Santander Holdings USA, Inc. - Quarter Report: 2015 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 2015



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

For the transition period from to .

Commission File Number: 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)



Virginia (State or other jurisdiction of incorporation or organization)		23-2453088 (I.R.S. Employer Identification No.)

75 State Street, Boston, Massachusetts (Address of principal executive offices)		02109 (Zip Code)

(617) 346-7200

Registrant’s telephone number including area code

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

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

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



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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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



Class		Outstanding at April 30, 2015
Common Stock (no par value)		530,391,043 shares

FORWARD-LOOKING STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

This Quarterly Report on Form 10-Q of Santander Holdings USA, Inc. (“SHUSA” or the “Company”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and future performance of the Company. Words such as “may,” “could,” “should,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” “anticipate,” “estimate,” “intend,” “plan,” “assume” or similar expressions are intended to indicate forward-looking statements.

Although SHUSA believes that the expectations reflected in these forward-looking statements are reasonable as of the date on which the statements are made, these statements are not guarantees of future performance and involve risks and uncertainties based on various factors and assumptions. Among the factors that could cause SHUSA’s financial performance to differ materially from that suggested by forward-looking statements are:

•

the effects of regulation and policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB”), including changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, the failure to adhere to which could subject SHUSA to formal or informal regulatory compliance and enforcement actions;


•	the strength of the United States economy in general and regional and local economies in which SHUSA conducts operations in particular, which may affect, among other things, the level of non-performing assets, charge-offs, and provisions for credit losses;


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


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


•	adverse movements and volatility in debt and equity capital markets and adverse changes in the securities markets, including those related to the financial condition of significant issuers in SHUSA’s investment portfolio;


•	SHUSA’s ability to manage changes in the value and quality of its assets, changing market conditions that may force management to alter the implementation or continuation of cost savings or revenue enhancement strategies and the possibility that revenue enhancement initiatives may not be successful in the marketplace or may result in unintended costs;


•	SHUSA’s ability to timely develop competitive new products and services in a changing environment and the acceptance of such products and services by customers;


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

•

the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, the applications and interpretations thereof by regulatory bodies and the impact of changes in and interpretations of generally accepted accounting principles in the United States of America ("GAAP");

•

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA"), enacted in July 2010, which is a significant development for the industry, and the full impact of which will not be known until the rule-making processes mandated by the legislation are complete, although the impact has involved and will involve higher compliance costs which have affected and will affect SHUSA’s revenue and earnings negatively;


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


•	acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters;


•	the costs and effects of regulatory or judicial proceedings;


•	the outcome of ongoing tax audits by federal, state and local income tax authorities that may require SHUSA to pay additional taxes compared to what has been accrued or paid as of period-end; and


•	SHUSA’s success in managing the risks involved in the foregoing.

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

Santander Holdings USA, Inc. provides the following list of abbreviations and acronyms as a tool for the reader that are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements.



ABS: Asset-backed securities		GAAP: Accounting principles generally accepted in the United States of America
ACL: Allowance for credit losses		GBM: Global Banking & Markets and Large Corporate Banking
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation		GSE: Government-sponsored entities
ASC: Accounting Standards Codification		IHC: U.S. intermediate holding company
ASU: Accounting Standards Update		IHC Implementation Plan: Plan for meeting the requirements of the Final Rule
Bank: Santander Bank, National Association		IPO: Initial public offering
BHC: Bank holding company		IRS: Internal Revenue Service
BOLI: Bank-owned life insurance		ISDA: International Swaps and Derivatives Association, Inc.
Brokers: Independent parties		LCR: Liquidity coverage ratio
CBP: Citizens Bank of Pennsylvania		LHFS: Loans held-for-sale
CCAR: Comprehensive Capital Analysis and Review		LIBOR: London Interbank Offered Rate
CD: Certificate(s) of deposit		LIHTC: Low Income Housing Tax Credit Investment
CEVF: Commercial equipment vehicle funding		LTV: Loan-to-value
CET1: Common equity tier 1		MBS: Mortgage-backed securities
CFPB: Consumer Financial Protection Bureau		MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations
Change in Control: First quarter 2014 change in control and consolidation of SCUSA		MSR: Mortgage servicing right
Chrysler Agreement: Ten-year private label financing agreement with the Chrysler Group signed by SCUSA		MVE: Market value of equity
Chrysler Capital: trade name used in providing services under the Chrysler Agreement.		NCI: Non-controlling interest
Chrysler Group: Chrysler Group LLC (FCA US LLC as of December 14, 2014)		NPL: Non-performing loans
CID: Civil investigative demand		NSFR: Net stable funding ratio
CLO: Collateralized loan obligations		OCC: Office of the Comptroller of the Currency
CLTV: Combined loan-to-value		OEM: Original equipment manufacturer
CODM: Chief Operating Decision Maker		OIS: Overnight indexed swap
Company: Santander Holdings USA, Inc.		Order: OCC consent order signed by SBNA on January 26, 2012 which replaced a prior order signed by the Bank and other parties with the OTS.
Consent Order: Consent order signed by the Bank with the OCC on April 17, 2015 that resolved issues related to the sale and servicing of the identify theft protection product.		OREO: Other real estate owned
CPR: Changes in anticipated loan prepayment rates		OTS: Office of Thrift Supervision
DCF: Discounted cash flow		OTS Order: Consent order signed by the Bank and other parties with the OTS on April 13, 2011 resolving certain of the Bank's and other parties' foreclosure activities.
DDFS: Dundon DFS LLC		REIT: Real estate investment trust
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act		OTTI: Other-than-temporary impairment
DOJ: Department of Justice		RV: Recreational vehicle
DOJ Order: Consent order signed by SCUSA with the DOJ on February 25, 2015 that resolved claims related to certain of SCUSA's repossession and collection activities.		S&P: Standard & Poor's
DTI: Debt-to-income		Santander: Banco Santander, S.A.
ECOA: Equal Credit Opportunity Act		Santander NY: New York branch of Banco Santander, S.A.
EPS: Enhanced Prudential Standards		Santander UK: Santander UK plc



Exchange Act: Securities Exchange Act of 1934, as amended		SCF: Statement of Cash Flows
FASB: Financial Accounting Standards Board		SCRA: Servicemember Civil Relief Act
FBO: Foreign banking organization		SCUSA: Santander Consumer USA Holdings Inc. and its subsidiaries
FDIC: Federal Deposit Insurance Corporation		SCUSA Common Stock: Common shares of SCUSA
Federal Reserve: Board of Governors of the Federal Reserve System		SEC: Securities and Exchange Commission
FHLB: Federal Home Loan Bank		Securities Act: Securities Act of 1933, as amended
FHLMC: Federal Home Loan Mortgage Corporation		SHUSA: Santander Holdings USA, Inc.
FICO: Fair Isaac Corporation^® credit scoring model		SPE: Special purpose entity
Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA		Sponsor Holdings: Sponsor Auto Finance Holding Series LP
FNMA: Federal National Mortgage Association		SUBI: Special unit of beneficial interest (in a titling trust used to finance leases)
FOMC: Federal Open Market Committee		TDR: Troubled debt restructuring
FRB: Federal Reserve Bank		Trusts: Securitization trusts
FVO: Fair value option		VIE: Variable interest entity

INDEX



	Page

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014	5
Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2015 and 2014	6
Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2015 and 2014	7
Condensed Consolidated Statements of Stockholders' Equity for the three-month periods ended March 31, 2015 and 2014	8
Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2015 and 2014	9
Notes to Condensed Consolidated Financial Statements	10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	82

Item 3. Quantitative and Qualitative Disclosures About Market Risk	124

Item 4. Controls and Procedures	124

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	125

Item 1A. Risk Factors	125

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	125

Item 3. Defaults upon Senior Securities	125

Item 4. Mine Safety Disclosures	125

Item 5. Other Information	125

Item 6. Exhibits	126

SIGNATURES	127


Ex-31.1 Certification
Ex-31.2 Certification
Ex-31.3 Certification
Ex-32.1 Certification
Ex-32.2 Certification
Ex-32.3 Certification
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1- FINANCIAL INFORMATION



Item 1.	Condensed Consolidated Financial Statements

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	March 31, 2015			December 31, 2014
	(in thousands)
ASSETS
Cash and cash equivalents	$	1,929,006		$	2,234,725
Investment securities:
Available-for-sale at fair value	18,429,023			15,908,078
Trading securities	—			833,936
Other investments	853,657			816,991
Loans held for investment ^{(1) (5)}	78,520,165			76,032,562
Allowance for loan losses ⁽⁵⁾	(2,493,240		)	(2,108,817		)
Net loans held for investment	76,026,925			73,923,745
Loans held-for-sale ⁽²⁾	1,361,895			260,252
Premises and equipment, net ⁽³⁾	840,250			854,671
Leased vehicles, net ⁽⁵⁾	7,073,755			6,638,115
Accrued interest receivable ⁽⁵⁾	547,789			559,962
Equity method investments	195,078			227,991
Goodwill	8,892,011			8,892,011
Intangible assets	718,681			735,488
Bank-owned life insurance	1,698,261			1,686,491
Restricted cash ⁽⁵⁾	2,801,427			2,024,838
Other assets ^{(4) (5)}	1,880,248			2,860,121
TOTAL ASSETS	$	123,248,006		$	118,457,415
LIABILITIES
Accrued expenses and payables	$	1,332,508		$	1,902,278
Deposits and other customer accounts	54,368,932			52,474,007
Borrowings and other debt obligations ⁽⁵⁾	42,813,441			39,709,653
Advance payments by borrowers for taxes and insurance	222,721			167,670
Deferred tax liabilities, net	1,030,676			1,025,948
Other liabilities	660,396			673,764
TOTAL LIABILITIES	100,428,674			95,953,320
STOCKHOLDER'S EQUITY
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at March 31, 2015 and at December 31, 2014)	195,445			195,445
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 and 530,391,043 shares outstanding at March 31, 2015 and at December 31, 2014, respectively)	14,730,156			14,729,609
Accumulated other comprehensive loss	(44,920		)	(96,410		)
Retained earnings	3,869,581			3,714,642
TOTAL SHUSA STOCKHOLDER'S EQUITY	18,750,262			18,543,286
Noncontrolling interest	4,069,070			3,960,809
TOTAL STOCKHOLDER'S EQUITY	22,819,332			22,504,095
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	123,248,006		$	118,457,415

⁽¹⁾ Loans held for investment includes $676.1 million and $845.9 million of loans recorded at fair value at March 31, 2015 and December 31, 2014, respectively.

⁽²⁾ Recorded at the fair value option ("FVO") or lower of cost or fair value.

⁽³⁾ Net of accumulated depreciation of $691.2 million and $638.0 million at March 31, 2015 and December 31, 2014, respectively.

⁽⁴⁾ Includes Mortgage Servicing Rights ("MSRs") of $135.5 million and $145.0 million at March 31, 2015 and December 31, 2014, respectively, for which the Company has elected the FVO.

⁽⁵⁾ The Company has interests in certain securitization trusts ("Trusts") that are considered variable interest entities ("VIEs") for accounting purposes. The Company consolidates VIEs where it is deemed the primary beneficiary. See Note 7 to these Condensed Consolidated Financial Statements for additional information.

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
INTEREST INCOME:
Loans	$	1,834,559		$	1,334,520
Interest-earning deposits	1,762			1,995
Investment securities:
Available-for-sale	77,638			61,584
Other investments	19,068			8,107
TOTAL INTEREST INCOME	1,933,027			1,406,206
INTEREST EXPENSE:
Deposits and other customer accounts	63,393			48,947
Borrowings and other debt obligations	215,475			185,154
TOTAL INTEREST EXPENSE	278,868			234,101
NET INTEREST INCOME	1,654,159			1,172,105
Provision for credit losses	872,184			335,330
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	781,975			836,775
NON-INTEREST INCOME:
Consumer fees	98,039			82,964
Commercial fees	42,685			42,970
Mortgage banking income, net	17,863			12,947
Equity method investments income/(loss), net	(7,354		)	19,642
Bank-owned life insurance	12,956			14,182
Lease income	398,385			115,402
Miscellaneous income	93,266			142,666
TOTAL FEES AND OTHER INCOME	655,840			430,773
Gain on Change in Control	—			2,428,539
Net gain on sale of investment securities	9,557			1,944
Net gain recognized in earnings	9,557			2,430,483
TOTAL NON-INTEREST INCOME	665,397			2,861,256
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits	319,852			318,959
Occupancy and equipment expenses	129,166			119,203
Technology expense	42,089			40,270
Outside services	48,399			35,959
Marketing expense	14,341			14,100
Loan expense	105,431			69,137
Lease expense	321,958			88,611
Other administrative expenses	68,460			52,275
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES	1,049,696			738,514
OTHER EXPENSES:
Amortization of intangibles	16,806			13,715
Deposit insurance premiums and other expenses	15,809			14,417
Loss on debt extinguishment	—			3,635
Investment expense on qualified affordable housing projects	49			—
TOTAL OTHER EXPENSES	32,664			31,767
INCOME BEFORE INCOME TAXES	365,012			2,927,750
Income tax provision	112,973			1,050,107
NET INCOME INCLUDING NONCONTROLLING INTEREST	252,039			1,877,643
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	93,450			107,740
NET INCOME	$	158,589		$	1,769,903

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
NET INCOME INCLUDING NONCONTROLLING INTEREST	$	252,039		$	1,877,643
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments, net of tax	(15,115		)	7,760
Net unrealized gains on available-for-sale investment securities, net of tax	65,990			82,861
Pension and post-retirement actuarial gain, net of tax	615			562
TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX	51,490			91,183
COMPREHENSIVE INCOME	$	303,529		$	1,968,826
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	$	93,450		$	107,740
COMPREHENSIVE INCOME	$	210,079		$	1,861,086

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2015 AND 2014

(Unaudited)

(in thousands)



	Common Shares Outstanding	Preferred Stock		Common Stock and Paid-in Capital		Accumulated Other Comprehensive Income/(Loss)			Retained Earnings			Noncontrolling Interest		Total Stockholder's Equity
Balance, December 31, 2013	520,307	$	195,445	$	12,209,816	$	(254,368	)	$	1,394,090		$	—	$	13,544,983
Comprehensive income/(loss)	—	—		—		91,183			1,769,903			—		1,861,086
SCUSA Change in Control⁽¹⁾				—								3,693,435		3,693,435
Issuance of common stock	10,000			2,500,000								—		2,500,000
Stock issued in connection with employee benefit and incentive compensation plans	—	—		242		—			—					242
Dividends paid on preferred stock	—	—		—		—			(3,650		)	—		(3,650		)
Balance, March 31, 2014	530,307	$	195,445	$	14,710,058	$	(163,185	)	$	3,160,343		$	3,693,435	$	21,596,096

(1) Refer to Note 3 to the Condensed Consolidated Financial Statements for further discussion.



