paid 55% in cash and 45%
in restricted stock. Mr. McCollom did not receive a bonus for 2007 or 2008 performance.
Pursuant to the terms of Mr. McColloms Separation Agreement, Mr. McCollom received
$225,500 in lieu of his supplemental short-term incentive bonus; such amount is not
reflected in this column, but is reflected in the All Other Compensation column.
    
    Mr. Rinaldi received a bonus of (i) $311,590 for 2008 performance, which we paid in
cash, and (ii) $135,000 for 2007 performance, which we paid 67% in cash and 33% in
restricted stock.
    
    Mr. Lever received (i) a bonus of $302,974 for 2008 performance, which we paid in
cash, and (ii) a $300,000 sign-on bonus, which we paid in cash.
    
    Mr. Sullivan received a bonus of (i) 263,915 for 2008 performance, which we paid in
cash, and (ii) $141,750 for 2007 performance, which we paid 75% in cash and 25% in
restricted stock.
 
 In 2006, each of Messrs. Campanelli and McCollom elected to defer 50% of his respective cash
bonus to the Deferred Compensation Plan in its former status as the Bonus Deferral Program,
which we describe under Deferred Compensation Plan, and which are not reflected in this
column. Such deferrals are included in the Stock Awards column. No named executive officer
elected to defer any salary or bonus into the Deferred Compensation Plan for 2007 or 2008.(4)
    
    The amounts in this column reflect the dollar amount recognized for financial statement
reporting purposes for the applicable fiscal year, in accordance with SFAS 123(R), of awards
under our equity compensation plans (each of which is more fully described under the caption
Our Compensation Plans During and Prior to 2008) and our Bonus Deferral Program for 2008
(which is paid in stock) and thus may include amounts from awards granted in and before the
applicable fiscal year. Assumptions used in the calculation of this amount are included in
footnotes to our audited financial statements included in this Annual Report on Form 10-K for
the fiscal year ended December 31, 2008. For Mr. Walters, the Stock Awards column includes
restricted stock units granted to Mr. Walters pursuant to the terms of his employment
agreement; such award was not granted under our equity compensation plans.(5)
    
    Includes the aggregate change in the accumulated pension value of the named executive
officers benefit under our Enhanced Retirement Plan, which is described following the
Pension Benefits  2008 table, and the above-market or preferential earnings on compensation
deferred under our nonqualified deferred compensation plans, which we describe following the
Nonqualified Deferred Compensation  2008 table. The separate amounts are as follows: Name
    
    Year
    
    Change in Pension Value
    
    Earnings on Deferred CompensationKirk W. Walters
    
    
    2008
    
    
    $
    0
    
    
    $
    0Salvatore J. Rinaldi
    
    
    2008
    
    
    $
    0
    
    
    $
    02007
    
    
    $
    0
    
    
    $
    0Roy J. Lever
    
    
    2008
    
    
    $
    0
    
    
    $
    02007
    
    
    $
    0
    
    
    $
    02006
    
    
    $
    0
    
    
    $
    19,599Patrick J. Sullivan
    
    
    2008
    
    
    $
    0
    
    
    $
    02007
    
    
    $
    0
    
    
    $
    0Joseph P. Campanelli
    
    
    2008
    
    
    $
    489,942
    
    
    $
    1702007
    
    
    $
    1,298,800
    
    
    $
    72006
    
    
    $
    2,459,423
    
    
    $
    223,528Mark R. McCollom
    
    
    2008
    
    
    $
    0
    
    
    $
    02007
    
    
    $
    0
    
    
    $
    02006
    
    
    $
    0
    
    
    $
    38,808
 122




---



##### Table of Contents



(6)
    
    Includes the following amounts that we paid to or on behalf of the named executive officers: Year
    
    Walters
    
    Rinaldi
    
    Lever
    
    Sullivan
    
    Campanelli
    
    McCollomCar Allowance or
Personal Use of
Company
Car(*)
    
    
    2008
    
    
    $
    10,996
    
    
    $
    12,188
    
    
    $
    9,200
    
    
    $
    9,000
    
    
    $
    0
    
    
    $
    3,7502007
    
    
    $
    
    
    
    $
    12,188
    
    
    $
    
    
    
    $
    9,000
    
    
    $
    2,552
    
    
    $
    7,2502006
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,139
    
    
    $
    6,000Club Membership
    
    
    2008
    
    
    $
    400
    
    
    $
    4,180
    
    
    $
    0
    
    
    $
    22,321
    
    
    $
    8,943
    
    
    $
    4,7192007
    
    
    $
    
    
    
    $
    3,916
    
    
    $
    
    
    
    $
    5,736
    
    
    $
    9,588
    
    
    $
    11,5692006
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,280
    
    
    $
    11,051Home Security System
    
    
    2008
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02007
    
    
    $
    
    
    
    $
    0
    
    
    $
    
    
    
    $
    0
    
    
    $
    49,119
    
    
    $
    02006
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0
    
    
    $
    0Physical Exam and
Tax Gross Up for
Exam
    
    
    2008
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02007
    
    
    $
    0
    
    
    $
    0
    
    
    $
    
    
    
    $
    0
    
    
    $
    0
    
    
    $
    4,7242006
    
    
    $
    0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0
    
    
    $
    0Independence
Community
Investment Corp.
REIT Award
    
    
    2008
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02007
    
    
    $
    
    
    
    $
    0
    
    
    $
    
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02006
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,074
    
    
    $
    1,088Company
Contribution to
Sovereign
Retirement
Plan(**)
    
    
    2008
    
    
    $
    8,797
    
    
    $
    8,466
    
    
    $
    9,200
    
    
    $
    9,200
    
    
    $
    9,200
    
    
    $
    9,2002007
    
    
    $
    
    
    
    $
    8,337
    
    
    $
    
    
    
    $
    9,000
    
    
    $
    9,000
    
    
    $
    9,0002006
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,536
    
    
    $
    20,536Dividends Paid on
Vesting of
Restricted Stock
    
    
    2008
    
    
    $
    0
    
    
    $
    1,088
    
    
    $
    0
    
    
    $
    1,523
    
    
    $
    2,666
    
    
    $
    1,6482007
    
    
    $
    
    
    
    $
    881
    
    
    $
    
    
    
    $
    881
    
    
    $
    2,900
    
    
    $
    1,1392006
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,990
    
    
    $
    595Relocation Expenses
    
    
    2008
    
    
    $
    122,928
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02007
    
    
    $
    
    
    
    $
    0
    
    
    $
    
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02006
    
    
    $
    
    
    