	Common Shares Outstanding	Preferred Stock		Common Stock and Paid-in Capital		Accumulated Other Comprehensive (Loss)/Income			Retained Earnings			Noncontrolling Interest		Total Stockholder's Equity
Balance, December 31, 2014	530,391	$	195,445	$	14,729,609	$	(96,410	)	$	3,714,642		$	3,960,809	$	22,504,095
Comprehensive income/(loss)	—	—		—		51,490			158,589			—		210,079
Net Income Attributable to Noncontrolling Interest												93,450		93,450
Impact of SCUSA Stock Option Activity												14,811		14,811
Stock issued in connection with employee benefit and incentive compensation plans				547										547
Dividends paid on preferred stock									(3,650		)			(3,650		)
Balance, March 31, 2015	530,391	$	195,445	$	14,730,156	$	(44,920	)	$	3,869,581		$	4,069,070	$	22,819,332

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interest	$	252,039		$	1,877,643
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on SCUSA Change in Control	—			(2,291,003		)
Net gain on sale of SCUSA shares	—			(137,536		)
Gain on sale of branches	—			(10,648		)
Provision for credit losses	872,184			335,330
Deferred taxes	467			800,165
Depreciation, amortization and accretion	71,671			(34,914		)
Net gain on sale of loans	(14,501		)	(37,471		)
Net gain on sale of investment securities	(9,557		)	(1,944		)
Net gain on sale of leased vehicles	(10,847		)	—
Loss on debt extinguishment	—			3,635
Net loss on real estate owned and premises and equipment	364			689
Stock-based compensation	4,622			2,707
Equity (earnings)/loss on equity method investments	7,354			(19,642		)
Originations of loans held-for-sale, net of repayments	(1,190,069		)	(831,266		)
Proceeds from sales of loans held-for-sale	905,354			1,176,991
Purchases of trading securities	(390,192		)	—
Proceeds from sales of trading securities	823,801			—
Net change in:
Other assets and bank-owned life insurance	445,757			(263,146		)
Other liabilities	9,218			500,115
Other	—			(790		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	1,777,665			1,068,915

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale investment securities	1,010,515			88,113
Proceeds from prepayments and maturities of available-for-sale investment securities	827,886			630,324
Purchases of available-for-sale investment securities	(3,940,818		)	(600,812		)
Proceeds from sales of other investments	140,949			154,126
Purchases of other investments	(153,034		)	(70,675		)
Net change in restricted cash	(775,768		)	(126,404		)
Proceeds from sales of loans held for investment	410,930			674,777
Proceeds from the sales of equity method investments	14,988			—
Distributions from equity method investments	1,050			1,936
Contributions to equity method investments	—			(18,459		)
Purchases of loans held for investment	(57,886		)	(994,166		)
Net change in loans other than purchases and sales	(3,969,146		)	(2,539,324		)
Purchases of leased vehicles	(1,531,304		)	(807,135		)
Proceeds from the sale of leased vehicles	586,664			9,451
Manufacturer incentives	309,458			165,581
Proceeds from sales of real estate owned and premises and equipment	23,188			246,127
Purchases of premises and equipment	(39,984		)	(97,285		)
Cash collateral paid on derivatives	—			(18,795		)
Net cash transferred on the sale of branches	—			(151,286		)
Proceeds from sale of SCUSA shares	—			320,145
Cash acquired in SCUSA Change in Control	—			11,076
NET CASH USED IN BY INVESTING ACTIVITIES	(7,142,312		)	(3,122,685		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	1,894,927			797,918
Net change in short-term borrowings	(3,400,000		)	(1,181,401		)
Net proceeds from long-term borrowings	11,948,200			6,552,549
Repayments of long-term borrowings	(9,059,761		)	(5,865,577		)
Proceeds from FHLB advances (with maturities greater than 90 days)	3,750,000			—
Repayments of FHLB advances (with maturities greater than 90 days)	(135,000		)	(813,635		)
Net change in advance payments by borrowers for taxes and insurance	55,051			71,364
Cash dividends paid to preferred stockholders	(3,650		)	(3,650		)
Proceeds from the issuance of common stock	9,161			1,754,827
NET CASH PROVIDED BY FINANCING ACTIVITIES	5,058,928			1,312,395

NET DECREASE IN CASH AND CASH EQUIVALENTS	(305,719		)	(741,375		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	2,234,725			4,226,947
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,929,006		$	3,485,572

SUPPLEMENTAL DISCLOSURES
Income taxes paid/(received), net	$	(237,980	)	$	258,501
Interest paid	284,258			(29,895		)

NON-CASH TRANSACTIONS⁽¹⁾
Loans transferred to other real estate owned	9,628			13,816
Loans transferred to repossessed vehicles	18,170			238,013
Loans transferred from held for investment to held for sale, net	848,137			—
Conversion of debt to common equity	—			750,000
Liquidation of common equity securities	—			24,742
⁽¹⁾ The first quarter 2014 change in control and consolidation of SCUSA (the "Change in Control") was accounted for as a non-cash transaction. See Note 3 to the Condensed Consolidated Financial Statements for detail on the Change in Control.

See accompanying notes to unaudited Condensed Consolidated Financial Statements

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Introduction

SHUSA is the parent company of Santander Bank, National Association, (the "Bank"), a national banking association, and Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SCUSA"), a consumer finance company focused on vehicle finance and personal lending products. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander").

The Bank’s primary business consists of attracting deposits from its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multi-family loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States, focused throughout Pennsylvania, New Jersey, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island, Delaware and Maryland. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios.

SCUSA has a controlling interest in Santander Consumer USA Inc., which is headquartered in Dallas, Texas, and is a full-service, technology-driven consumer finance company focused on vehicle finance and personal lending products.

On January 22, 2014, SCUSA's registration statement for an initial public offering ("IPO") of shares of its common stock (the “SCUSA Common Stock”), was declared effective by the Securities and Exchange Commission (the "SEC"). Prior to the IPO, the Company owned approximately 65% of the shares of SCUSA's common stock.

On January 28, 2014, the IPO was closed, and certain stockholders of SCUSA, including the Company and Sponsor Auto Finance Holdings Series LP ("Sponsor Holdings"), sold 85,242,042 shares of SCUSA Common Stock. Immediately following the IPO, the Company owned approximately 61% of the shares of SCUSA Common Stock. In connection with these sales, certain board representation, governance and other rights granted to Dundon DFS, LLC ("DDFS") and Sponsor Holdings were terminated as a result of the reduction in DDFS and Sponsor Holdings’ collective ownership of shares of SCUSA Common Stock below certain ownership thresholds, causing the Change in Control.

Prior to the Change in Control, the Company accounted for its investment in SCUSA under the equity method. Following the Change in Control, the Company consolidated the financial results of SCUSA in the Company’s Consolidated Financial Statements. The Company’s consolidation of SCUSA is treated as an acquisition of SCUSA by the Company in accordance with Accounting Standards Codification ("ASC") 805 - Business Combinations (ASC 805). SCUSA Common Stock is now listed for trading on the New York Stock Exchange under the trading symbol "SC".

See Note 3 to the Consolidated Financial Statements for a detailed discussion of the Company's consolidation of SCUSA in accordance with ASC 805.

Basis of Presentation

These Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries, including the Bank, SCUSA, and certain special purpose financing trusts utilized in financing transactions which are considered VIEs. The Company consolidates VIEs for which it is deemed the primary beneficiary. The Condensed Consolidated Financial Statements have been prepared by the Company, without audit, pursuant to SEC regulations. All intercompany balances and transactions have been eliminated in consolidation. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. However, in the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Statements of Operations, Condensed Statements of Comprehensive Income, Condensed Statements of Stockholder's Equity and Condensed Statements of Cash Flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Reclassifications and Corrections to Previously Reported Amounts

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications did not have an impact on our consolidated financial condition or results of operations.

We have made certain corrections to the March 31, 2014 Condensed Consolidated Statements of Cash Flows and Note 5. The Company identified and corrected immaterial classification errors related to long-term borrowing repayments and short-term borrowings reported within cash flows in financing activities. These changes resulted in decreased total cash provided by operating activities and decreased total cash used in investing activities by an equal and offsetting amount. There was no net impact to cash provided by financing activities. The reclassification errors did not impact the net change in cash and cash equivalents, total cash and cash equivalents, net income, or any other operating measure.

The corrections to Note 5 related to the components of troubled debt restructuring activities for the three-month period ended March 31, 2014. The corrections do not affect the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income for the three month period ended March 31, 2015 and 2014, Condensed Consolidated Statements of Stockholder's Equity for the three-month period ended March 31, 2015 and 2014, or Condensed Consolidated Balance Sheets at March 31, 2015.

Significant Accounting Policies

Management identified accounting for consolidation, business combinations, the allowance for loan losses and the reserve for unfunded lending commitments, goodwill, derivatives and hedge activities, and income taxes as the Company's most critical accounting policies and estimates, in that they are important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

As of March 31, 2015, with the exception of the items noted in the section "Changes in Accounting Policies" below, there have been no significant changes to the Company's accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2014.

Changes in Accounting Policies

During the first quarter of 2015, the Company adopted the following Financial Accounting Standards Board (the "FASB") Accounting Standards Updates ("ASUs"), none of which had a material impact to the Company's Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Operations:

•

The Company adopted the FASB ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, which allows an entity to make an accounting policy election to account for its investments in qualified affordable housing projects using the proportional amortization method, if certain conditions are met. Under this method, an investor would amortize the cost of its investments in proportion to the tax credits and other tax benefits received and will recognize the amortization, net of tax credits and other tax benefits, in the income statement as a component of income tax expense. This ASU is required to be adopted on a retrospective basis for all periods presented. The adoption of this ASU did not have a material effect to the Company’s prior periods’ consolidated financial statements to warrant retrospective application. The cumulative effect of the adoption was recognized in the first quarter of 2015 and was not material to the Company’s condensed consolidated financial statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

•

The Company adopted FASB ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, on a prospective basis. Under this ASU, an in-substance repossession or foreclosure occurs when the creditor obtains legal title to the residential real estate property or the borrower conveys all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The Company’s adoption of this ASU did not have a material effect on its condensed consolidated financial statements.

•

The Company adopted FASB ASU 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This ASU requires that a government-guaranteed mortgage loan be de-recognized, and that a separate other receivable be recognized, upon foreclosure if the three criteria identified in the ASU are met. Upon foreclosure and meeting the three criteria, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) that is expected to be recovered from the guarantor. The Company’s adoption of this ASU did not have a material effect on its condensed consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates pertain to consolidation, fair value measurements, allowance for loan and lease losses and reserve for unfunded lending commitments, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, derivatives and hedge activities, and income taxes. Actual results may differ from the estimates, and the differences may be material to the Condensed Consolidated Financial Statements.

Subsequent Events

The Company evaluated events from the date of the Condensed Consolidated Financial Statements on March 31, 2015 through the issuance of these Condensed Consolidated Financial Statements and has determined that there have been no material events that would require recognition in its Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements for the quarter ended March 31, 2015 other than the transaction disclosed within Note 10 and 17 of these Condensed Consolidated Financial Statements.

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), superseding the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. The amendment will be effective for the Company for the first annual period ending after December 15, 2016, including interim periods within that reporting period. On April 29, 2015, the FASB voted to propose a one-year deferral for the effective date of the amendment. If approved following the 30-day comment period, the amendment would be effective for the Company for the first annual period ending after December 15, 2017. The amendment should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. Early adoption of the guidance is not permitted. The Company is currently evaluating the impact of adopting this ASU on its financial position, results of operations and disclosures.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (Topic 718). This ASU requires that a performance target that affects vesting, and could be achieved after the requisite service period, be treated as a performance condition. Application of existing guidance in ASC 718, as it relates to awards with performance conditions that affect vesting, should continue to be used to account for such awards. The amendment will be effective for the Company for the first reporting period ending after December 15, 2015. Adoption of this amendment should be applied on a prospective basis to awards that are granted or modified on or after the effective date. There also is an option to apply the amendments on a modified retrospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the adoption date. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its financial position, results of operations and disclosures.

In August 2014, the FASB also issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40). This ASU requires management to perform an assessment of going concern and provides specific guidance on when and how to assess or disclose going concern uncertainties. The new standard also defines terms used in the evaluation of going concern, such as "substantial doubt." Following application, the Company will be required to perform assessments at each annual and interim period, provide an assessment period of one year from the issuance date, and make disclosures in certain circumstances in which substantial doubt is identified. The amendment will be effective for the Company for the first reporting period ending after December 15, 2016. Earlier application is permitted. The Company does not expect the adoption of this ASU to have an impact on its financial position, result of operations, or disclosures.

In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates the concept of extraordinary items from GAAP, which previously required the separate classification, presentation, and disclosure of extraordinary events and transactions. The amendment will be effective for the Company for the first reporting period ending after December 15, 2015 with early adoption permitted if the guidance is applied from the beginning of the fiscal year of adoption. Adoption of the amendment by the Company can be either on a prospective or retrospective basis. The Company plans to apply this amendment effective for reporting periods beginning after December 15, 2015 and will apply it prospectively as the Company has not reported any extraordinary items in the three prior fiscal years. The Company does not expect the adoption of this ASU to have an impact on its financial position, results of operations, or disclosures.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 820): Amendments to the Consolidation Analysis. This ASU changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendment will be effective for the Company for the first reporting period ending after December 15, 2015, with early adoption permitted if the guidance is applied from the beginning of the fiscal year of adoption. Adoption of the amendment by the Company may be on a retrospective or modified retrospective basis. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In April 2015, the FASB issued ASU 2015-03, Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU simplifies the presentation of debt issuance costs and requires that debt issuance costs be presented as a deduction from the recognized debt liability, and eliminates prior guidance which required that debt issuance costs be recorded as a deferred charge. This amendment will be effective for the Company for the first reporting period ending after December 15, 2015, with early adoption permitted for financial statements that have not been previously issued. Adoption of the amendment by the Company must be on a retrospective basis. The Company is in the process of evaluating the impacts of the adoption of this ASU.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. BUSINESS COMBINATIONS

General

On January 28, 2014, the Company obtained a controlling financial interest in SCUSA in connection with the Change in Control. The financial information set forth in these Condensed Consolidated Financial Statements gives effect to the Company’s consolidation of SCUSA as a result of the Change in Control.

Consolidated Assets acquired and Liabilities assumed

The Company did not incur any material transaction related expenses in connection with the Change in Control, and no cash, equity interests, or other forms of consideration were transferred from the Company in connection with the Change in Control. As a result, the Company measured goodwill by reference to the fair value of SCUSA's equity as implied by the IPO offering price. The following table summarizes these equity related interests in SCUSA which constitute the purchase price and the identified assets acquired and liabilities assumed:



	January 28, 2014
	(dollars in thousands)
Fair value of noncontrolling interest in SCUSA	$	3,273,265
Fair value of SCUSA employee vested stock options	210,181
Fair value of SHUSA remaining ownership interest in SCUSA	5,063,881
Fair value of equity-related interests in SCUSA	$	8,547,327

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents	$	11,075
Restricted cash	1,704,906
Loan receivables - held for sale	990,137
Loan receivables - retail installment contracts	19,870,790
Loan receivables from dealers	102,689
Loan receivables - unsecured	1,009,896
Premises and equipment	74,998
Leased vehicles, net	2,486,929
Intangibles	768,750
Miscellaneous receivables and other assets	1,061,351
Deferred tax asset	16,399
Borrowings and other debt obligations	(24,497,607		)
Accounts payable and accrued liabilities	(520,568		)
Total identifiable net assets	3,079,745

Goodwill	$	5,467,582

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. BUSINESS COMBINATIONS (continued)

The fair value of the non-controlling interest ("NCI") of $3.3 billion and the fair value of the Company's remaining ownership interest in SCUSA of $5.1 billion were determined on the basis of the market price of SCUSA Common Stock on the Change in Control date.

The Company recognized SCUSA’s stock option awards that were outstanding as of the IPO date at fair value, which in aggregate amounted to $369.3 million. The portion of the total fair value of the stock option awards that is attributable to pre-business combination service amounting to $210.2 million represented a NCI in SCUSA as of the IPO date, while $159.1 million of the total amount pertains to the post-business combination portion, which will be recognized as stock compensation expense over the remaining vesting period of the awards in the Company’s post-business combination consolidated financial statements. Of the total $159.1 million, $82.6 million was immediately recognized as stock compensation expense as a result of the acceleration of the vesting of certain of the stock option awards upon the closing of the IPO. The fair value of share option awards were estimated using the Black-Scholes option valuation model. The Company also recognized SCUSA's restricted stock awards that were outstanding as of the IPO date at fair value. These shares of restricted stock were granted to certain SCUSA executives on December 28, 2013 and had an aggregate fair value of approximately $12.0 million as of the IPO date. The grant date fair value was determined based on SCUSA's per share prices as of the IPO closing date.

The fair value of the assets acquired includes finance receivables. SHUSA estimated the fair value of loans acquired from SCUSA by utilizing a methodology in which similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of SCUSA's allowance for loan losses associated with the loans SHUSA acquired as the loans were initially recorded at fair value.



	January 28, 2014
	(in thousands)
Fair value of loan receivables ⁽¹⁾	$	19,870,790
Gross contractual amount of loan receivables ⁽¹⁾	31,410,699
Estimate of contractual cash flows not expected to be collected at acquisition ⁽¹⁾	4,301,586

⁽¹⁾ Fair value of receivables does not include amounts related to the loan receivables - unsecured and loan receivables from dealers due to the short-term and revolving nature of the receivables.

Goodwill recognized in connection with the Change in Control is attributable to SCUSA's workforce as well as the experience, proven track record, and strong capabilities of its senior management team. The goodwill associated with the Change in Control was allocated to our SCUSA segment and is not deductible for tax purposes.



	January 28, 2014
	Fair Value		Weighted Average Amortization Period
	(dollars in thousands)
Intangibles subject to amortization:
Dealer networks	$	580,000	17.5 years (a)
Chrysler relationship	138,750		9.2 years

Intangibles not subject to amortization:
Trade name	50,000		indefinite lived
Total Intangibles	$	768,750

^(a) The amortization periods of the dealer network range between 7 and 20 years.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. BUSINESS COMBINATIONS (continued)

Gain on Change in Control

The Company recognized a pre-tax gain of $2.4 billion in connection with the Change in Control in Non-interest income in the Condensed Consolidated Statement of Operations.



	January 28, 2014
	(in thousands)

Gain attributable to SCUSA shares sold	$	137,536
Gain attributable to the remaining equity interest	2,291,003
Total pre-tax gain	$	2,428,539

In connection with the closing of the IPO on January 28, 2014, the Company sold 13,895,243 shares of SCUSA Common Stock, which generated proceeds of $320.1 million and a realized gain on sale of $137.5 million.

Proforma Financial Information

The results of SCUSA are included in our results beginning January 28, 2014. The following table summarizes the actual unaudited amounts of Total revenue, net of Total interest expense and Net income including Noncontrolling Interest of SCUSA included in our Condensed Consolidated Financial Statements for the three-month period ended March 31, 2014 and the supplemental pro forma consolidated Total revenue, net of total interest expense and Net income including noncontrolling interest of SHUSA entity for the three-month period ended March 31, 2014 as if the Change in Control had occurred on January 1, 2013. These results include the impact of amortizing certain purchase accounting adjustments such as intangible assets as well as fair value adjustments to loans and issued debt. These pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual consolidated results of operations of SHUSA that would have been achieved had the Change in Control occurred at January 1, 2013, nor are they intended to represent or be indicative of future results of operations.



	SCUSA Amounts Included in Results for Three-Month Period Ended March 31, 2014		Supplemental Pro Forma Combined for the Three- Month Period Ended March 31, 2014 ^(b)
	(in thousands)

Total Revenue, Net of Total Interest Expense^(a)	$	1,066,725	$	1,930,714
Net Income including Noncontrolling Interest	238,066		105,669

(a) Total Revenue, Net of Total Interest Expense is calculated as the sum of Total Interest Income and Total Non-Interest Income, less Total Interest Expense.
(b) Includes the impact of recording provision for loan losses necessary to bring the retail installment contracts and personal unsecured loans to their expected carrying values considering the required allowance for loan losses on their recorded investment amounts.

These amounts have been calculated after applying SHUSA's accounting policies and adjusting the results of SCUSA to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to loans, debt, premises and equipment had been applied from January 1, 2013 with the consequential tax effects.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. INVESTMENT SECURITIES

Investments Available-for-sale

Investment Securities Summary - Available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of securities available-for-sale at the dates indicated:



	March 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury and government agency securities	$	2,140,641	$	13,539	$	(16	)	$	2,154,164
Corporate debt securities	2,106,549		37,399		(4,909		)	2,139,039
Asset-backed securities ("ABS")	2,977,387		23,665		(3,167		)	2,997,885
Equity securities	10,686		6		(217		)	10,475
State and municipal securities	1,421,202		23,544		(2,393		)	1,442,353
Mortgage-backed securities:
U.S. government agencies	3,888,253		14,724		(22,512		)	3,880,465
FHLMC and FNMA debt securities ⁽¹⁾	5,847,185		36,259		(91,718		)	5,791,726
Non-agency securities	12,524		392		—			12,916
Total investment securities available-for-sale	$	18,404,427	$	149,528	$	(124,932	)	$	18,429,023

(1) Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")



	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury and government agency securities	$	1,692,838	$	2,985	$	(56	)	$	1,695,767
Corporate debt securities	2,159,681		29,630		(6,910		)	2,182,401
Asset-backed securities	2,707,207		17,787		(4,591		)	2,720,403
Equity securities	10,619		3		(279		)	10,343
State and municipal securities	1,790,776		35,071		(2,385		)	1,823,462
Mortgage-backed securities:
U.S. government agencies	2,623,722		1,809		(40,997		)	2,584,534
FHLMC and FNMA debt securities	4,994,974		12,974		(130,161		)	4,877,787
Non-agency securities	12,842		539		—			13,381
Total investment securities available-for-sale	$	15,992,659	$	100,798	$	(185,379	)	$	15,908,078

The Company continuously evaluates its investment strategies in light of changes in the regulatory and market environments that could have an impact on capital and liquidity. Based on this evaluation, it is reasonably possible that the Company may elect to pursue other strategies relative to its investment securities portfolio.

As of March 31, 2015 and December 31, 2014, the Company had investment securities available-for-sale with an estimated fair value of $3.4 billion and $3.5 billion, respectively, pledged as collateral, which was made up of the following: $2.6 billion and $2.6 billion were pledged to secure public fund deposits; $274.7 million and $301.6 million, respectively, were pledged at various brokers to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; and $535.9 million and $560.6 million, respectively, were pledged to secure the Bank's customer overnight sweep product.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. INVESTMENT SECURITIES (continued)

At March 31, 2015 and December 31, 2014, the Company had $68.2 million and $66.9 million, respectively, of accrued interest related to investment securities.

The Company's state and municipal bond portfolio primarily consists of general obligation bonds of states, cities, counties and school districts. The portfolio had a weighted average underlying credit risk rating of AA+ as of March 31, 2015. The largest geographic concentrations of state and local municipal bonds are in Texas, Florida, Massachusetts and Washington, which represented 12.5%, 11.4%, 11.6%, and 11.4%, respectively, of the total portfolio. No other state comprised more than 10% of the total portfolio.

Contractual Maturity of Debt Securities

Contractual maturities of the Company’s debt securities available-for-sale at March 31, 2015 are as follows:



	Amortized Cost		Fair Value
	(in thousands)
Due within one year	$	340,390	$	339,177
Due after 1 year but within 5 years	5,524,548		5,588,176
Due after 5 years but within 10 years	1,469,688		1,478,971
Due after 10 years	11,059,115		11,012,224
Total	$	18,393,741	$	18,418,548

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

Gross Unrealized Loss and Fair Value of Securities Available-for-Sale

The following tables present the aggregate amount of unrealized losses as of March 31, 2015 and December 31, 2014 on securities in the Company’s available-for-sale investment portfolio classified according to the amount of time that those securities have been in a continuous loss position:



	March 31, 2015
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
U.S. Treasury and government agency securities	$	49,778	$	(16	)	$	—	$	—		$	49,778	$	(16	)
Corporate debt securities	112,463		(3,546		)	131,195		(1,363		)	243,658		(4,909		)
Asset-backed securities	473,217		(1,800		)	258,012		(1,367		)	731,229		(3,167		)
Equity securities	31		—			9,932		(217		)	9,963		(217		)
State and municipal securities	159,801		(962		)	24,988		(1,431		)	184,789		(2,393		)
Mortgage-backed securities:
U.S. government agencies	656,111		(3,083		)	1,332,263		(19,429		)	1,988,374		(22,512		)
FHLMC and FNMA debt securities	527,423		(1,061		)	2,434,679		(90,657		)	2,962,102		(91,718		)
Total	$	1,978,824	$	(10,468	)	$	4,191,069	$	(114,464	)	$	6,169,893	$	(124,932	)

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. INVESTMENT SECURITIES (continued)



	December 31, 2014
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
US Treasury and government agency securities	$	298,914	$	(56	)	$	—	$	—		$	298,914	$	(56	)
Corporate debt securities	538,108		(3,262		)	214,852		(3,648		)	752,960		(6,910		)
Asset-backed securities	632,936		(1,437		)	424,333		(3,154		)	1,057,269		(4,591		)
Equity securities	55		—			9,879		(279		)	9,934		(279		)
State and municipal securities	45,128		(90		)	192,091		(2,295		)	237,219		(2,385		)
Mortgage-backed securities:
U.S. government agencies	696,989		(5,152		)	1,485,177		(35,845		)	2,182,166		(40,997		)
FHLMC and FNMA debt securities	410,445		(2,190		)	2,607,695		(127,971		)	3,018,140		(130,161		)
Total	$	2,622,575	$	(12,187	)	$	4,934,027	$	(173,192	)	$	7,556,602	$	(185,379	)

Other-Than-Temporary Impairment ("OTTI")

Management evaluates all investment products in an unrealized loss position for OTTI on at least a quarterly basis. Individual securities are further assessed for OTTI as deemed necessary. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as Company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average Fair Isaac Corporation credit scoring model ("FICO") scores and weighted average loan-to-value ("LTV") ratio, rating or scoring, credit ratings and market spreads, as applicable.

The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company has determined that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.

The Company did not record any OTTI in earnings related to its investment securities in the three-month period ended March 31, 2015 or March 31, 2014.

Management has concluded that the remaining unrealized losses on its debt and equity securities for which it has not recognized OTTI (which was comprised of 211 individual securities at March 31, 2015) are temporary in nature since (1) they are not related to the underlying credit quality of the issuers, (2) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (3) the Company does not intend to sell these investments at a loss and (4) it is more likely than not that the Company will not be required to sell the investments before recovery of the amortized cost basis, which may be at maturity. Accordingly, the Company has concluded that the impairment on these securities is not other-than-temporary.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. INVESTMENT SECURITIES (continued)

Gains (Losses) and Proceeds on Sales of Securities

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



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
Proceeds from the sales of available-for-sale securities	$	1,010,515		$	88,113

Gross realized gains	$	10,782		$	1,944
Gross realized losses	(1,225		)	—
Net realized gains	$	9,557		$	1,944

The Company uses the specific identification method to determine the cost of the securities sold and the gain or loss recognized.

The Company recognized $9.6 million and $1.9 million at March 31, 2015 and March 31, 2014 in gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the three-month period ended March 31, 2015 was primarily comprised of the sale of state and municipal securities with a book value of $305.4 million for a gain of $9.2 million. The net gain realized for the three-month period ended March 31, 2014 was primarily due to the sale of corporate debt securities with a book value of $134.1 million for a gain of $1.9 million.

Trading Securities

The Company did not hold trading securities at March 31, 2015, compared to $833.9 million held at December 31, 2014. Gains and losses on trading securities are recorded within Mortgage banking income, net, in the Company's Condensed Consolidated Statement of Operations as the Company utilized trading securities portfolio to economically hedge the MSR portfolio. The realized activity of trading gains and losses related to trading securities for the three-months ended March 31 are as follows:



	Three-Month Period Ended March 31,
	2015		2014
	(in thousands)
Net gains recognized during the period on trading securities	$	6,391	$	—
Less: Net gains recognized during the period on trading securities sold during the period	6,391		—
Unrealized losses during the reporting period on trading securities still held at the reporting date	$	—	$	—

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. INVESTMENT SECURITIES (continued)

Other Investments

Other investments primarily include the Company's investment in the stock of the Federal Home Loan Bank ("FHLB") of Pittsburgh and the Federal Reserve Bank ("FRB") with aggregate carrying amounts of $829.1 million and $817.0 million as of March 31, 2015 and December 31, 2014, respectively. The stocks do not have readily determinable fair values because their ownership is restricted and they lack a market. The stocks can be sold back only at their par value of $100 per share and only to FHLBs or to another member institution. Accordingly, these stocks are carried at cost. During the three-month period ended March 31, 2015, the Company purchased $149.3 million of FHLB stock and $3.7 million of FRB stock at par and also redeemed $140.9 million of FHLB stock at par. There was no gain or loss associated with these sales. Other investment includes $24.6 million of Low Income Housing Tax Credit Investment ("LIHTC") as of March 31, 2015. Other investments at March 31, 2014 also included an FHLB Certificate of Deposit ("CD") with a carrying amount of $19.9 million that matured in September 2014.

The Company evaluates these investments for impairment based on the ultimate recoverability of the par value, rather than by recognizing temporary declines in value.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Overall

The Company's loans are reported at their outstanding principal balances net of any unearned income, cumulative charge-offs, unamortized deferred fees and costs on originated loans and unamortized premiums or discounts on purchased loans. The Company maintains an allowance for credit losses ("ACL") to provide for losses inherent in its portfolios. Certain loans are pledged as collateral for borrowings, securitizations, or special purpose entities ("SPEs"). These loans totaled $53.3 billion at March 31, 2015 and $52.5 billion at December 31, 2014.

The Company engages in direct and leveraged lease financing, which totaled $1.2 billion at March 31, 2015 and $1.2 billion at December 31, 2014. Direct financing leases are recorded as the aggregate of minimum lease payments receivable plus the estimated residual value of the leased property, less unearned income. Leveraged leases, a form of direct financing leases, are recorded net of related non-recourse debt. Financing leases are included within commercial and industrial loans.

Loans that the Company has the intent to sell are classified as loans held-for-sale ("LHFS"). The LHFS portfolio balance at March 31, 2015 was $1.4 billion, compared to $260.3 million at December 31, 2014. LHFS in the residential mortgage portfolio are reported at fair value. All other LHFS are accounted for at the lower of cost or fair value. For a discussion on the valuation of LHFS at fair value, see Note 16 to the Condensed Consolidated Financial Statements.