    $
    0
    
    
    $
    
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Severance Payments
    
    
    2008
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,223,075
    (***)
    
    $
    2,939,528
    (****)Total
    
    
    2008
    
    
    $
    143,121
    
    
    $
    25,992
    
    
    $
    18,400
    
    
    $
    42,044
    
    
    $
    4,243,884
    
    
    $
    2,958,8452007
    
    
    $
    
    
    
    $
    25,322
    
    
    $
    
    
    
    $
    24,617
    
    
    $
    73,159
    
    
    $
    33,6822006
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    38,019
    
    
    $
    39,270
 
 (*)
    
    The value that we attribute to the personal use of Sovereign-provided automobiles (as
calculated in accordance with Internal Revenue Service guidelines) is included as compensation
on the W-2 forms of the named executive officers who receive such benefits. Each such named
executive officer is responsible for paying income tax on such amount. We determined the
aggregate incremental cost of any personal use of company automobiles in accordance with the
requirements of the U.S. Treasury Regulation § 1.61-21.(**)
    
    Includes our matching contribution to each named executive officers 401(k) account under our
retirement plan for 2008, 2007, and 2006. Includes the value as of December 31, 2007, for
2007, and as of December 29, 2006, for 2006 of the shares of our common stock allocated as our
contribution to each named executive officers ESOP account under our retirement plan. We did
not make an ESOP contribution for 2008.(***)
    
    Includes the following payments and benefits under the terms of Mr. Campanellis Separation
Agreement: (a) a severance payment of $3,253,624, (b) a cash payment, in respect of each of
his 341,495 shares of restricted stock, equal to the fair value per share of our common stock,
and (c) continued participation in Sovereigns welfare benefit plans for a limited time
(estimated at $44,000). Under the Separation Agreement, Mr. Campanelli was also entitled to
(a) full vesting and distribution of his entire account (29,125 shares) under the Bonus
Deferral Program and (b) full vesting of his nonqualified stock options under the 2001 Plan;
such amounts are included in the Stock Awards and Option Awards columns, respectively. See
Separation Agreements.(****)
    
    Includes the following payments and benefits under the terms of Mr. McColloms Separation
Agreement: [(a) a cash payment of approximately $2,046,625 due under his employment agreement,
(b) $450,000 for a non-solicitation agreement, whereby Mr. McCollom agreed not to solicit or
hire any of our employees, or any subsidiary, for a one-year period following his termination
on May 30, 2008, (c) $75,000 for consulting services provided by Mr. McCollom to us, (d)
$225,500 in lieu of the 2008 supplemental short-term incentive award, (e)a $86,586 cash
payment equal to the closing price of Sovereign common stock on the day prior to the change in
control times 35,055, (f) $15,817 in long-term disability premiums and (g) continued
participation in Sovereigns welfare benefit plans for a limited time (estimated at $40,000).
See Separation Agreements. 123




---



##### Table of Contents



(7)
    
    Mr. Campanelli resigned as our President and Chief Executive Officer effective September 30,
2008, and was terminated effective October 30, 2008. Mr. McCollom resigned as our Chief
Financial Officer effective March 3, 2008, and was terminated effective May 30, 2008. See
Separation Agreements. Grants Of Plan-Based Awards  2008
 Estimated Future
    
    Estimated FuturePayouts Under Non-Equity
    
    Payouts Under Equity
    
    
    
    
    
    All Other OptionIncentive Plan
    
    Incentive Plan
    
    All other Stock
    
    Awards: Number of
    
    
    
    
    
    Grant Date FairAwards
    
    Awards(1)
    
    Awards: Number of
    
    Securities
    
    Exercise or Base
    
    Value of Stock andThreshold
    
    Target
    
    
    
    
    
    Threshold
    
    Target
    
    Maximum
    
    Shares of Stock or
    
    Underlying Options
    
    Price of Option
    
    Option AwardsName
    
    Grant Date
    
    (#)
    
    (#)
    
    Maximum (#)
    
    (#)
    
    (#)
    
    (#)
    
    Units (#)
    
    (#)
    
    Awards ($/Sh)
    
    ($)Kirk W. Walters
    
    
    3/3/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    61,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    562,000
    
    
    $
    700,0003/7/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    19,551
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    200,0010/2/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    19,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    99,98610/2/2008
    (2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5.25
    
    
    $
    787,50010/2/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5.25
    
    
    $
    787,50010/6/2008
    (4)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    180,955
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,016,96710/6/2008
    (4)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    700,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5.62
    
    
    $
    3,934,000Salvatore J. Rinaldi
    
    
    3/3/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    52,632
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    600,0003/3/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    3,908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,550Roy J. Lever
    
    
    3/3/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    43,860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    500,000Patrick J. Sullivan
    
    
    3/3/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    43,860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    500,0003/3/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    3,109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,438Joseph P. Campanelli
    
    
    3/3/2008
    (3)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    180,373
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,056,252Mark R. McCollom
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 Footnotes:
 
 (1)
    
    Except with respect to Mr. Walters, the amounts shown in this column reflect the number of
shares of common stock granted to each named executive officer as restricted stock. For Mr.
Walters, the amounts shown reflect the following: restricted stock (100,000), shares
underlying option (300,000), shares underlying restricted stock units (180,955) and shares
underlying stock appreciation rights (700,000). Except for Mr. Walters, we did not grant any
stock options, restricted stock units or stock appreciation rights to named executive officers
in 2008.(2)
    
    Awarded under the terms of the 2001 Plan.(3)
    
    Awarded under the terms of the 2004 Plan.(4)
    
    Awarded pursuant to the terms of Mr. Walters employment agreement; such awards were not
granted under our equity compensation plans. See Description of Employment and Related
Agreements. 124




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##### Table of Contents



Outstanding Equity Awards At Fiscal 2008 Year End
 Option Awards
    
    Stock AwardsEquity IncentiveNumber of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity Incentive
    
    Plan Awards: MarketSecurities
    
    Number of Securities
    
    Equity Incentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan Awards: Number
    
    or Payout Value ofUnderlying
    
    Underlying
    
    Awards: Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market Value of
    
    of Unearned Shares,
    
    Unearned Shares,Unexercised
    
    Unexercised
    
    Securities Underlying
    
    
    
    
    
    
    
    
    
    Number of Shares or
    
    Shares or Units of
    
    Units or Other
    
    Units or OtherOptions(#)
    
    Options(#)
    
    Unexercised Unearned
    
    Option Exercise
    
    Option Expiration
    
    Units of Stock that
    
    Stock that have not
    
    Rights that have
    
    Rights that haveName
    
    Exercisable
    
    Unexercisable
    
    Options(#)
    
    Price($)
    
    Date
    
    have not Vested(#)
    
    Vested($)
    
    not Vested(#)
    
    not Vested($)Kirk W. Walters
    
    
    
    
    
    
    150,000
    (13)
    
    
    
    
    
    $
    5.25
    
    
    
    10/02/2018
    
    
    
    19,551
    (11)
    
    $
    58,262150,000
    (13)
    
    $
    5.25
    
    
    
    10/02/2018
    
    
    
    61,404
    (10)
    
    $
    182,984700,000
    (13)
    
    $
    5.62
    
    
    
    10/06/2018
    
    
    
    19,045
    (14)
    
    $
    56,754180,955
    (14)
    
    $
    539,246Salvatore J. Rinaldi
    
    
    1,575
    
    
    
    
    
    
    
    
    
    
    $
    6.40
    
    
    
    01/28/2010
    
    
    
    5,528
    (4)
    
    $
    16,4373,675
    
    
    
    
    
    
    
    
    
    
    $
    6.40
    
    
    
    01/28/2010
    
    
    
    5,822
    (5)
    
    $
    17,3502,527
    
    
    
    
    
    
    
    
    
    
    $
    7.56
    
    
    
    10/19/2010
    
    
    
    729
    (1)
    
    $
    2,1728,332
    
    
    
    
    
    
    
    
    
    
    $
    7.56
    
    
    
    10/19/2010
    
    
    
    6,557
    (6)
    
    $
    19,5404,892
    
    
    
    
    
    
    
    
    
    
    $
    7.56
    
    
    
    10/19/2010
    
    
    
    1,064
    (2)
    
    $
    3,1712,100
    
    
    
    
    
    
    
    
    
    
    $
    7.35
    
    
    
    12/21/2010
    
    
    
    6,893
    (7)
    
    $
    20,54111,729
    
    
    
    
    
    
    
    
    
    
    $
    7.86
    
    
    
    01/18/2011
    
    
    
    3,908
    (3)
    
    $
    11,646999
    
    
    
    
    
    
    
    
    
    
    $
    7.86
    
    
    
    01/18/2011
    
    
    
    52,632
    (10)
    
    $
    156,8438,273
    
    
    
    
    
    
    
    
    
    
    $
    7.86
    
    
    
    02/18/201118,674
    
    
    
    
    
    
    
    
    
    
    $
    12.16
    
    
    
    02/23/201226,250
    
    
    
    
    
    
    
    
    
    
    $
    12.48
    
    
    
    03/18/20132,638
    (12)
    
    $
    7,861Roy J. Lever
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,860
    (9)
    
    $
    130,073Patrick J. Sullivan
    
    
    26,250
    
    
    
    
    
    
    
    
    
    
    $
    12.48
    
    
    
    03/18/2013
    
    
    
    5,528
    (4)
    
    $
    16,4735,822
    (5)
    
    $
    17,350729
    (1)
    
    $
    2,1726,557
    (6)
    
    $
    19,5402,009
    (2)
    
    $
    5,9875,357
    (8)
    
    $
    15,9643,109
    (3)
    
    $
    9,26543,860
    (9)
    
    $
    130,7034,804
    (12)
    
    $
    14,316Joseph P. Campanelli
    
    
    1,576
    
    
    
    
    
    
    
    
    
    
    $
    11.67
    
    
    
    02/18/2009131,250
    
    
    
    
    
    
    
    
    
    
    $
    6.67
    
    
    
    02/20/201012,728
    
    
    
    
    
    
    
    
    
    
    $
    7.86
    
    
    
    01/18/201166,023
    
    
    
    
    
    
    
    
    
    
    $
    7.86
    
    
    
    02/18/201126,250
    
    
    
    
    
    
    
    
    
    
    $
    11.73
    
    
    
    07/21/201152,500
    
    
    
    
    
    
    
    
    
    
    $
    12.16
    
    
    
    02/23/201252,500
    
    
    
    
    
    
    
    
    
    
    $
    12.48
    
    
    
    03/18/201324,526
    
    
    
    
    
    
    
    
    
    
    $
    21.64
    
    
    
    03/18/201433,673
    
    
    
    
    
    
    
    
    
    
    $
    19.98
    
    
    
    03/15/2016Mark R. McCollom
    
    
    32,500
    
    
    
    
    
    
    
    
    
    
    $
    6.67
    
    
    
    02/20/20102,851
    
    
    
    
    
    
    
    
    
    
    $
    7.86
    
    
    
    01/18/201113,523
    
    
    
    
    
    
    
    
    
    
    $
    7.86
    
    
    
    02/18/201114,621
    
    
    
    
    
    
    
    
    
    
    $
    12.16
    
    
    
    02/23/201221,000
    
    
    
    
    
    
    
    
    
    
    $
    12.48
    
    
    
    03/18/20135,250
    
    
    
    
    
    
    
    
    
    
    $
    13.21
    
    
    
    04/18/2013
 Footnotes:
 
 (5)
    
    We awarded these shares of restricted stock on February 15, 2006 as part of our annual
short-term equity incentive compensation awards. These restricted shares were to vest ratably
over a three-year period from the date of the award. 125




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##### Table of Contents



(6)
    
    We awarded these shares of restricted stock on February 13, 2007 as part of our
annual-short-term equity incentive compensation awards. These restricted shares were to vest
ratably over a three-year period from the date of the award.(7)
    
    We awarded these shares of restricted stock on March 3, 2008 as part of our annual-short-term
equity incentive compensation awards. These restricted shares were to vest ratably over a
three-year period from the date of the award.(8)
    
    We awarded these restricted shares as part of our long-term equity incentive compensation
awards on February 18, 2004. These restricted shares were to vest after five years had
elapsed from the date of the award.(9)
    
    We awarded these restricted shares as part of our long-term equity incentive compensation
awards on February 16, 2005. These restricted shares were to vest after five years had
elapsed from the date of the award.(10)
    
    We awarded these restricted shares as part of our long-term equity incentive compensation
awards on February 15, 2006. These restricted shares were to vest after five years had
elapsed from the date of the award.(11)
    
    We awarded these restricted shares as part of our long-term equity incentive compensation
awards on February 13, 2007. These restricted shares were to vest after five years had
elapsed from the date of the award.(12)
    
    We awarded these restricted shares as part of our long-term equity incentive compensation
awards on February 13, 2007. These restricted shares were to vest ratably over a five-year
period from the date of the award.(13)
    