Interest income on loans is accrued based on the contractual interest rate and the principal amount outstanding, except for those loans classified as non-accrual. At March 31, 2015 and December 31, 2014, accrued interest receivable on the Company's loans was $479.6 million and $492.7 million, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Loan and Lease Portfolio Composition

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



	March 31, 2015				December 31, 2014
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial loans held for investment:
Commercial real estate loans	$	8,799,757	11.2	%	$	8,739,233	11.5	%
Commercial and industrial loans	18,814,718		24.0	%	17,092,312		22.5	%
Multi-family loans	8,552,911		10.9	%	8,705,890		11.5	%
Other commercial⁽²⁾	2,148,280		2.7	%	2,084,232		2.7	%
Total commercial loans held for investment	38,315,666		48.8	%	36,621,667		48.2	%
Consumer loans secured by real estate:
Residential mortgages	6,716,182		8.5	%	6,773,575		8.9	%
Home equity loans and lines of credit	6,171,981		7.9	%	6,206,980		8.2	%
Total consumer loans secured by real estate	12,888,163		16.4	%	12,980,555		17.1	%
Consumer loans not secured by real estate:
Retail installment contracts and auto loans	23,386,192		29.8	%	22,430,241		29.5	%
Personal unsecured loans	2,696,815		3.4	%	2,696,820		3.5	%
Other consumer⁽³⁾	1,233,329		1.6	%	1,303,279		1.7	%
Total consumer loans	40,204,499		51.2	%	39,410,895		51.8	%
Total loans held for investment⁽¹⁾	$	78,520,165	100.0	%	$	76,032,562	100.0	%
Total loans held for investment:
Fixed rate	$	46,144,348	58.8	%	$	45,425,408	59.7	%
Variable rate	32,375,817		41.2	%	30,607,154		40.3	%
Total loans held for investment⁽¹⁾	$	78,520,165	100.0	%	$	76,032,562	100.0	%

(1)Total loans held for investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net decrease in loan balances of $1.1 billion as of March 31, 2015 and a net decrease in loan balances of $1.5 billion as of December 31, 2014, respectively.

(2)Other commercial primarily includes commercial equipment vehicle funding ("CEVF") leveraged leases and loans.

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

Portfolio segments and classes

GAAP requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes,” based on management’s systematic methodology for determining the ACL. For this, compared to the financial statement categorization of loans, the Company utilizes an alternate categorization to model and calculate the ACL and track the credit quality, delinquency and impairment status of the underlying loan populations. In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer segments.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

The commercial segmentation reflects line of business distinctions. The three commercial real estate lines of business distinctions include “Corporate banking,” which includes commercial and industrial owner-occupied real estate, “Middle market commercial real estate,” which represents the portfolio of specialized lending for investment real estate, including financing for continuing care retirement communities and “Santander real estate capital” ("SREC"), which is the commercial real estate portfolio of the specialized lending group. "Commercial and industrial" loans includes non-real estate-related commercial and industrial loans. "Multi-family" represents loans for multi-family residential housing units. “Other commercial” primarily represents the CEVF business.

The following table reconciles the Company's recorded investment classified by its major loan classifications to its commercial loan classifications utilized in its determination of the allowance for loan losses and other credit quality disclosures at March 31, 2015 and December 31, 2014, respectively:



Commercial Portfolio Segment⁽²⁾
Major Loan Classifications⁽¹⁾	March 31, 2015		December 31, 2014
	(in thousands)
Commercial loans held for investment:
Commercial real estate:
Corporate Banking	$	3,170,416	$	3,218,151
Middle Markets Real Estate	3,991,045		3,743,100
Santander Real Estate Capital	1,638,296		1,777,982
Total commercial real estate	8,799,757		8,739,233
Commercial and industrial loans⁽³⁾	18,814,718		17,092,312
Multi-family loans	8,552,911		8,705,890
Other commercial	2,148,280		2,084,232
Total commercial loans held for investment	$	38,315,666	$	36,621,667


(1)	These represent the Company's loan categories based on the SEC's Regulation S-X, Article 9.


(2)	These represent the Company's loan classes used to determine its allowance for loan and lease losses in accordance with ASC 310-10.

(3) Commercial and industrial loans excluded $44.3 million and $19.1 million of LHFS at March 31, 2015 and December 31, 2014, respectively.

The Company's portfolio segments are substantially the same as its financial statement categorization of loans for the consumer loan populations. “Residential mortgages” includes mortgages on residential property including single family and 1-4 family units. "Home equity loans and lines of credit” includes all organic home equity contracts and purchased home equity portfolios. "Retail installment contracts and auto loans" includes the Company's direct automobile loan portfolios, but excludes RV and marine retail installment contracts. "Personal unsecured loans" includes personal revolving loans and credit cards. “Other consumer” includes an acquired portfolio of marine and RV contracts as well as indirect auto loans.



Consumer Portfolio Segment⁽²⁾
Major Loan Classifications⁽¹⁾	March 31, 2015		December 31, 2014
	(in thousands)
Consumer loans secured by real estate:
Residential mortgages⁽³⁾	$	6,716,182	$	6,773,575
Home equity loans and lines of credit	6,171,981		6,206,980
Total consumer loans secured by real estate	12,888,163		12,980,555
Consumer loans not secured by real estate:
Retail installment contracts and auto loans⁽⁴⁾	23,386,192		22,430,241
Personal unsecured loans	2,696,815		2,696,820
Other consumer	1,233,329		1,303,279
Total consumer loans held for investment	$	40,204,499	$	39,410,895


(1)	These represent the Company's loan categories based on the SEC's Regulation S-X, Article 9.


(2)	These represent the Company's loan classes used to determine its allowance for loan and lease losses in accordance with ASC 310-10.


(3)	Home mortgages excludes $298.1 million and $195.7 million of LHFS at March 31, 2015 and December 31, 2014, respectively.


(4)	Retail installment contracts and auto loans excludes $1.0 billion and $45.4 million of LHFS at March 31, 2015 and December 31, 2014, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

ACL Rollforward by Portfolio Segment

The activity in the ACL by portfolio segment for the three-month period ended March 31, 2015 and 2014 was as follows:



	Three-Month Period Ended March 31, 2015
	Commercial			Consumer			Unallocated		Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	396,489		$	1,679,304		$	33,024	$	2,108,817
Provision for/ (Recovery of) loan losses	25,689			813,220			38,275		877,184
Other⁽³⁾	—			(27,117		)	—		(27,117		)
Charge-offs	(19,310		)	(956,811		)	—		(976,121		)
Recoveries	5,999			504,478			—		510,477
Charge-offs, net of recoveries	(13,311		)	(452,333		)	—		(465,644		)
Allowance for loan and lease losses, end of period	$	408,867		$	2,013,074		$	71,299	$	2,493,240

Reserve for unfunded lending commitments, beginning of period	$	132,641		$	—		$	—	$	132,641
Provision for unfunded lending commitments	(5,000		)	—			—		(5,000		)
Loss on unfunded lending commitments	—			—			—		—
Reserve for unfunded lending commitments, end of period	127,641			—			—		127,641
Total allowance for credit losses, end of period	$	536,508		$	2,013,074		$	71,299	$	2,620,881
Ending balance, individually evaluated for impairment⁽²⁾	$	79,474		$	279,273		$	—	$	358,747
Ending balance, collectively evaluated for impairment	329,393			1,733,801			71,299		2,134,493

Financing receivables:
Ending balance	$	38,359,991		$	41,522,069		$	—	$	79,882,060
Ending balance, evaluated under the fair value option or lower of cost or fair value⁽¹⁾	44,325			1,993,667			—		2,037,992
Ending balance, individually evaluated for impairment⁽²⁾	469,759			2,966,947			—		3,436,706
Ending balance, collectively evaluated for impairment	37,845,907			36,561,455			—		74,407,362


(1)	Represents LHFS and those loans for which the Company has elected the FVO.


(2)	Consumer loans individually evaluated for impairment consists of loans in troubled debt restructuring ("TDR") status


(3)	The "Other" amount represents the impact on the allowance for loan and lease losses in connection with SCUSA classifying approximately $1.0 billion of RICs as held-for-sale during the quarter ended March 31, 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)



	Three-Month Period Ended March 31, 2014
	Commercial			Consumer			Unallocated		Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	443,074		$	363,647		$	27,616	$	834,337
Provision for / (Recovery of) loan losses	15,289			343,168			16,873		375,330
Charge-offs	(29,590		)	(147,748		)	—		(177,338		)
Recoveries	5,388			72,875			—		78,263
Charge-offs, net of recoveries	(24,202		)	(74,873		)	—		(99,075		)
Allowance for loan and lease losses, end of period	$	434,161		$	631,942		$	44,489	$	1,110,592

Reserve for unfunded lending commitments, beginning of period	$	220,000		$	—		$	—	$	220,000
Provision for unfunded lending commitments	(40,000		)	—			—		(40,000		)
Reserve for unfunded lending commitments, end of period	180,000			—			—		180,000
Total allowance for credit losses, end of period	$	614,161		$	631,942		$	44,489	$	1,290,592
Ending balance, individually evaluated for impairment	$	84,147		$	156,882		$	—	$	241,029
Ending balance, collectively evaluated for impairment	350,014			475,060			44,489		869,563

Financing receivables:
Ending balance	$	34,310,467		$	40,002,610		$	—	$	74,313,077
Ending balance, evaluated at fair value ⁽¹⁾	44,627			1,722,187			—		1,766,814
Ending balance, individually evaluated for impairment ⁽²⁾	572,851			845,754			—		1,418,605
Ending balance, collectively evaluated for impairment	33,692,989			37,434,669			—		71,127,658


(1)	Represents LHFS and those loans for which the Company has elected the FVO


(2)	Consumer loans individually evaluated for impairment consists of loans in TDR status

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Non-accrual loans by Class of Financing Receivable

The recorded investment in non-accrual loans disaggregated by class of financing receivables is summarized as follows:



	March 31, 2015		December 31, 2014
	(in thousands)
Non-accrual loans:
Commercial:
Commercial real estate:
Corporate banking	$	87,671	$	90,579
Middle market commercial real estate	59,936		71,398
Santander real estate capital	5,697		5,803
Commercial and industrial	66,081		54,658
Multi-family	9,746		9,639
Other commercial	3,446		4,136
Total commercial loans	232,577		236,213
Consumer:
Residential mortgages	212,122		231,316
Home equity loans and lines of credit	140,321		142,026
Retail installment contracts and auto loans	671,242		960,293
Personal unsecured loans	11,809		14,007
Other consumer	21,970		12,654
Total consumer loans	1,057,464		1,360,296
Total non-accrual loans	1,290,041		1,596,509

Other real estate owned ("OREO")	52,157		65,051
Repossessed vehicles	140,801		136,136
Other repossessed assets	161		11,375
Total OREO and other repossessed assets	193,119		212,562
Total non-performing assets	$	1,483,160	$	1,809,071

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Age Analysis of Past Due Loans

The age of recorded investments in past due loans and accruing loans greater than 90 days past due disaggregated by class of financing receivables is summarized as follows:



	As of March 31, 2015
		30-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking		$	27,149	$	39,407	$	66,556	$	3,103,860	$	3,170,416	$	—
Middle market commercial real estate		1,224		26,263		27,487		3,963,558		3,991,045		—
Santander real estate capital		833		2,092		2,925		1,635,371		1,638,296		—
Commercial and industrial		27,440		32,075		59,515		18,799,528		18,859,043		—
Multi-family		6,567		4,692		11,259		8,541,652		8,552,911		—
Other commercial		6,087		794		6,881		2,141,399		2,148,280		—
Consumer:
Residential mortgages		144,471		181,899		326,370		6,687,906		7,014,276		—
Home equity loans and lines of credit		34,430		84,504		118,934		6,053,047		6,171,981		—
Retail installment contracts and auto loans		2,374,712		177,559		2,552,271		21,853,397		24,405,668		—
Personal unsecured loans		110,324		100,137		210,461		2,486,354		2,696,815		84,567
Other consumer		42,258		34,576		76,834		1,156,495		1,233,329		—
Total		$	2,775,495	$	683,998	$	3,459,493	$	76,422,567	$	79,882,060	$	84,567


(1)	Financing receivables include LHFS.



	As of December 31, 2014
		30-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking		$	18,363	$	37,708	$	56,071	$	3,162,080	$	3,218,151	$	—
Middle market commercial real estate		3,179		33,604		36,783		3,706,317		3,743,100		—
Santander real estate capital		4,329		2,115		6,444		1,771,538		1,777,982		—
Commercial and industrial		27,071		23,469		50,540		17,060,866		17,111,406		—
Multi-family		13,810		5,512		19,322		8,686,568		8,705,890		—
Other commercial		5,054		1,245		6,299		2,077,933		2,084,232		—
Consumer:
Residential mortgages		165,270		200,818		366,088		6,603,221		6,969,309		—
Home equity loans and lines of credit		36,074		86,749		122,823		6,084,157		6,206,980		—
Retail installment contracts and auto loans		3,046,943		259,534		3,306,477		19,169,188		22,475,665		—
Personal unsecured loans		92,905		111,917		204,822		2,491,998		2,696,820		93,152
Other consumer		47,696		30,653		78,349		1,224,930		1,303,279		—
Total		$	3,460,694	$	793,324	$	4,254,018	$	72,038,796	$	76,292,814	$	93,152


(1)	Financing receivables include LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Impaired Loans by Class of Financing Receivable

Impaired loans are generally defined as all TDRs plus commercial non-accrual loans in excess of $1.0 million.

Impaired loans disaggregated by class of financing receivables are summarized as follows:



	March 31, 2015
	Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	$	36,933	$	39,807	$	—	$	37,334
Middle market commercial real estate	111,944		156,918		—		119,868
Santander real estate capital	2,936		2,936		—		2,959
Commercial and industrial	3,931		5,202		—		4,979
Multi-family	16,553		16,553		—		19,523
Other commercial	—		—		—		44
Consumer:
Residential mortgages	21,725		21,725		—		22,567
Home equity loans and lines of credit	26,441		26,441		—		26,836
Retail installment contracts and auto loans	151,229		196,458		—		149,788
Personal unsecured loans	509		509		—		551
Other consumer	5,351		5,351		—		5,476
With an allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	58,426		68,522		22,569		59,188
Middle market commercial real estate	54,298		60,224		16,114		57,198
Santander real estate capital	2,761		5,239		342		3,320
Commercial and industrial	82,515		95,517		39,103		74,350
Multi-family	5,226		6,319		731		5,603
Other commercial	1,589		1,650		615		1,761
Consumer:
Residential mortgages	136,201		162,550		25,701		133,507
Home equity loans and lines of credit	63,224		72,651		4,580		61,678
Retail installment contracts and auto loans	2,677,764		3,002,462		237,745		2,241,385
Personal unsecured loans	19,070		19,385		7,519		17,773
Other consumer	16,663		22,617		3,728		16,479
Total:
Commercial	$	377,112	$	458,887	$	79,474	$	386,127
Consumer	3,118,177		3,530,149		279,273		2,676,040
Total	$	3,495,289	$	3,989,036	$	358,747	$	3,062,167


(1)	Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments.