    We awarded these restricted shares as part of our long-term equity incentive compensation
awards on March 3, 2008. These restricted shares were to vest ratably over a five-year period
from the date of the award.(14)
    
    We awarded these restricted shares as part of our long-term equity incentive compensation
awards on March 3, 2008. These restricted shares were to vest after five years had elapsed
from the date of the award, unless the average of Sovereigns year to year improvement for
return on risk-weighted assets for 2008, 2009 and 2010, was greater than the relative
performance of at least 50% of the companies in Sovereigns per group, in which case the award
was to vest 100% cliff vest after three years had elapsed from the date of the award.(15)
    
    We awarded these restricted shares on March 7, 2008 pursuant to the terms of Mr. Walters
offer letter. These restricted shares were to vest ratably over a five-year period from the
date of the award.(16)
    
    These shares of our common stock represent our 100% matching contribution on the amount of
cash bonus deferred under the Bonus Deferral Program. These shares were to vest five years
from the date of award as follows: Year of Award
    
    Vesting Date of Shares2004
    
    March 5, 20092005
    
    March 4, 20102006
    
    March 10, 20112007
    
    March 8, 2012
 (17)
    
    Consists of 300,000 options and 700,000 stock appreciation rights awarded to Mr. Walters on
October 2, 2008 and October 6, 2008, respectively, pursuant to the terms of Mr. Walters
employment agreement. See Description of Employment and Related Agreements.(18)
    
    Consists of 19,045 shares of restricted stock and 180,955 restricted stock units awarded to
Mr. Walters on October 2, 2008 and October 6, 2008, respectively, pursuant to the terms of Mr.
Walters employment agreement. These awards were to vest ratably over a three-year period
from the date of the award. See Description of Employment and Related Agreements. 126




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##### Table of Contents



Option Exercises And Stock Vested  2008
 Option Awards
    
    Stock AwardsNumber of Shares
    
    
    
    
    
    Number of Shares
    
    ValueAcquired on
    
    Value Realized
    
    Acquired on
    
    Realized onName
    
    Exercise(#)
    
    on Exercise($)
    
    Vesting(#)
    
    Vesting($)Kirk W. Walters
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Salvatore J. Rinaldi
    
    
    
    
    
    $
    
    
    
    
    2,007
    
    
    $
    24,817Roy J. Lever
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Patrick J. Sullivan
    
    
    
    
    
    $
    
    
    
    
    3,818
    
    
    $
    47,455Joseph P. Campanelli
    
    
    
    
    
    $
    
    
    
    
    6,102
    
    
    $
    75,425Mark R. McCollom
    
    
    40,377
    
    
    $
    120,293
    
    
    
    3,374
    
    
    $
    41,960
 Our Compensation Plans During And Prior To 2008
 Explanatory Note
  The 2004 Plan
      The 2001 Plan
   127




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##### Table of Contents



The 1996 Plan
   The 1993 Plan
   Equity Compensation Plan Information During and Prior to 2008 Shares Outstanding and Available
for Grant or Award
  Weighted-Average
    
    Number of SecuritiesNumber of Securities to
    
    Exercise Price of
    
    Remaining Available forbe Issued Upon Exercise
    
    Outstanding
    
    Future Issuance Underof Outstanding Options,
    
    Options, Warrants,
    
    Plans (ExcludingWarrants,
    
    and Rights
    
    Securities Reflected inCategory
    
    and Rights(1)
    
    ($)(1)
    
    the First Column)Equity compensation
plans approved by
shareholders
    
    
    5,066,611
    (2)(3)
    
    $
    13.87
    
    
    
    6,254,299
    (4)Equity compensation
plans not approved
by shareholders
    
    
    0
    
    
    $
    0
    
    
    
    0Total
    
    
    5,066,611
    
    
    $
    13.87
    
    
    
    6,254,299
 Footnotes:
 (19)
    
    The information relates exclusively to shares issuable through the exercise of options as of
December 31, 2008; we have not granted any warrants or rights under any of our equity
compensation plans.(20)
    
    Consists of shares issuable through the exercise of options under the following
shareholder-approved plans: the 2004 Plan and the 2001 Plan; and the following
shareholder-approved plans that have been discontinued: the Sovereign Bancorp, Inc. 1997
Non-Employee Directors Stock Option Plan, the 1996 Plan and the 1993 Plan.(21)
    
    Excludes shares issuable under the Sovereign Bancorp, Inc. Employee Stock Purchase Plan,
which we refer to as the Purchase Plan, under which 3,150,000 shares were initially reserved
to be issued, subject to automatic increase by a number of shares equal to one percent of our
total outstanding shares each year to a maximum of 21,000,000 shares.(22)
    
    Includes 1,383,952 and 837,851 shares available for future issuance under the Purchase Plan
and the 2006 Non-Employee Director Compensation Plan, respectively, as of December 31, 2008.
Also includes 3,672,472 and 360,024 shares that were issuable under the 2004 Plan and the 2001
Plan, respectively, as of December 31, 2008.  128




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##### Table of Contents



Description Of Employment And Related Agreements
  Employments Agreement During and Prior to 2008; New Letter Agreements
 Kirk Walters
     
    
    19,045 shares of our restricted common stock under the 2001 Plan, which was granted
on October 2, 2008 at the closing trading price on such date. The shares were to vest
in three equal annual installments, subject to Mr. Walters continued employment as of
each vesting date.
    
    180,955 restricted stock units, which was granted on October 6, 2008 at the closing
trading price on such date. The units were to vest in three equal annual installments,
subject to Mr. Walters continued employment as of each vesting date.
    
    Stock options to purchase 300,000 shares of our common stock, which was granted on
October 2, 2008 at the closing trading price on such date. The options were divided
into two equal tranches, the first tranche (granted under the 2001 Plan) of which vested
in three equal annual installments, subject to Mr. Walters continued employment as of
each vesting date. The second tranche (granted under the 2004 Plan) was subject to the
three-year graded vesting schedule, as well as to conditions regarding the performance
or our stock price. Amounts of the second tranche that did not vest during the
applicable three-year period, could have also vested on the fifth anniversary of the
grant date, subject to continued employment and conditions related to the performance of
our common stock as of such date.
    
    Stock appreciation rights with respect to 700,000 shares of our common stock, which
was granted on October 6, 2008 at the closing trading price on such date. The stock
appreciation rights would have conditionally vested, subject to the same vesting
conditions applicable to the second tranche of options discussed above.
   129




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##### Table of Contents



th th th
     Salvatore J. Rinaldi
             130




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##### Table of Contents



Roy J. Lever
     
    
    Participate in the bonus programs that we maintained for our executive officers of
similar rank;
    
    Participate in our insurance, vacation, pension, and other fringe benefit programs; and
    
    Participate in our tax qualified employee benefit plans.
  
    
    Payment of a lump sum cash payment, within 30 days following Mr. Levers termination,
equal to the greater of:
    
    Continued payments of current base salary through the end of the employment term or a period of 24 months, whichever is longer; or
    
    A lump sum severance payment equal to the severance provided under our severance pay plan at the time of termination.
  
    
    Payment of a lump sum cash payment, within 30 days following Mr. Levers termination, equal
to two times the sum of:
 
    
    The highest annualized base salary paid to Mr. Lever during the year of termination or the immediately preceding two calendar years, and
    
    The greater of:
 
    
    Mr. Levers target bonus in the year of termination; or
    
    The highest bonus paid to Mr. Lever with respect to one of the three calendar years immediately preceding the year of termination.
 
    
    Continuation, for two years, of certain welfare benefits in effect during the immediately preceding two calendar years (or a lump sum tax-effected
payment in lieu thereof, if continued participation in such benefits is not permitted because Mr. Lever is no longer an employee)less such amount as
he was paying for such benefits at the time of his termination.
 131




---



##### Table of Contents



Patrick J. Sullivan
      132




---



##### Table of Contents



Separation Agreements
 Joseph P. Campanelli
            Mark R. McCollom
    133




---



##### Table of Contents




    
    A cash payment of approximately $2.1 million due under his employment agreement;
    
    Continuation, until December 31, 2010, of life, disability, and medical insurance, also
due under his employment agreement;
    
    $450,000 for a non-solicitation agreement, whereby Mr. McCollom agrees not to solicit or
hire any of our team members for the one-year period following his termination of
employment;
    
    $12,500 a month for 12 months (for a total of $150,000) as compensation for consulting
services to be provide by Mr. McCollom; and
    
    $225,500 as payment in lieu of the 2008 supplemental short-term incentive award (which
we describe in Short-Term Incentive Compensation section of our Compensation Discussion
and Analysis).
   134




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##### Table of Contents



Pension Benefits  2008
 Number of Years of
    
    Present Value of
    
    Payments DuringCredited Service
    
    Accumulated Benefit
    
    Last Fiscal YearName
    
    Plan Name
    
    (#)
    
    ($)(1)
    
    ($)Joseph P. Campanelli
    
    Enhanced Retirement Plan
    
    
    11
    
    
    $
    4,328,076
    (1)
    
    $
    0
 Footnotes:
 (1)
    
    Mr. Campanelli will receive this amount in April 2009.
 Enhanced Executive Retirement Plan
        135




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##### Table of Contents



AggregateExecutive
    
    Registrant
    
    Aggregate
    
    
    
    
    
    BalanceContributions
    
    Contributions
    
    Earnings
    
    Aggregate
    
    At Last Fiscalin Last
    
    in Last
    
    in Last Fiscal
    
    Withdrawals/
    
    YearFiscal Year
    
    Fiscal Year
    
    Year
    
    Distributions
    
    EndName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Kirk W. WaltersTotal
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Salvatore J. RinaldiBonus Deferral Program
    
    $
    0
    
    
    
    0
    
    
    
    (44,421
    )
    
    
    0
    
    
    
    15,7221998 ESOP Allocation Arrangement
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,783Total
    
    $
    0
    
    
    $
    0
    
    
    $
    (44,421
    )
    
    $
    0
    
    
    $
    32,505Roy J. LeverTotal
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Patrick J. SullivanBonus Deferral Program
    
    $
    0
    
    
    $
    0
    
    
    $
    (84,160
    )
    
    $
    (29,627
    )
    
    
    28,632Total
    
    $
    23,375
    
    
    $
    23,375
    
    
    $
    (84,160
    )
    
    $
    (29,627
    )
    
    $
    28,632Joseph P. CampanelliBonus Deferral Program
    
    $
    0
    
    
    $
    0
    
    
    $
    (263,858
    )
    
    $
    (169,296
    )
    
    $
    86,792Prior Deferred Compensation Plan
    
    $
    0
    
    
    $
    0
    
    
    $
    1,176
    
    
    $
    0
    
    
    $
    20,1141998 ESOP Allocation Arrangement
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    23,417Total
    
    $
    0
    
    
    $
    0
    
    
    $
    (262,682
    )
    
    $
    (169,296
    )
    
    $
    130,323Mark R. McCollomBonus Deferral Program
    
    $
    0
    
    
    $
    0
    
    
    $
    (106,842
    )
    
    $
    (59,780
    )
    
    $
    0Total
    
    $
    0
    
    
    $
    0
    
    
    $
    (106,842
    )
    
    $
    (59,780
    )
    
    $
    0
  Deferred Compensation Plan
           136




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##### Table of Contents



Prior Deferred Compensation Plan
   Other Arrangements
  Potential Payments Upon Termination Or Change In Control
  137




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##### Table of Contents



Director Compensation In Fiscal Year 2008
   Changein Pension ValueFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    and NonqualifiedEarned
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    Allor Paid
    
    Stock
    
    Option
    
    Non-Incentive plan
    
    Compensation
    
    Otherin Cash
    
    Awards
    
    Awards
    
    Compensation
    
    Earnings
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)(1)
    
    ($)
    
    ($)
    
    ($)
    
    ($)P. Michael Ehlerman
    
    $
    158,500
    
    
    $
    133,454
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    291,954Brian Hard
    
    $
    106,000
    
    
    $
    70,976
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    176,976Marian L. Heard
    
    $
    96,000
    
    
    $
    70,976
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    166,976Gonzalo de Las Heras
    
    $
    125,250
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    125,250Andrew C. Hove, Jr.
    
    $
    96,000
    
    
    $
    70,976
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    166,976Gabriel Jaramillo
    
    $
    35,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    35,500William J. Moran
    
    $
    89,750
    
    
    $
    70,976
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    160,726Maria Fiorini Ramirez(2)
    
    $
    96,000
    
    
    $
    70,976
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    166,976Juan Rodriguez-Inciarte
    
    $
    71,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    71,000Alberto Sánchez
    
    $
    106,500
    
    
    $
    0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    106,500Cameron C. Troilo, Sr.
    