The Company recognized interest income of $80.5 million for the period ended March 31, 2015 on approximately $3.0 billion of TDRs that were returned to performing status as of March 31, 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)



	December 31, 2014
	Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	$	37,735	$	40,453	$	—	$	40,610
Middle market commercial real estate	127,792		172,766		—		114,465
Santander real estate capital	2,982		2,982		—		1,867
Commercial and industrial	6,027		15,580		—		9,580
Multi-family	22,492		22,492		—		24,762
Other commercial	88		88		—		44
Consumer:
Residential mortgages	23,408		23,408		—		57,776
Home equity loans and lines of credit	27,230		27,230		—		29,152
Retail installment contracts and auto loans	148,347		189,663		—		74,173
Personal unsecured loans	592		592		—		296
Other consumer	5,600		5,600		—		6,973
With an allowance recorded:
Commercial:
Corporate banking	59,950		66,328		25,322		56,856
Middle market commercial real estate	60,098		66,024		17,004		89,472
Santander real estate capital	3,878		6,356		364		6,630
Commercial and industrial	66,186		74,737		36,115		83,205
Multi-family	5,979		7,076		1,475		8,699
Other commercial	1,932		1,995		688		1,055
Consumer:
Residential mortgages	130,813		156,669		23,628		339,071
Home equity loans and lines of credit	60,132		69,374		5,002		57,516
Retail installment contracts and auto loans	1,805,006		2,031,134		192,325		902,504
Personal unsecured loans	16,476		16,815		6,508		9,506
Other consumer	16,295		22,812		3,264		16,889
Total:
Commercial	$	395,139	$	476,877	$	80,968	$	437,245
Consumer	2,233,899		2,543,297		230,727		1,493,856
Total	$	2,629,038	$	3,020,174	$	311,695	$	1,931,101


(1)	Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments.

The Company recognized interest income of $86.1 million for the year ended December 31, 2014 on approximately $2.1 billion of TDRs that were returned to performing status as of December 31, 2014.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Commercial Lending Asset Quality Indicators

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

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

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

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

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

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

Commercial loan credit quality indicators by class of financing receivables are summarized as follows:



	Commercial Real Estate
March 31, 2015	Corporate banking		Middle market commercial real estate		Santander real estate capital		Commercial and industrial		Multi-family		Remaining commercial		Total⁽¹⁾
	(in thousands)
Regulatory Rating:
Pass	$	2,861,240	$	3,734,460	$	1,454,801	$	18,167,856	$	8,393,127	$	2,132,032	$	36,743,516
Special Mention	80,698		54,607		121,364		339,165		113,198		9,137		718,169
Substandard	205,327		172,695		59,370		323,465		45,699		6,670		813,226
Doubtful	23,151		29,283		2,761		28,557		887		441		85,080
Total commercial loans	$	3,170,416	$	3,991,045	$	1,638,296	$	18,859,043	$	8,552,911	$	2,148,280	$	38,359,991


(1)	Financing receivables include LHFS.



	Commercial Real Estate
December 31, 2014	Corporate banking		Middle market commercial real estate		Santander real estate capital		Commercial and industrial		Multi-family		Remaining commercial		Total⁽¹⁾
	(in thousands)
Regulatory Rating:
Pass	$	2,910,957	$	3,472,448	$	1,564,983	$	16,495,319	$	8,533,427	$	2,064,947	$	35,042,081
Special Mention	83,122		61,166		133,950		237,331		131,677		8,475		655,721
Substandard	192,911		174,882		76,232		358,782		40,355		10,311		853,473
Doubtful	31,161		34,604		2,817		19,974		431		499		89,486
Total commercial loans	$	3,218,151	$	3,743,100	$	1,777,982	$	17,111,406	$	8,705,890	$	2,084,232	$	36,640,761


(1)	Financing receivables include LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Consumer Lending Asset Quality Indicators - Class of Financing Receivables

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



March 31, 2015	Residential mortgages		Home equity loans and lines of credit		Retail installment contracts and auto loans		Personal unsecured loans		Other consumer		Total⁽¹⁾
	(in thousands)
Performing	$	6,802,154	$	6,031,660	$	23,734,426	$	2,685,006	$	1,211,359	$	40,464,605
Non-performing	212,122		140,321		671,242		11,809		21,970		1,057,464
Total consumer loans	$	7,014,276	$	6,171,981	$	24,405,668	$	2,696,815	$	1,233,329	$	41,522,069


(1)	Financing receivables include LHFS.



December 31, 2014	Residential mortgages		Home equity loans and lines of credit		Retail installment contracts and auto loans		Personal unsecured loans		Other consumer		Total⁽¹⁾
	(in thousands)
Performing	$	6,737,993	$	6,064,954	$	21,515,372	$	2,682,813	$	1,290,625	$	38,291,757
Non-performing	231,316		142,026		960,293		14,007		12,654		1,360,296
Total consumer loans	$	6,969,309	$	6,206,980	$	22,475,665	$	2,696,820	$	1,303,279	$	39,652,053


(1)	Financing receivables include LHFS.

Consumer Lending Asset Quality Indicators-Credit Score

Consumer financing receivables for which credit score is a core component of the allowance model are summarized by credit score as follows:



March 31, 2015
Credit Score Range⁽²⁾	Retail installment contracts and auto loans⁽³⁾		Percent		Personal unsecured loans balance		Percent		Home equity loans and lines of credit		Percent
	(dollars in thousands)
<600	$	12,648,832	51.8	%	$	472,501	17.5	%	$	304,669	4.9	%
600-639	5,221,963		21.4	%	439,314		16.3	%	283,304		4.6	%
640-679	2,429,771		10.0	%	1,189,155		44.1	%	509,672		8.3	%
680-719	—		—	%	64,417		2.4	%	856,525		13.9	%
720-759	—		—	%	72,614		2.7	%	1,193,212		19.3	%
>=760	—		—	%	76,368		2.8	%	2,816,648		45.6	%
N/A⁽¹⁾	4,105,102		16.8	%	382,446		14.2	%	207,951		3.4	%
Total	$	24,405,668	100.0	%	$	2,696,815	100.0	%	$	6,171,981	100.0	%


(1)	Consists primarily of loans serviced by third parties. Loans serviced by third parties do not receive refreshed FICO scores. Home equity loans and lines of credit "N/A" range includes the purchased home equity portfolio in run-off.


(2)	Credit scores updated quarterly.


(3)	Includes LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)



December 31, 2014
Credit Score Range⁽²⁾	Retail installment contracts and auto loans		Percent		Personal unsecured loans balance		Percent		Home equity loans and lines of credit		Percent
	(dollars in thousands)
<600	$	11,731,114	52.2	%	$	491,984	18.2	%	$	286,694	4.6	%
600-639	4,071,918		18.1	%	446,995		16.6	%	278,594		4.5	%
640-679	4,066,539		18.1	%	1,163,203		43.1	%	514,502		8.3	%
680-719	—		—	%	64,610		2.4	%	867,323		14.0	%
720-759	—		—	%	72,235		2.7	%	1,181,245		19.0	%
>=760	—		—	%	78,234		2.9	%	2,861,721		46.1	%
N/A⁽¹⁾	2,606,094		11.6	%	379,559		14.1	%	216,901		3.5	%
Total	$	22,475,665	100.0	%	$	2,696,820	100.0	%	$	6,206,980	100.0	%


(1)	Consists primarily of loans serviced by third parties. Loans serviced by third parties do not receive refreshed FICO scores. Home equity loans and lines of credit "N/A" range includes the purchased home equity portfolio in run-off.


(2)	Credit scores updated quarterly.

Consumer Lending Asset Quality Indicators-Combined Loan-to-Value ("CLTV") Range

Residential mortgage and home equity financing receivables by CLTV range are summarized as follows:



March 31, 2015
	Residential mortgages⁽⁴⁾				Home equity loans and lines of credit
CLTV Range⁽¹⁾	Amount		Percent		Amount		Percent
	(dollars in thousands)
<=80%	$	5,651,633	80.6	%	$	4,744,219	76.9	%
80.01 - 90%	426,877		6.1	%	495,560		8.0	%
90.01 - 100%	252,790		3.6	%	232,123		3.8	%
100.01 - 120%	142,295		2.0	%	242,189		3.9	%
120.01 - 140%	48,189		0.7	%	82,148		1.3	%
>140%	44,339		0.6	%	73,136		1.2	%
N/A⁽²⁾⁽³⁾	448,153		6.4	%	302,606		4.9	%
Total	$	7,014,276	100.0	%	$	6,171,981	100.0	%



December 31, 2014
	Residential mortgages⁽⁴⁾				Home equity loans and lines of credit
CLTV Range⁽¹⁾	Amount		Percent		Amount		Percent
	(dollars in thousands)
<=80%	$	5,732,061	82.2	%	$	4,951,656	79.8	%
80.01 - 90%	396,356		5.7	%	386,096		6.2	%
90.01 - 100%	215,803		3.1	%	199,850		3.2	%
100.01 - 120%	143,925		2.1	%	215,483		3.5	%
120.01 - 140%	57,949		0.8	%	70,438		1.1	%
>140%	54,446		0.8	%	63,468		1.0	%
N/A⁽²⁾⁽³⁾	368,769		5.3	%	319,989		5.2	%
Total	$	6,969,309	100.0	%	$	6,206,980	100.0	%


(1)	CLTV is inclusive of senior lien balances and updated as deemed necessary. CLTV ranges represent the unpaid principal balance.


(2)	Residential mortgage "N/A" range represents the unpaid principal balance on loans that are in process and loans which are serviced by others, for which a current CLTV is unavailable, plus deferred loan origination costs, net of deferred loan fees and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments.


(3)	Home equity loans and lines of credit "N/A" range represents the unpaid principal balance on loans which are serviced by others, for which a current CLTV is unavailable, plus the purchased home equity portfolio in run-off.


(4)	Includes LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

For both residential mortgage and home equity loans, loss severity assumptions are incorporated in the loan loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various current CLTV bands within these portfolios. CLTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current CLTV. The Company's allowance for loan losses incorporates the refreshed CLTV information to update the distribution of defaulted loans by CLTV as well as the associated loss given default for each CLTV band. Reappraisals on a recurring basis at the individual property level are not considered cost-effective or necessary on a recurring basis; however, reappraisals are performed on certain higher risk accounts to support line management activities, default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted.

Troubled Debt Restructurings

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



	March 31, 2015		December 31, 2014
	(in thousands)
Performing	$	2,962,052	$	2,117,789
Non-performing	392,256		377,239
Total	$	3,354,308	$	2,495,028

Commercial Loan TDRs

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

Consumer Loan TDRs

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

For the Company’s other consumer portfolios, including retail installment contracts and autos, the terms of the modifications generally include one or a combination of the following: a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

Consumer TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). Any loan that has remained current for the six months immediately prior to modification will remain on accrual status after the modification is enacted. Exceptions to this policy include retail installment contracts, which may begin accruing as soon as they are made current by the borrower. The TDR classification will remain on the loan until it is paid in full or liquidated.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

In addition to those identified as TDRs above, the guidance also requires loans discharged under Chapter 7 bankruptcy to be considered TDRs and collateral-dependent, regardless of delinquency status. These loans must be written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

TDR Impact to Allowance for Loan Losses

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

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

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

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Financial Impact and TDRs by Concession Type

The following tables detail the activity of TDRs for the three-month period ended March 31, 2015 and March 31, 2014, respectively:



	Three-Month Period Ended March 31, 2015
	Number of Contracts	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Post-Modification Outstanding Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	2	$	1,448	$	1,439
Middle market commercial real estate	1	14,439		14,439
Santander real estate capital	—	—		—
Commercial and industrial	99	11,477		8,448
Multi-family	—	—		—
Other commercial	—	—		—
Consumer:
Residential mortgages⁽³⁾	46	7,866		7,588
Home equity loans and lines of credit	40	3,671		3,671
Retail installment contracts and auto loans	80,560	1,190,272		1,131,418
Personal unsecured loans	4,468	5,394		5,356
Other consumer	15	920		912
Total	85,231	$	1,235,487	$	1,173,271


(1)	Pre-modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.


(2)	Post-modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.


(3)	The post-modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)



	Three-Month Period Ended March 31, 2014
	Number of Contracts	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Post-Modification Outstanding Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate banking	2	$	3,524	$	3,505
Middle markets commercial real estate	—	—		—
Santander real estate capital	—	—		—
Commercial and industrial	12	18,793		18,207
Multi-family	—	—		—
Other commercial	1	498		500
Consumer:
Residential mortgages⁽³⁾	79	17,811		17,670
Home equity loans and lines of credit	26	2,285		2,285
Retail installment contracts and auto loans ⁽⁴⁾	14,059	153,133		123,617
Personal unsecured loans	—	—		—
Other consumer	1	41		42
Total	14,180	$	196,085	$	165,826


(1)	Pre-modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.


(2)	Post-modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.


(3)	The post-modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.


(4)	The number of Retail installment contracts that were modified increased by 1,345 contracts with a corresponding increase of $23.9 million to the Pre-modification outstanding recorded investment and a decrease of $3.3 million to the Post-modification Outstanding Recorded Investment to correct the TDR activity that occurred during the three-month period ended March 31, 2014.

TDRs Which Have Subsequently Defaulted

A TDR is generally considered to have subsequently defaulted if after modification the loan becomes 90 days past due. For retail installment contracts, a TDR is considered to have subsequently defaulted after modification at the earlier of the date of repossession or 120 days past due. The following table details TDRs that became TDRs during the past twelve-month period and have subsequently defaulted during the three-month period ended March 31, 2015 and March 31, 2014, respectively.



	Three-Month Period Ended March 31,
	2015			2014
	Number of Contracts	Recorded Investment⁽¹⁾		Number of Contracts	Recorded Investment⁽¹⁾
	(dollars in thousands)
Commercial
Commercial and industrial	10	$	276	—	$	—
Consumer:
Residential mortgages	8	931		12	1,915
Home equity loans and lines of credit	5	262		—	—
Retail installment contracts and auto loans⁽²⁾	13,355	130,290		187	1,743
Unsecured loans	64	58		—	—
Other consumer	2	244		—	—
Total	13,444	$	132,061	199	$	3,658


(1)	The recorded investment represents the period-end balance at March 31, 2015 and 2014. Does not include Chapter 7 bankruptcy TDRs.


(2)	The number of Retail installment contracts TDRs that subsequently defaulted increased by 187 contracts with a recorded investment of $1.7 million to correct the subsequently defaulted TDR activity for the three-month period ended March 31, 2014.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6. LEASED VEHICLES, NET

The Company has operating leases which are included in the Company's condensed consolidated balance sheets as leased vehicles, net. The leased vehicle portfolio consists primarily of leases originated under a ten-year private label financing agreement signed by SCUSA with the Chrysler Group to be a preferred lender (the "Chrysler Agreement").

Leased vehicles, net consisted of the following as of March 31, 2015:



	March 31, 2015			December 31, 2014
	(in thousands)
Leased vehicles	$	9,038,489		$	8,314,356
Origination fees and other costs	25,051			20,628
Manufacturer subvention payments	(901,348		)	(839,150		)
	8,162,192			7,495,834
Less: accumulated depreciation	(1,088,437		)	(857,719		)
	$	7,073,755		$	6,638,115

On March 31, 2015, the company executed a bulk sale of Chrysler Capital leases with a depreciated net capitalized cost of $561.3 million and a net book value of $488.9 million to a U.S. subsidiary of a large international bank. This sale was affected through the transfer of a Special unit of beneficial interest ("SUBI") in SCUSA's titling trust. SCUSA retained servicing on the sold leases.