    $
    71,000
    
    
    $
    70,976
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    141,976Ralph V. Whitworth
    
    $
    100,904
    
    
    $
    70,976
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    171,880
 Footnotes:
 (23)
    
    On December 31, 2008, Mr. Troilo had outstanding 100,800 unexercised, vested options to
purchase shares of our common stock. We granted these options under the Sovereign Bancorp,
Inc. 1997 Non-Employee Directors Stock Option Plan, which we terminated on February 20, 2002.
In 2008, we did not have any equity compensation plans that permitted the grant of stock
options to our non-employee directors; thus, we did not grant any options in 2008.(24)
    
    Mrs. Ramirez deferred $72,000 of her cash fees that would have been paid in 2008. These
amounts are included in the $96,000 fees shown above.
 Director Plan
        138




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##### Table of Contents



i.e.
 Directors Retirement Plan
     Name
    
    AmountP. Michael Ehlerman
    
    $
    355,853Brian Hard
    
    $
    857,293Marian L. Heard
    
    $
    0Gonzalo de Las Heras
    
    $
    0Andrew C. Hove, Jr.
    
    $
    357,773Gabriel Jaramillo
    
    $
    0William J. Moran
    
    $
    0Maria Fiorini Ramirez
    
    $
    0Alberto Sánchez
    
    $
    0Cameron C. Troilo, Sr.
    
    $
    894,432Ralph V. Whitworth
    
    $
    0
  139




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##### Table of Contents



Directors Participation in Deferred Compensation Plan
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
   
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
 Explanatory Note
  Certain Relationships and Related Transactions
  Santander Relationship
 
    
    In January 2006, Santander extended a total of $425 million in an unsecured line of
credit to Sovereign Bank for federal funds and Eurodollar borrowings and for the
confirmation of standby letters of credit issued by Sovereign Bank. This line of credit is
at market rates, in the ordinary course of business and can be cancelled by either
Sovereign Bank or Santander at any time and can be replaced by Sovereign at any time. As
of December 31, 2008, the average balance outstanding was $412,158,735, all of which was
for confirmation of standby letters of credit. Sovereign Bank paid approximately
$2,354,871 in fees to Santander in 2008 in connection with this line of credit, which, for
the fiscal year ended December 31, 2008.
    
    ISBAN UK Limited, a Santander affiliate, is under contract with Sovereign Bank to
provide technology consulting services focusing on improvements to current systems and
analyzing and recommending new systems with fees paid of $1,551,289.
    
    Ingenieria de Software Bancario, S.L., Branch US, an affiliate of Santander, is under
contract with Sovereign to provide advice with respect to implementing a single
technological platform for Sovereign with fees paid of $1,355,749.
    
    In November 2007, Santander Universidades, the major corporate social responsibility
program for Santander, and Babson College (of which Mr. Campanelli is a trustee) entered
into an educational partnership pursuant to which the parties will support a variety of
projects in regions where Santander has a significant presence. The first four projects
included scholarships for students from Latin American countries to spend time at Babson.
Santander has invested approximately $500,000 annually in this partnership.
    
    Sovereign Bank provides U.S. deposit (free and investable balances) and other cash
management services to Santanders Latin American and European commercial clients.
Customer vetting procedures are the same as those that apply to other Sovereign customers.
Under a revenue sharing agreement, Santander receives 50% of the net margin on any
deposits, which resulted in a fee to Santander for 2008 of $347,795. There were 113
accounts and 58 customers with approximately $90,057,631 in deposits outstanding at
December 31, 2008 under this agreement.
    
    Keith Morgan, a Santander consultant, provided advice with respect to the restructuring
of Sovereign Banks retail banking strategy for a fee of $60,000 per month plus expenses.
 140




---



##### Table of Contents



Cameron C. Troilo, Sr.
 
    
    Lease Rental Relationships. As of December 31, 2008, Mr. Troilo or his affiliates
leased 7 commercial properties to Sovereign Bank. In 2008, Sovereign Bank paid total
rental payments of $582,811.54 ($435,078.82 of actual rental payments and $147,732.72 of
pass-through expenses and other adjustments) to Mr. Troilo for one location. Sovereign
Bank paid 6th & Bay Group, LLC, an entity in which Mr. Troilo owns a 50% equity
interest, total rental payments of $113,664.62 ($89,232.00 of actual rental payments and
$24,432.62 of pass-through expenses).
    
    Commercial Banking Relationships. As of December 31, 2008, Mr. Troilo and affiliated
entities have 10 separate direct loans for the aggregate original amount of $17.5 million,
with $16.1 million outstanding. Sovereigns net exposure being $13.4 million as a result
of loan participation sold without recourse. Pursuant to these loans, aggregate monthly
payments of $95,529 (ranging from $1,215 to $24,097) are made to Sovereign, and
approximately $681,000 in interest and fees were paid to Sovereign.
 Loans to Directors and Executive Officers
  1
    Approval of Related Transactions
  Director Independence
  141




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##### Table of Contents



Item 14. Principal Accounting Fees and Services.
 PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Fees of the Independent Auditor
  Fiscal Year Ended December 31, 2008
 December 31, 2008Audit Fees
    
    $
    4,878,000Audit-Related Fees
    
    $
    298,500Tax Fees
    
    $
    115,017All Other Fees
    
    $
    0Total Fees
    
    $
    5,291,517
    Fiscal Year Ended December 31, 2007
 December 31, 2007Audit Fees
    
    $
    4,357,597Audit-Related Fees
    
    
    498,299Tax Fees
    
    
    146,424All Other Fees
    
    
    0Total Fees
    
    $
    5,002,320
      Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by Independent Auditor
  142




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 (a)(1)
    
    Financial Statements.
 The following financial statements are filed as part of this report:
    
    Consolidated Balance Sheets
    
    Consolidated Statements of Operations
    
    Consolidated Statements of Stockholders Equity
    
    Consolidated Statements of Cash Flows
    
    Notes to Consolidated Financial Statements(2)
    
    Financial Statement Schedules.
  (b)
    
    Exhibits.
 (2.1)
    
    Transaction Agreement, dated as of October 13, 2008, between Sovereign Bancorp, Inc. and
Banco Santander, S.A. (Incorporated by reference to Exhibit 2.1 to Sovereigns Current Report
on Form 8-K filed October 16, 2008)(3.1)
    
    Amended and Restated Articles of Incorporation of Sovereign Bancorp, Inc. (Incorporated by
reference to Exhibit 3.1 to Sovereigns Current Report on Form 8-K filed January 30, 2009)(3.2)
    
    Amended and Restated Bylaws of Sovereign Bancorp, Inc. (Incorporated by reference to Exhibit
3.2 to Sovereigns Current Report on Form 8-K filed January 30, 2009)(4.1)
    
    Sovereign Bancorp, Inc. has certain debt obligations outstanding. None of the instruments
evidencing such debt authorizes an amount of securities in excess of 10% of the total assets
of Sovereign Bancorp, Inc. and its subsidiaries on a consolidated basis; therefore, copies of
such instruments are not included as exhibits to this Annual Report on Form 10-K. Sovereign
Bancorp, Inc. agrees to furnish copies to the SEC on request.(4.2)
    
    Fiscal Agency Agreement dated December 22, 2008 between Sovereign Bank and The Bank of New
York Mellon Trust Company, N.A., as fiscal agent (Incorporated by reference to Exhibit 4.1 to
Sovereigns Current Report on Form 8-K filed December 22, 2008)(4.3)
    
    Fiscal Agency Agreement dated December 22, 2008 between Sovereign Bancorp, Inc. and The Bank
of New York Mellon Trust Company, N.A., as fiscal agent (Incorporated by reference to Exhibit
4.2 to Sovereigns Current Report on Form 8-K filed December 22, 2008)(10.1)
    
    Employment Agreement, dated as of January 30, 2003, between Sovereign Bancorp, Inc. and
Joseph P. Campanelli (Incorporated by reference to Exhibit 10.14 to Sovereigns Annual Report
on Form 10-K for the fiscal year ended December 31, 2002)(10.2)
    
    Agreement to Amend, dated May 30, 2006, between Sovereign Bancorp, Inc. and Joseph P.
Campanelli (Incorporated by reference to Exhibit 10.2 to Sovereigns Current Report on Form
8-K filed November 14, 2006)(10.3)
    
    Amendment #2 to Employment Agreement, dated as of October 10, 2006, between Sovereign
Bancorp, Inc. and Joseph P. Campanelli (Incorporated by reference to Exhibit 10.3 to
Sovereigns Current Report on Form 8-K filed November 14, 2006)(10.4)
    
    Employment Agreement, dated as of January 16, 2007, between Sovereign Bancorp, Inc. and
Joseph P. Campanelli (Incorporated by reference to Exhibit 10.1 to Sovereigns Current Report
on Form 8-K filed March 20, 2007)(10.5)
    
    Separation and Consulting Agreement, dated September 30, 2008, between Sovereign Bancorp,
Inc. and Joseph P. Campanelli (Incorporated by reference to Exhibit 10.4 to Sovereigns
Current Report on Form 8-K filed on September 30, 2008)(10.6)
    
    Employment Agreement dated as of May 20, 2005, between Sovereign Bancorp, Inc. and Mark R.
McCollom (Incorporated by reference to Exhibit 10.1 to Sovereigns Current Report on Form
8-K/A filed on May 20, 2005)(10.7)
    
    Agreement to Amend dated May 30, 2006, between Sovereign Bancorp, Inc. and Mark R. McCollom
(Incorporated by reference to Exhibit 10.17 to Sovereigns Annual Report on Form 10-K for the
fiscal year ended December 31, 2006)(10.8)
    
    Amendment #2 to Employment Agreement, dated November 9, 2007, between Sovereign Bancorp,
Inc. and Mark R. McCollom (Incorporated by reference to Exhibit 10.4 to Sovereigns Current
Report on Form 8-K filed November 15, 2007)(10.9)
    
    Separation Agreement, dated February 20, 2008, between Sovereign Bancorp, Inc. and Mark R.
McCollom (Incorporated by reference to Exhibit 10.1 to Sovereigns Current Report on Form 8-K
filed February 21, 2008)(10.10)
    
    Employment Agreement, effective March 3, 2008, between Sovereign Bancorp, Inc. and Kirk W.
Walters (Incorporated by reference to Exhibit 10.2 to Sovereigns Current Report on Form 8-K
filed February 21, 2008)(10.11)
    
    First Amendment to Employment Agreement, dated September 30, 2008, between Sovereign
Bancorp, Inc. and Kirk W. Walters (Incorporated by reference to Exhibit 10.2 to Sovereigns
Current Report on Form 8-K filed on September 30, 2008)(10.12)
    
    Employment Agreement, dated September 30, 2008, between Sovereign Bancorp, Inc. and Kirk W.
Walters (Incorporated by reference to Exhibit 10.3 to Sovereigns Current Report on Form 8-K
filed on September 30, 2008)(10.13)
    
    Employment Agreement, dated October 2, 2008, between Sovereign Bancorp, Inc. and Kirk W.
Walters (Incorporated by reference to Exhibit 10.1 to Sovereigns Current Report on Form 8-K
filed on October 7, 2008)(10.14)
    
    Employment Agreement, dated September 30, 2008, between Sovereign Bancorp, Inc. and Paul A.
Perrault (Incorporated by reference to Exhibit 10.1 to Sovereigns Current Report on Form 8-K
filed on September 30, 2008)(10.15)
    
    Sovereign Bancorp, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit
C to Sovereigns definitive proxy statement, dated March 22, 2004)(10.16)
    
    Form of Incentive Stock Option Agreement under the Sovereign Bancorp, Inc. 1986 Stock
Option Plan (Incorporated by reference to Exhibit 10.13 to Sovereigns Current Report on Form
8-K filed February 18, 2005)(10.17)
    
    Sovereign Bancorp, Inc. Non-Employee Directors Services Compensation Plan (Incorporated by
reference to Exhibit 10.9 to Sovereigns Annual Report on Form 10-K for the fiscal year ended
December 31, 2006)
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##### Table of Contents



(10.18)
    
    Sovereign Bancorp, Inc. 1993 Stock Option Plan (the 1993 Plan) (Incorporated by reference
to Exhibit 10.10 to Sovereigns Annual Report on Form 10-K for the fiscal year ended December
31, 2006)(10.19)
    
    Form of Incentive Stock Option Agreement under the 1993 Plan (Incorporated by reference to
Exhibit 10.11 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.20)
    
    Form of Nonqualified Stock Option Agreement under the 1993 Plan (Incorporated by reference
to Exhibit 10.12 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.21)
    
    Sovereign Bancorp, Inc. 1996 Stock Option Plan (the 1996 Plan) (Incorporated by reference
to Exhibit 10.12 to Sovereigns Annual Report on Form 10-K for the fiscal year ended December
31, 2006)(10.22)
    
    Form of Incentive Stock Option Agreement under the 1996 Plan (Incorporated by reference to
Exhibit 10.9 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.23)
    
    Form of Nonqualified Stock Option Agreement under the 1996 Plan (Incorporated by reference
to Exhibit 10.10 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.24)
    