The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of March 31, 2015 (in thousands):




Remainder of 2015	$	986,168
2016	1,154,419
2017	561,410
2018	56,143
2019	61
Thereafter	4
Total	$	2,758,205

NOTE 7. VARIABLE INTEREST ENTITIES

The Company, through SCUSA, transfers retail installment contracts into newly-formed Trusts that then issue one or more classes of notes payable backed by collateral. The Company’s continuing involvement with the Trusts is in the form of servicing assets held by the Trusts and, except for the Chrysler Capital securitizations, through holding residual interests in the Trusts. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and, except for the securitizations associated with Chrysler Capital, are consolidated because the Company has: (a) power over the significant activities of the entity as servicer of its financial assets and (b) residual interest and in some cases of debt securities held by the Company, an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company did not retain any debt or equity interests in the Chrysler Capital securitizations, and recorded these transactions as sales of the associated retail installment contracts.

The collateral, borrowings under credit facilities and securitization notes payable of the consolidated Trusts remain on the Company's Condensed Consolidated Balance Sheets. The Company recognizes finance charges and fee income on the retail installment contracts and leased vehicles and interest expense on the debt, and records a provision for loan losses to cover probable inherent losses on the contracts. All of the Trusts are separate legal entities and the collateral and other assets held by these subsidiaries are legally owned by them and not available to other creditors.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. VARIABLE INTEREST ENTITIES (continued)

On-balance sheet variable interest entities

The following table summarizes the assets and liabilities related to the above mentioned VIEs that are included in the Company's Condensed Consolidated Financial Statements as of the date indicated:



	March 31, 2015
	(in thousands)
Restricted cash	$	1,852,825
Loans held for investment	20,555,636
Leased vehicles, net	5,042,419
Various other assets	2,393,301
Notes payable	29,755,859
Various other liabilities	2,086

The Company retains servicing responsibility for receivables transferred to the Trusts and receives a monthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in fees, commissions and other income. As of March 31, 2015, the Company was servicing $24.9 billion of retail installment contracts that have been transferred to consolidated Trusts. The remainder of the Company’s retail installment contracts are either pledged in private issuances or warehouse facilities or un-pledged.

Below is a summary of the cash flows received from the Trusts for the period indicated:



	Three-Month Period Ended March 31, 2015		Period from January 28, 2014 to March 31, 2014
	(in thousands)
Receivables securitized	$	3,981,855	$	1,574,084

Net proceeds from new securitizations	3,060,862		1,238,202
Cash received for servicing fees	159,802		97,932
Cash received upon release from reserved and restricted cash accounts	—		165
Net distributions from Trusts	300,487		241,251
Total cash received from securitization trusts	$	3,521,151	$	1,577,550

Off-balance sheet variable interest entities

The Company executed no off-balance sheet securitizations during the three-month period ended March 31, 2015.

The Company has completed sales to VIEs that met sale accounting treatment in accordance with the applicable guidance. Due to the nature, purpose, and activity of the transactions, the Company determined for consolidation purposes that it either does not hold potentially significant variable interests or is not the primary beneficiary as a result of the Company's limited further involvement with the financial assets. For such transactions, the transferred financial assets are removed from the Company's condensed consolidated balance sheets. In certain situations, the Company remains the servicer of the financial assets and receives servicing fees that represent adequate compensation. The Company also recognizes a gain or loss for the difference between the cash proceeds and carrying value of the assets sold. For the period from January 28, 2014 to March 31, 2014, the Company sold $774.2 million of gross retail installment contracts in off-balance sheet securitizations, for a gain of approximately $32.5 million.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. VARIABLE INTEREST ENTITIES (continued)

As of March 31, 2015 and December 31, 2014, the Company was servicing $1.9 billion and $2.2 billion, respectively, of gross retail installment contracts that have been sold in these off-balance sheet Chrysler Capital securitizations. Other than repurchases of sold assets due to standard representations and warranties, the Company has no exposure to loss as a result of its involvement with these VIEs.

A summary of the cash flows received from the off-balance Trusts for the periods indicated are as follows:



	Three-Month Period Ended March 31, 2015		Period from January 28, 2014 to March 31, 2014
	(in thousands)
Receivables securitized	$	—	$	774,183
Net proceeds from new securitizations	$	—	$	815,850
Cash received for servicing fees	5,304		2,788
Total cash received from securitization trusts	$	5,304	$	818,638

NOTE 8. GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presents activity in the Company's goodwill by its reporting units for the quarter ended March 31, 2015:



	Retail Banking		Auto Finance & Alliances		Real Estate and Commercial Banking		Global Banking & Markets and Large Corporate		SCUSA		Total
	(in thousands)
Goodwill at December 31, 2014	$	1,815,729	$	71,522	$	1,406,048	$	131,130	$	5,467,582	$	8,892,011
Additions / disposals during the period	—		—		—		—		—		—
Goodwill at March 31, 2015	$	1,815,729	$	71,522	$	1,406,048	$	131,130	$	5,467,582	$	8,892,011

The Company evaluates goodwill for impairment at the reporting unit level. The fair value of the Company's reporting units is determined by using discounted cash flow ("DCF") and market comparability methodologies. Goodwill is assigned to reporting units, which are operating segments or one level below an operating segment, as of the acquisition date.

Other Intangible Assets

The following table details amounts related to the Company's finite-lived and indefinite-lived intangible assets for the dates indicated.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. GOODWILL AND OTHER INTANGIBLES (continued)



	March 31, 2015					December 31, 2014
	Net Carrying Amount		Accumulated Amortization			Net Carrying Amount		Accumulated Amortization
	(in thousands)
Intangibles subject to amortization:
Dealer networks	$	534,250	$	(45,750	)	$	544,054	$	(35,946	)
Chrysler Relationship	121,250		(17,500		)	125,000		(13,750		)
Core deposit intangibles	5,338		(290,504		)	7,779		(288,063		)
Other intangibles	7,843		(22,065		)	8,655		(21,253		)
Total intangibles subject to amortization	668,681		(375,819		)	685,488		(359,012		)
Intangibles not subject to amortization:
Trade name	50,000		—			50,000		—
Total Intangibles	$	718,681	$	(375,819	)	$	735,488	$	(359,012	)

Amortization expense on intangible assets for the three months ended March 31, 2015 was $16.8 million, compared to $13.7 million for the corresponding period in 2014.

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



Year	Calendar Year Amount		Recorded To Date		Remaining Amount To Record
	(in thousands)
2015	$	64,432	$	16,806	$	47,626
2016	57,163		—		57,163
2017	55,055		—		55,055
2018	54,702		—		54,702
2019	54,501		—		54,501
Thereafter	399,634		—		399,634

NOTE 9. OTHER ASSETS

The following is a detail of items that comprise other assets at March 31, 2015 and December 31, 2014:



	March 31, 2015		December 31, 2014
	(in thousands)
Income tax receivables	$	575,143	$	939,948
Derivative assets at fair value	451,267		366,061
Other repossessed assets ⁽¹⁾	160,151		137,201
MSRs, at fair value	135,452		145,047
Prepaid expenses	155,944		159,250
OREO	52,157		65,051
Miscellaneous assets and receivables	350,134		1,047,563
Total other assets	$	1,880,248	$	2,860,121

(1) Other repossessed assets primarily consists of assets obtained through repossession or lease termination.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9. OTHER ASSETS (continued)

Refer to Note 11 to the Condensed Consolidated Financial Statements for further details about derivative assets.

Other repossessed assets primarily consists of SCUSA's vehicle inventory which includes vehicles obtained either through repossession or lease termination. OREO consists primarily of the Bank's foreclosed properties.

Miscellaneous assets and receivables includes, but is not limited to, subvention receivables in connection with the Chrysler Agreement, investment and capital market receivables, and unapplied payments.

Mortgage Servicing Rights

The Company maintains an MSR asset for sold residential real estate loans serviced for others. At March 31, 2015 and December 31, 2014, the balance of these loans serviced for others was $15.6 billion and $15.9 billion, respectively. The Company accounts for residential MSRs using the FVO. Changes in fair value are recorded through the Condensed Consolidated Statements of Operations. The fair value of the MSRs at March 31, 2015 and December 31, 2014 was $135.5 million and $145.0 million, respectively. See further discussion on the valuation of the MSRs in Note 16. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps, forward contracts to purchase mortgage-backed securities ("MBS"), and investment trading securities. See further discussion on these derivative activities in Note 11 to these Condensed Consolidated Financial Statements.

For the three-month period ended March 31, 2015, the Company recorded net changes in the fair value of MSRs totaling $(7.0) million, compared to $(4.5) million for the corresponding period of 2014. The MSR asset fair value decrease during the first quarter of 2015 was primarily the result of decreased interest rates.

The following table presents a summary of activity included in Mortgage Banking Income, net in the Condensed Consolidated Statements of Operations for the Company’s residential MSRs.



	Three-Month Period Ended
	March 31, 2015			March 31, 2014
	(in thousands)
Fair value at beginning of period	$	145,047		$	141,787
Mortgage servicing assets recognized	3,526			1,874
Principal reductions	(6,131		)	(4,427		)
Change in fair value due to valuation assumptions	(6,990		)	(4,459		)
Fair value at end of period	$	135,452		$	134,775

Multi-family

Historically, the Company originated and sold multi-family loans in the secondary market to FNMA while retaining servicing. The Company has not sold multi-family loans to FNMA since 2009. At March 31, 2015 and December 31, 2014, the Company serviced $2.4 billion and $2.6 billion, respectively, of loans for FNMA. The servicing asset related to these portfolios was previously fully amortized.

Fee income and gain/loss on sale of mortgage loans

Included in Mortgage banking revenue on the Condensed Consolidated Statement of Operations was mortgage servicing fee income of $11.2 million for the three-month period ended March 31, 2015, compared to $10.8 million for the corresponding period ended March 31, 2014. The Company had gains on the sale of mortgage loans of $6.2 million for the three-month period ended March 31, 2015 compared to gains of $3.2 million for the corresponding period ended March 31, 2014.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. BORROWINGS

Total borrowings and other debt obligations at March 31, 2015 were $42.8 billion, compared to $39.7 billion at December 31, 2014. The Company's debt agreements impose certain limitations on dividends and other payments and transactions. The Company is currently in compliance with these limitations.

Periodically, as part of the Company's wholesale funding management, it opportunistically repurchases outstanding borrowings in the open market and subsequently retires the obligations. The Company did not repurchase any outstanding borrowings during the three-month period ended March 31, 2015. During the three-month period ended March 31, 2014, the Company repurchased $0.6 million of outstanding borrowings in the open market.

On April 17, 2015, the Company completed the public offer and sale of $1.0 billion aggregate principal amount of 2.650% Senior Notes due 2020.

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



	March 31, 2015				December 31, 2014
	Balance		Effective Rate		Balance		Effective Rate
	(in thousands)
3.00% senior notes, due September 2015	$	599,707	3.28	%	$	599,556	3.28	%
4.625% senior notes, due April 2016	475,221		4.85	%	475,034		4.85	%
3.45% senior notes, due August 2018	499,363		3.62	%	499,318		3.62	%
Junior subordinated debentures - Capital Trust VI, due June 2036	70,262		7.91	%	70,262		7.91	%
Common securities - Capital Trust VI	10,000		7.91	%	10,000		7.91	%
Junior subordinated debentures - Capital Trust IX, due July 2036	150,000		2.03	%	150,000		2.03	%
Common securities - Capital Trust IX	4,640		2.03	%	4,640		2.03	%
Total holding company borrowings and other debt obligations	$	1,809,193	3.88	%	$	1,808,810	3.88	%

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



	March 31, 2015				December 31, 2014
	Balance		Effective Rate		Balance		Effective Rate
	(in thousands)
2.00% senior notes, due January 2018	$	747,519	2.27	%	$	—	—	%
Senior notes, due January 2018⁽¹⁾	250,000		1.33	%	—		—	%
8.750% subordinated debentures, due May 2018	498,055		8.91	%	497,924		8.91	%
FHLB advances, maturing through August 2018⁽²⁾	9,670,000		1.82	%	9,455,000		2.06	%
Subordinated term loan, due February 2019	136,412		6.03	%	142,451		6.00	%
REIT ⁽³⁾ preferred, due May 2020	153,794		13.61	%	153,417		13.64	%
Subordinated term loan, due August 2022	34,104		7.81	%	34,104		7.77	%
Total Bank borrowings and other debt obligations	$	11,489,884	2.37	%	$	10,282,896	2.64	%

(1) These notes will bear interest at a rate equal to Three-Month London Interbank Offered Rate ("LIBOR") plus 93 basis points per annum.

(2) In February 2014, the Company restructured $1.7 billion of FHLB advances and extended their maturities by two years. The average rate of these borrowings decreased from 5.39% to 3.43% as a result of the restructuring. In September 2014, the Bank terminated $100.0 million of FHLB callable advances. As a consequence, the Company incurred costs of $8.3 million through the loss on debt extinguishment. In October 2014, the Bank terminated $600.0 million of FHLB callable advances. As a consequence, the Company incurred costs of $90.6 million through loss on debt extinguishment. In December 2014, the Bank terminated $200.0 million of FHLB callable advances. As a consequence, the Company incurred costs of $13.7 million through loss on debt extinguishment.

(3) Real estate investment trust ("REIT")

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. BORROWINGS (continued)

The following tables present information regarding SCUSA's borrowings and other debt obligations:

Revolving Credit Facilities

The following tables present information regarding SCUSA's credit facilities as of March 31, 2015 and December 31, 2014:



	March 31, 2015
	Balance		Effective Rate		Assets Pledged		Restricted Cash Pledged
	(in thousands)
Warehouse line, maturing on various dates⁽¹⁾	$	890,965	1.00	%	$	1,305,875	$	32,484
Warehouse line, due May 2015⁽²⁾	250,594		1.02	%	—		—
Warehouse line, due June 2015	388,435		0.98	%	558,135		—
Warehouse line, due September 2015⁽³⁾	199,980		2.00	%	351,512		15,926
Warehouse line, due June 2016⁽⁴⁾	2,465,041		0.93	%	3,719,820		85,180
Warehouse line, due October 2016⁽³⁾	249,987		2.05	%	308,279		19,139
Warehouse line, due November 2016⁽⁵⁾	175,000		1.73	%	—		—
Warehouse line, due November 2016⁽⁵⁾	250,000		1.73	%	—		2,500
Warehouse line, due December 2016	1,575,977		1.05	%	2,222,916		46,853
Repurchase facility, maturing on various dates⁽⁶⁾	892,571		1.64	%	—		32,936
Line of credit with related party, due December 2016⁽⁷⁾	500,000		2.47	%	1,074		—
Line of credit with related party, due December 2016⁽⁷⁾	1,750,000		2.36	%	—		—
Line of credit with related party, due December 2018⁽⁷⁾	250,000		3.23	%	—		—
Line of credit with related party, due December 2018⁽⁷⁾	1,575,000		2.82	%	7,076		—
Total SCUSA revolving credit facilities	$	11,413,550	1.68	%	$	8,474,687	$	235,018

(1) Half of the outstanding balance on this facility matures in April 2015 and half in March 2016. On April 20, 2015, this facility was extended so that half matures in March 2016 and half matures in March 2017.

(2) This line is collateralized by securitization notes payable retained by SCUSA.

(3) This line is held exclusively for personal term loans.

(4) This line is held exclusively for Chrysler Capital retail loan and lease financing.

(5) This line is collateralized by residuals retained by SCUSA.

(6) The repurchase facility is collateralized by securitization notes payable retained by SCUSA. No portion of this facility is unsecured. This facility has rolling 30-day and 90-day maturities.

(7) These lines are also collateralized by securitization notes payable and residuals retained by SCUSA. As of March 31, 2015, $2.7 billion of the aggregate outstanding balances on these credit facilities was unsecured.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. BORROWINGS (continued)



	December 31, 2014
	Balance		Effective Rate		Assets Pledged		Restricted Cash Pledged
	(in thousands)
Warehouse line, maturing on various dates⁽¹⁾	$	397,452	1.26	%	$	589,529	$	20,661
Warehouse line, due March 2015⁽²⁾	250,594		0.98	%	—		—
Warehouse line, due June 2015	243,736		1.17	%	344,822		—
Warehouse line, due September 2015⁽³⁾	199,980		1.96	%	351,755		13,169
Warehouse line, due December 2015	468,565		0.93	%	641,709		16,467
Warehouse line, due June 2016⁽⁴⁾	2,201,511		0.98	%	3,249,263		65,414
Warehouse line, due June 2016	1,051,777		1.06	%	1,481,135		28,316
Warehouse line, due October 2016⁽³⁾	240,487		2.02	%	299,195		17,143
Warehouse line, due November 2016⁽⁵⁾	175,000		1.71	%	—		—
Warehouse line, due November 2016⁽⁵⁾	250,000		1.71	%	—		2,500
Repurchase facility, maturing on various dates⁽⁶⁾	923,225		1.63	%	—		34,184
Line of credit with related party, due December 2016⁽⁷⁾	500,000		2.46	%	1,340		—
Line of credit with related party, due December 2016⁽⁷⁾	1,750,000		2.33	%	—		—
Line of credit with related party, due December 2018⁽⁷⁾	1,140,000		2.85	%	9,701		—
Total SCUSA revolving credit facilities	$	9,792,327	1.68	%	$	6,968,449	$	197,854

(1) Half of the outstanding balance on this facility matures in March 2015 and half in March 2016.

(2) This line is collateralized by securitization notes payable retained by SCUSA.

(3) This line is held exclusively for personal consumer term loans.

(4) This line is held exclusively for Chrysler Capital retail loan and lease financing.

(5) This line is collateralized by residuals retained by SCUSA.

(6) The repurchase facility is collateralized by securitization notes payable retained by SCUSA. No portion of this facility is unsecured. This facility has rolling 30-day and 90-day maturities.

(7) These lines are also collateralized by securitization notes payable and residuals retained by SCUSA. As of December 31, 2014, $2.2 billion of the aggregate outstanding balances on these credit facilities was unsecured.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. BORROWINGS (continued)

Secured Structured Financings

The following tables present information regarding SCUSA's secured structured financings as of March 31, 2015 and December 31, 2014:



	March 31, 2015
	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral		Restricted Cash
	(in thousands)
SCUSA public securitizations, maturing on various dates⁽¹⁾	$	11,926,756	$	27,012,890	0.89% - 2.02%	$	14,876,824	$	1,301,436
SCUSA privately issued amortizing notes, maturing on various dates⁽¹⁾	6,174,058		8,992,861		1.05% - 1.85%	8,815,269		322,806
Total SCUSA secured structured financings	$	18,100,814	$	36,005,751	0.89% - 2.02%	$	23,692,093	$	1,624,242



	December 31, 2014
	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral		Restricted Cash
	(in thousands)
SCUSA public securitizations, maturing on various dates⁽¹⁾	$	11,538,472	$	26,682,930	0.89% - 2.80%	$	14,345,242	$	1,184,047
SCUSA privately issued amortizing notes, maturing on various dates⁽¹⁾	6,287,148		8,499,111		1.05% - 1.85%	9,114,997		281,038
Total SCUSA secured structured financings	$	17,825,620	$	35,182,041	0.89% - 2.80%	$	23,460,239	$	1,465,085

(1) SCUSA has entered into various securitization transactions involving its retail automotive installment loans and leases. These transactions are accounted for as secured financings and therefore both the securitized retail installment contracts and the related securitization debt issued by SPEs, remain on the Condensed Consolidated Balance Sheet. The maturity of this debt is based on the timing of repayments from the securitized assets.

Most of the Company's secured structured financings are in the form of public, SEC-registered securitizations. The Company also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act") and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company's securitizations and private issuances generally are collateralized by vehicle retail installment contracts and loans; however, private issuances also may be collateralized by vehicle leases.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES

General

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity and credit risk, as well as to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes. The fair value of all derivative balances is recorded within Other assets and Other liabilities on the Condensed Consolidated Balance Sheet.

See Note 16 for discussion of the valuation methodology for derivative instruments.

Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract. Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged and is not recorded on the balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate (commonly Overnight Indexed Swap ("OIS") or LIBOR), security price, credit spread or other index. Derivative balances are presented on a gross basis taking into consideration the effects of legally enforceable master netting agreements.

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

To qualify for hedge accounting, the Company was required to designate SCUSA’s derivatives as accounting hedges on or after the Change in Control date. The Company has designated certain of SCUSA’s derivatives as accounting hedges beginning April 1, 2014.

Credit Risk Contingent Features

The Company has entered into certain derivative contracts that require the posting of collateral to counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to the Company's long-term senior unsecured credit ratings. In a limited number of instances, counterparties also have the right to terminate their International Swaps and Derivatives Association, Inc. ("ISDA") master agreements if the Company's ratings fall below investment grade. As of March 31, 2015, derivatives in this category had a fair value of $23.3 million. The credit ratings of the Bank and SHUSA are currently considered investment grade. The Bank estimates a further 1- or 2- notch downgrade by either Standard & Poor's (S&P) or Moody's would require the Bank to post up to an additional $3.6 million or $5.6 million of collateral, respectively, to comply with existing derivative agreements.

As of March 31, 2015 and December 31, 2014, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) that were in a net liability position totaled $157.3 million and $133.2 million, respectively. The Company had $145.1 million and $127.6 million in cash and securities collateral posted to cover those positions as of March 31, 2015 and December 31, 2014, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)

Fair Value Hedges

The Company enters into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments. The Company also entered into interest rate swaps to hedge the interest rate risk on certain fixed rate investments. These derivatives are designated as fair value hedges at inception. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the three-month period ended March 31, 2015 or March 31, 2014. The last of the hedges is scheduled to expire in March 2020.

Cash Flow Hedges

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

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

The last of the hedges is scheduled to expire in December 2030. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the three-month period ended March 31, 2015 or March 31, 2014. As of March 31, 2015, the Company expects approximately $5.8 million of gross losses recorded in accumulated other comprehensive income to be reclassified to earnings during the subsequent twelve months as the future cash flows occur.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)

Derivatives Designated in Hedge Relationships – Notional and Fair Values

Derivatives designated as accounting hedges at March 31, 2015 and December 31, 2014 included:



	Notional Amount		Asset		Liability		Weighted Average Receive Rate		Weighted Average Pay Rate		Weighted Average Life (Years)
	(dollars in thousands)
March 31, 2015
Fair value hedges:
Cross-currency swaps	$	16,118	$	4,624	$	700	4.76	%	4.75	%	0.86
Interest rate swaps	291,000		—		3,539		0.93	%	2.37	%	4.17
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	9,430,064		111		38,369		0.18	%	0.36	%	3.09
Total	$	9,737,182	$	4,735	$	42,608	0.21	%	0.43	%	3.12

December 31, 2014
Fair Value hedges:
Cross-currency swaps	$	18,230	$	2,711	$	980	4.76	%	4.75	%	1.11
Interest rate swaps	257,000		232		779		0.90	%	2.38	%	4.33
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	10,086,103		7,619		20,552		0.17	%	1.11	%	3.02
Total	$	10,361,333	$	10,562	$	22,311	0.19	%	1.14	%	3.05

See Note 13 for detail of the amounts included in accumulated other comprehensive income related to derivatives activity.

Other Derivative Activities

The Company also enters into derivatives that are not designated as accounting hedges under GAAP. The majority of these derivatives are customer-related derivatives relating to foreign exchange and lending arrangements. In addition, derivatives are used to manage risks related to residential and commercial mortgage banking and investing activities. Although these derivatives are used to hedge risk and are considered economic hedges, they are not designated as accounting hedges because the contracts they are hedging are typically also carried at fair value on the balance sheet, resulting in generally symmetrical accounting treatment for both the hedging instrument and the hedged item.

Mortgage Banking Derivatives

The Company's derivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.

The Company typically retains the servicing rights related to residential mortgage loans that are sold. Residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)

Customer-related derivatives

The Company offers derivatives to its customers in connection with their risk management needs. These financial derivative transactions primarily consist of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers, including Santander.

Other derivative activities

The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts as well as cross currency swaps, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.

In March 2014, SCUSA entered into a financing arrangement with a third party under which SCUSA pledged certain bonds retained in its own securitizations in exchange for approximately $251 million in cash. In conjunction with this financing arrangement, SCUSA entered into a total return swap related to the bonds as an effective avenue to monetize SCUSA’s retained bonds as a source of financing. SCUSA will receive a fixed return on the bonds in exchange for paying a variable rate of three-month LIBOR plus 75 basis points. In addition, SCUSA will receive a payment from, or make a payment to, the counterparty at maturity based on the change in fair value of the bonds during the facility's one-year term. Throughout the facility's term, the party in a net liability position must post collateral. SCUSA has the ability to substitute collateral and may do so if a bond is set to begin amortizing. Alternatively, the amortization may be utilized to reduce the notional amount of the facility.

Other derivative instruments primarily include forward contracts related to certain investment securities sales, an OIS, a total return swap on Visa, Inc. Class B common shares, and equity options, which manage our market risk associated with certain investments and customer deposit products.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)

Derivatives Not Designated in Hedge Relationships – Notional and Fair Values

Other derivative activities at March 31, 2015 and December 31, 2014 included:



	Notional				Asset derivatives Fair value				Liability derivatives Fair value
	March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014
	(in thousands)
Mortgage banking derivatives:
Forward commitments to sell loans	$	623,870	$	328,757	$	—	$	—	$	2,611	$	2,424
Interest rate lock commitments	381,176		163,013		6,999		3,063		—		—
Mortgage servicing	435,000		469,000		2,237		7,432		3,473		7,448
Total mortgage banking risk management	1,440,046		960,770		9,236		10,495		6,084		9,872

Customer related derivatives:
Swaps receive fixed	8,165,227		7,927,522		274,744		213,415		286		4,343
Swaps pay fixed	8,225,468		7,944,247		2,714		13,361		241,078		186,732
Other	1,690,776		1,670,696		99,851		62,464		99,302		61,880
Total customer related derivatives	18,081,471		17,542,465		377,309		289,240		340,666		252,955

Other derivative activities:
Foreign exchange contracts	1,489,485		1,152,125		31,997		20,033		30,228		17,390
Interest rate swap agreements	2,939,000		3,231,000		—		535		14,767		12,743
Interest rate cap agreements	8,098,762		7,541,385		31,585		49,762		—		—
Options for interest rate cap agreements	8,098,762		7,541,385		—		—		31,614		49,806
Other	833,086		646,321		8,804		6,543		12,971		9,914
Total	$	40,980,612	$	38,615,451	$	458,931	$	376,608	$	436,330	$	352,680

SCUSA is the holder of a warrant that gives it the right, if certain vesting conditions are satisfied, to purchase additional shares in a company in which it has a cost method investment. This warrant was issued in 2012 and is carried at its estimated fair value of zero at March 31, 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)

Gains (Losses) on All Derivatives

The following Condensed Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the three-month period ended March 31, 2015 and 2014, respectively:



		Three-Month Period Ended March 31,
Derivative Activity	Accounts	2015			2014
		(in thousands)
Fair value hedges:
Cross-currency swaps	Miscellaneous income	$	(36	)	$	(681	)
Interest rate swaps	Miscellaneous income	(2,993		)	735
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Net interest income	(4,451		)	(13,685		)
Other derivative activities:
Forward commitments to sell loans	Mortgage banking income	(187		)	(2,009		)
Interest rate lock commitments	Mortgage banking income	3,937			1,181
Mortgage servicing	Mortgage banking income	(1,219		)	(7,761		)
Customer related derivatives	Miscellaneous income	418			113
Foreign exchange	Miscellaneous income	(874		)	(911		)
SCUSA derivatives	Miscellaneous income	(2,397		)	13,025
SCUSA derivatives	Net interest income	18,044			(1,839		)
Other	Miscellaneous income	(1,445		)	(648		)

Disclosures about Offsetting Assets and Liabilities

The Company enters into legally enforceable master netting agreements, which reduce risk by permitting netting of transactions with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment and in a single currency. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in the ISDA master agreement. The Company's financial instruments, including resell and repurchase agreements, securities lending arrangements, derivatives and cash collateral, may be eligible for offset on its Condensed Consolidated Balance Sheet.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)

Information about financial assets and liabilities that are eligible for offset on the Condensed Consolidated Balance Sheet as of March 31, 2015 and December 31, 2014, respectively, is presented in the following tables:



	Offsetting of Financial Assets
							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet		Financial Instruments		Cash Collateral Received		Net Amount
	(in thousands)
March 31, 2015
Fair value hedges	$	4,624	$	—	$	4,624	$	—	$	—	$	4,624
Cash flow hedges	111		—		111		—		—		111
Other derivative activities⁽¹⁾	451,932		12,399		439,533		10,031		39,255		390,247
Total derivatives subject to a master netting arrangement or similar arrangement	456,667		12,399		444,268		10,031		39,255		394,982
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	6,999		—		6,999		—		—		6,999
Total Derivative Assets	$	463,666	$	12,399	$	451,267	$	10,031	$	39,255	$	401,981

Total Financial Assets	$	463,666	$	12,399	$	451,267	$	10,031	$	39,255	$	401,981

December 31, 2014
Fair value hedges	$	2,943	$	—	$	2,943	$	—	$	—	$	2,943
Cash flow hedges	7,619		—		7,619		—		—		7,619
Other derivative activities⁽¹⁾	373,545		21,109		352,436		10,020		5,940		336,476
Total derivatives subject to a master netting arrangement or similar arrangement	384,107		21,109		362,998		10,020		5,940		347,038
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	3,063		—		3,063		—		—		3,063
Total Derivative Assets	$	387,170	$	21,109	$	366,061	$	10,020	$	5,940	$	350,101

Total Financial Assets	$	387,170	$	21,109	$	366,061	$	10,020	$	5,940	$	350,101


(1)	Includes customer-related and other derivatives


(2)	Includes mortgage banking derivatives

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)



	Offsetting of Financial Liabilities
							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet		Financial Instruments		Cash Collateral Pledged		Net Amount
	(in thousands)
March 31, 2015
Fair value hedges	$	4,239	$	—	$	4,239	$	77	$	7,653	$	(3,491	)
Cash flow hedges	38,369		12,748		25,621		4,555		19,098		1,968
Other derivative activities⁽¹⁾	434,576		126,287		308,289		43,335		155,722		109,232
Total derivatives subject to a master netting arrangement or similar arrangement	477,184		139,035		338,149		47,967		182,473		107,709
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	1,754		1,422		332		—		—		332
Total Derivative Liabilities	$	478,938	$	140,457	$	338,481	$	47,967	$	182,473	$	108,041

Total Financial Liabilities	$	478,938	$	140,457	$	338,481	$	47,967	$	182,473	$	108,041

December 31, 2014
Fair value hedges	$	1,759	$	—	$	1,759	$	65	$	5,589	$	(3,895	)
Cash flow hedges	20,552		—		20,552		7,341		16,797		(3,586		)
Other derivative activities⁽¹⁾	350,863		21,109		329,754		49,318		198,103		82,333
Total derivatives subject to a master netting arrangement or similar arrangement	373,174		21,109		352,065		56,724		220,489		74,852
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	1,817		—		1,817		—		1,736		81
Total Derivative Liabilities	$	374,991	$	21,109	$	353,882	$	56,724	$	222,225	$	74,933

Total Financial Liabilities	$	374,991	$	21,109	$	353,882	$	56,724	$	222,225	$	74,933


(1)	Includes customer-related and other derivatives


(2)	Includes mortgage banking derivatives

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12. INCOME TAXES

An income tax provision of $113.0 million was recorded for the three-month period ended March 31, 2015, compared to $1.1 billion for the corresponding period in 2014. This resulted in an effective tax rate of 31.0% for the three-month period ended March 31, 2015, compared to 35.9% for the corresponding period in 2014. The lower tax rate for the three-month period in 2015 was primarily due to the deferred tax expense recorded on the book gain resulting from the Change in Control recognized during the first quarter of 2014.