    Sovereign Bancorp, Inc. 1997 Non-Employee Directors Stock Option Plan (the 1997
Directors Plan) (Incorporated by reference to Exhibit A to Sovereigns definitive proxy
statement dated March 16, 1998)(10.25)
    
    Form of Nonqualified Stock Option Agreement under the 1997 Directors Plan (Incorporated by
reference to Exhibit 10.8 to Sovereigns Current Report on Form 8-K filed February 18, 2005.)(10.26)
    
    Sovereign Bancorp, Inc. 2001 Stock Incentive Plan (the 2001 Plan) (Incorporated by
reference to Exhibit 10.21 to Sovereigns Annual Report on Form 10-K for the fiscal year ended
December 31, 2006)(10.27)
    
    Form of Incentive Stock Option Agreement under the 2001 Plan (Incorporated by reference to
Exhibit 10.5 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.28)
    
    Form of Nonqualified Stock Option Agreement under the 2001 Plan (Incorporated by reference
to Exhibit 10.6 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.29)
    
    Form of Restricted Stock Agreement under the 2001 Plan (Incorporated by reference to
Exhibit 10.7 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.30)
    
    Sovereign Bancorp, Inc. 2004 Broad-Based Stock Incentive Plan (the 2004 Plan)
(Incorporated by reference to Exhibit 10.23 to Sovereigns Annual Report on Form 10-K for the
fiscal year ended December 31, 2006)(10.31)
    
    Form of Incentive Stock Option Agreement under the 2004 Plan (Incorporated by reference to
Exhibit 10.2 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.32)
    
    Form of Nonqualified Stock Option Agreement under the 2004 Plan (Incorporated by reference
to Exhibit 10.3 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.33)
    
    Form of Restricted Stock Agreement under the 2004 Plan (Incorporated by reference to
Exhibit 10.4 to Sovereigns Current Report on Form 8-K filed February 18, 2005)(10.34)
    
    Sovereign Bancorp, Inc. 2006 Non-Employee Director Compensation Plan (Incorporated by
reference to Exhibit 10.22 to Sovereigns Annual Report on Form 10-K for the fiscal year ended
December 31, 2006)(10.35)
    
    Sovereign Bancorp, Inc. 2006 Leaders Incentive Plan (Incorporated by reference to Exhibit
10.1 to Sovereigns Current Report on Form 8-K filed February 22, 2006)(10.36)
    
    Sovereign Bancorp, Inc. 2007 Deferred Compensation Plan (Incorporated by reference to
Exhibit 10.36 to Sovereigns Annual Report on Form 10-K for the fiscal year ended December 31,
2006)(10.37)
    
    Investment Agreement, dated as of October 24, 2005 between Sovereign Bancorp, Inc. and
Banco Santander, S.A. (Incorporated by reference to Exhibit 10.1 to Sovereigns Current Report
on Form 8-K filed October 27, 2005)(10.38)
    
    Amendment to Investment Agreement, made as of November 22, 2005, between Sovereign Bancorp,
Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 10.2 to Sovereigns
Current Report on Form 8-K filed November 23, 2005)(10.39)
    
    Second Amendment to Investment Agreement, dated as of May 31, 2006, between Sovereign
Bancorp, Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 10.3 to
Sovereigns Current Report on Form 8-K filed June 6, 2006)(10.40)
    
    Third Amendment to Investment Agreement, dated as of October 13, 2008, between Sovereign
Bancorp, Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 4.2 to
Sovereigns Current Report on Form 8-K filed October 16, 2008)(10.41)
    
    Form of Letter Agreement, dated May 9, 2008, by and between Sovereign Bancorp, Inc. and
Banco Santander, S.A. (incorporated by referenced to Exhibit 10.1 to Sovereigns Current
Report on Form 8-K filed May 12, 2008)(10.42)
    
    Form of Shareholder Agreement, dated October 13, 2008, between Banco Santander, S.A. and
the shareholder signatory thereto (Incorporated by reference to Exhibit 4.1 to Sovereigns
Current Report on Form 8-K filed October 16, 2008)(10.43)
    
    Agreement and General Release, dated February 12, 2009, between Sovereign Bancorp, Inc. and Kirk W. Walters.(10.44)
    
    Agreement and General Release, dated February 12, 2009, between Sovereign Bancorp, Inc. and Patrick J. Sullivan.(10.45)
    
    Agreement and General Release, dated February 16, 2009, between Sovereign Bancorp, Inc. and Roy J. Lever.(10.46)
    
    Employment Agreement, dated February 9, 2008, between Sovereign Bancorp, Inc. and Roy J. Lever.(10.47)
    
    Offer Letter, dated December 11, 2007, between Sovereign Bancorp, Inc. and Roy J. Lever.(10.48)
    
    Employment Agreement, dated August 7, 2007 between Sovereign Bancorp, Inc. and Salvatore J. Rinaldi.(10.49)
    
    Amendment to Employment Agreement, dated September 18, 2007, between Sovereign Bancorp, Inc. and Salvatore J. Rinaldi.(10.50)
    
    Employment Agreement, dated February 11, 2008, between Sovereign Bancorp, Inc. and Patrick J. Sullivan(21)
    
    Subsidiaries of Registrant(23.1)
    
    Consent of Ernst & Young LLP(31.1)
    
    Chief Executive Officer certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act(31.2)
    
    Chief Financial Officer certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act(32.1)
    
    Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(32.2)
    
    Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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##### Table of Contents



Signatures
  SOVEREIGN BANCORP, INC.
(Registrant)By:
    /s/ Gabriel JaramilloName:
    Gabriel JaramilloTitle:
    Chairman of the Board, Chief Executive Officer   Signature
    
    Title
    
    Date/s/ Gabriel Jaramillo
    
    Chairman of the Board
Chief Executive Officer
    
    March 17, 2009Gabriel Jaramillo
    
    (Principal Executive Officer)/s/ Kirk Walters
    
    Director
Senior Executive Vice President
    
    March 17, 2009Kirk Walters
    
    Chief Financial Officer
Chief Administration Officer
(Principal Financial Officer)/s/ Gonzalo de Las Heras
    
    Director
    
    March 17, 2009Gonzalo de Las Heras/s/ Marian Heard
    
    Director
    
    March 17, 2009Marian Heard/s/ Alberto Sánchez
    
    Director
    
    March 17, 2009Alberto Sánchez/s/ Thomas Cestare
    
    Chief Accounting Officer
    
    March 17, 2009Thomas Cestare
    
    Executive Vice President(Principal Accounting Officer)
 145