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

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

The Company has a lawsuit pending against the United States in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions, the Company paid foreign taxes of $264.0 million during the years 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the Internal Revenue Service ("IRS") disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million. The Company has paid the taxes, penalties and interest associated with the IRS adjustments for all tax years, and the lawsuit will determine whether the Bank is entitled to a refund of the amounts paid. The Company has recorded a receivable in the Other assets line of Condensed Consolidated Balance Sheets for the amount of these payments, less a tax reserve of $125.9 million, as of March 31, 2015.

On October 17, 2013, the Court issued a written opinion in favor of the Company relating to a motion for partial summary judgment on a significant issue in the case. The Company subsequently filed a motion for summary judgment requesting the Court to conclude the case in its entirety and enter a final judgment awarding the Company a refund of all amounts paid. In response, the IRS filed a motion opposing the Company's motion, and filed a cross-motion for summary judgment requesting that the Court enter a final judgment in the IRS's favor. The Company anticipates the Court will make a determination as to whether further proceedings are required at the District Court level to resolve any remaining legal or factual issues, which could affect the Company's entitlement to some or all of the refund. The Company expects the IRS to appeal any decision in favor of the Company. In 2013, two different federal courts decided cases involving similar financing structures entered into by the Bank of New York Mellon Corp. and BB&T Corp. (referred to as the Salem Financial Case) in favor of the IRS. Bank of New York Mellon Corp. and BB&T Corp. have filed notices of appeal in their respective cases. The Company remains confident in its position and believes its reserve amount adequately provides for potential exposure to the IRS related to these items. As this litigation progresses over the next 24 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $125.9 million to an increase of $294.0 million.

The IRS concluded the exam of the Company’s 2006 and 2007 tax returns in 2011. In addition to the adjustments for items related to the financing transactions discussed above, the IRS proposed to recharacterize ordinary losses related to the sale of certain assets as capital losses. The Company paid the tax assessment resulting from this recharacterization, and contested the adjustment through the administrative appeals process. IRS administrative appeals determined that the Company properly characterized the loss as an ordinary loss. As of March 2015, the Company learned that the Joint Committee on Taxation completed its review of the ordinary tax treatment of the losses. While the parties have not yet executed the formal agreement memorializing the IRS's concession to treat these losses as ordinary losses, the Company understands that the IRS will issue a refund for all taxes paid associated with this issue (for which a benefit has already been recognized), and that the Company is not subject to any further exposure.

With few exceptions, the Company is no longer subject to federal, state and non-US income tax examinations by tax authorities for years prior to 2003.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)

The following table presents the components of accumulated other comprehensive income/ (loss), net of related tax, for the three-month period ended March 31, 2015 and 2014, respectively.



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive Income/(Loss)
	Three-Month Period Ended March 31, 2015									December 31, 2014						March 31, 2015
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
	(in thousands)
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments	$	(29,009	)	$	11,154		$	(17,855	)
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments ⁽¹⁾	4,451			(1,711		)	2,740
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	(24,558		)	9,443			(15,115		)	$	(14,260	)	$	(15,115	)	$	(29,375	)

Change in unrealized gains/(losses) on investment securities available-for-sale	117,781			(45,964		)	71,817
Reclassification adjustment for net gains/(losses) included in net income on non-OTTI securities ⁽²⁾	(9,557		)	3,730			(5,827		)
Net unrealized gains/(losses) on investment securities available-for-sale	108,224			(42,234		)	65,990			(52,515		)	65,990			13,475

Pension and post-retirement actuarial gain/(loss)⁽³⁾	1,018			(403		)	615			(29,635		)	615			(29,020		)

As of March 31, 2015	$	84,684		$	(33,194	)	$	51,490		$	(96,410	)	$	51,490		$	(44,920	)

(1) Net losses reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statement of Operations for settlements of interest rate swap contracts designated as cash flow hedges.

(2) Net gains reclassified into Net gain on sale of investment securities sales in the Condensed Consolidated Statement of Operations for the sale of available-for-sale securities.

(3) Included in the computation of net periodic pension costs.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive Income/(Loss)
	Three-Month Period Ended March 31, 2014									December 31, 2013					March 31, 2014
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity		Ending Balance
	(in thousands)
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments	$	(1,648	)	$	586		$	(1,062	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments	13,685			(4,863		)	8,822
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	12,037			(4,277		)	7,760			$	(39,423	)	$	7,760	$	(31,663	)

Change in unrealized gains/(losses) on investment securities available-for-sale	2,566,682			(1,005,159		)	1,561,523
Reclassification adjustment for net gains included in net income on non-OTTI securities⁽²⁾	(2,430,483		)	951,821			(1,478,662		)
Net unrealized gains/(losses) on investment securities available-for-sale	136,199			(53,338		)	82,861			(199,392		)	82,861		(116,531		)

Pension and post-retirement actuarial gain/(loss)	447			115			562			(15,553		)	562		(14,991		)

As of March 31, 2014	$	148,683		$	(57,500	)	$	91,183		$	(254,368	)	$	91,183	$	(163,185	)

NOTE 14. COMMITMENTS, CONTINGENCIES, AND GUARANTEES

Off-Balance Sheet Risk - Financial Instruments

In the normal course of business, the Company utilizes a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, letters of credit, loans sold with recourse, forward contracts, and interest rate and cross currency swaps, caps and floors. These financial instruments may involve, to varying degrees, elements of credit, liquidity, and interest rate risk in excess of the amount recognized on the Condensed Consolidated Balance Sheet. The contractual or notional amounts of these financial instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward contracts and interest rate swaps, caps and floors, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward contracts and interest rate swaps, caps and floors through credit approvals, limits and monitoring procedures. See Note 11 to these Condensed Consolidated Financial Statements for discussion of all derivative contract commitments.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

The following table details the amount of commitments at the dates indicated:



Other Commitments	March 31, 2015		December 31, 2014
	(in thousands)
Commitments to extend credit	$	28,676,743	$	28,792,062
Unsecured revolving lines of credit	—		5
Letters of credit	1,800,952		1,789,666
Recourse and credit enhancement exposure on sold loans	189,902		174,902
Commitments to sell loans	96,736		82,791
Total commitments	$	30,764,333	$	30,839,426

Commitments to Extend Credit

Commitments to extend credit generally have fixed expiration dates, are variable rate, and contain clauses that permit the Company to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.

The following table details the amount of commitments to extend credit expiring per period as of the dates indicated:



	March 31, 2015		December 31, 2014
	(in thousands)
One year or less	$	5,555,799	$	5,968,468
Over 1 year to 3 years	4,926,667		5,322,291
Over 3 years to 5 years	11,473,813		10,810,213
Over 5 years	6,720,464		6,691,090
Total	$	28,676,743	$	28,792,062

Unsecured Revolving Lines of Credit

Such commitments arise primarily from agreements with customers for unused lines of credit on unsecured revolving accounts and credit cards, provided there is no violation of conditions in the underlying agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualifications.

Letters of Credit

The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments is 15.6 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a draw by the beneficiary that complies with the terms of the letters of credit, the Company would be required to honor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and other customer business assets. The maximum undiscounted exposure related to these commitments at March 31, 2015 was $1.8 billion. The fees related to letters of credit are deferred and amortized over the lives of the commitments and were immaterial to the Company’s financial statements at March 31, 2015. Management believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of the commitments, as has been the Company’s experience to date. As of March 31, 2015 and December 31, 2014, the liability related to these letters of credit was $47.4 million and $73.9 million, respectively, which is recorded within the reserve for unfunded lending commitments in Other liabilities on the Condensed Consolidated Balance Sheet. The credit risk associated with letters of credit is monitored using the same risk rating system utilized within the loan and financing lease portfolio. Also included within the reserve for unfunded lending commitments at March 31, 2015 and December 31, 2014 were lines of credit outstanding of $80.3 million and $58.8 million, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

The following table details the amount of letters of credit expiring per period as of the dates indicated:



	March 31, 2015		December 31, 2014
	(in thousands)
One year or less	$	1,187,806	$	1,250,124
Over 1 year to 3 years	322,543		285,108
Over 3 years to 5 years	261,579		248,209
Over 5 years	29,024		6,225
Total	$	1,800,952	$	1,789,666

Loans Sold with Recourse

The Company has loans sold with recourse that meet the definition of a guarantee. For loans sold with recourse under the terms of its multi-family sales program with FNMA, the Company retained a portion of the associated credit risk. The unpaid principal balance outstanding of loans sold in these programs was $2.4 billion as of March 31, 2015 and $2.6 billion as of December 31, 2014. As a result of its agreement with FNMA, the Company retained a 100% first loss position on each multi-family loan sold to FNMA until the earlier to occur of (i) the aggregate approved losses on multi-family loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole of $152.8 million as of March 31, 2015 and $152.8 million as of December 31, 2014, or (ii) all of the loans sold to FNMA under this program are being fully paid off. Any losses sustained as a result of impediments in standard representations and warranties would be in addition to the maximum loss exposure.

The Company has established a liability which represents the fair value of the retained credit exposure and the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability is calculated as the present value of losses that the portfolio is projected to incur based upon internal specific information and an industry-based default curve with a range of estimated losses. At March 31, 2015 and December 31, 2014, the Company had $35.8 million and $40.7 million, respectively, of reserves classified in accrued expenses and payables on the Condensed Consolidated Balance Sheets related to the fair value of the retained credit exposure for loans sold to FNMA under this program. The Company's commitment will expire in March 2039 based on the maturity of the loans sold with recourse. Losses sustained by the Company may be offset, or partially offset, by proceeds resulting from the disposition of the underlying mortgaged properties. Approval from FNMA is required for all transactions related to the liquidation of properties underlying the mortgages.

Additionally, during the period from 1999 to 2002, residential mortgage loans were sold with recourse and credit enhancement features to FNMA and FHLMC. The remaining unpaid principal balance of these loans was $53.9 million and $55.8 million at March 31, 2015 and December 31, 2014, respectively, and the remaining maximum amount of credit exposure on these loans was $21.4 million and $22.1 million for the same periods. The Company has posted collateral in the amount of $0.9 million at March 31, 2015 and December 31, 2014 to be utilized for any losses incurred related to these loans.

Commitments to Sell Loans

The Company enters into forward contracts relating to its mortgage banking business to hedge the exposures from commitments to make new residential mortgage loans with existing customers and from mortgage loans classified as LHFS. These contracts mature in less than one year.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Representation and Warranty Liability

In the ordinary course of business, the Company sells residential loans on a non-recourse basis to certain government-sponsored entities ("GSEs") and private investors. In connection with these sales, the Company has entered into agreements containing various representations and warranties about, among other things, the ownership of the loans, the validity of the liens securing the loans, the loans' compliance with any applicable loan criteria established by the GSEs and the private investors, including underwriting standards and the ongoing existence of mortgage insurance, the absence of delinquent taxes or liens against the property securing the loans and the loans' compliance with applicable federal, state, and local laws. Breaches of these representations and warranties may require the Company to repurchase the mortgage loan or, if the loan has been foreclosed, the underlying collateral, or otherwise make whole or provide other remedies to the GSEs and the private investors. The repurchase liability is recorded within Accrued expenses and payables on the Condensed Consolidated Balance Sheet, and the related income statement activity is recorded in Mortgage banking revenue on the Condensed Consolidated Statement of Operations. In May 2014, the Company reached a settlement with FNMA for loans previously sold, resulting in an $8.0 million reduction in the representation and warranty liability. In December 2014, the Company reached a settlement with FHLMC for loans previously sold, resulting in a $24.8 million reduction in the presentation and warranty liability.

Management believes the Company's repurchase reserve appropriately reflects the estimated probable losses on repurchase claims for all loans sold and outstanding as of March 31, 2015. In making these estimates, the Company considers the losses it expects to incur over the lives of the loans sold. The table below represents the activity in the representation and warranty reserve for the dates indicated.



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
Beginning Balance	$	24,266		$	54,836
Changes in Estimate	(569		)	193
Claims	(646		)	(4,514		)
Ending Balance	$	23,051		$	50,515

SCUSA Commitments

SCUSA is obligated to make purchase price hold-back payments to a third party originator of loans that it purchases on a periodic basis, when losses are lower than originally expected. SCUSA also is obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased pools are greater than originally expected.

SCUSA has extended revolving lines of credit to certain auto dealers. Under this arrangement, SCUSA is committed to lend up to each dealer's established credit limit.

Under terms of agreements with a peer-to-peer personal lending platform company, SCUSA has committed to purchase at least the lesser of $30 million per month or 75% of the lending platform company’s "near-prime" (as that term is defined in the agreements) originations through July 2015, and the lesser of $30 million per month or 50% of the lending platform company’s near-prime originations thereafter through July 2017. This commitment can be reduced or canceled with 90 days’ notice.

SCUSA committed to purchase certain new advances on personal revolving financings originated by a third party retailer, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and renewing through April 2022 at the retailer's option. Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As these credit lines do not have a specified maturity, but rather can be terminated at any time in the event of adverse credit changes or lack of use, SCUSA has not recorded an allowance for unfunded commitments. As of March 31, 2015and December 31, 2014, SCUSA was obligated to purchase $6.4 million and $7.7 million, respectively, in receivables that had been originated by the retailer but not yet purchased by SCUSA. SCUSA also is required to make a profit-sharing payment to the retailer each month if performance exceeds a specified return threshold.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Under terms of an application transfer agreement with an original equipment manufacturer ("OEM"), SCUSA has the first opportunity to review for its own portfolio any credit applications turned down by the OEM's captive finance company. The agreement does not require SCUSA to originate any loans, but for each loan originated SCUSA will pay the OEM a referral fee, comprised of a volume bonus fee and a loss betterment bonus fee. The loss betterment bonus fee will be calculated annually and is based on the amount by which losses on loans originated under the agreement are lower than an established percentage threshold.

In connection with the sale of retail installment contracts through securitizations and other sales, SCUSA has made standard representations and warranties customary in the consumer finance industry. Violations of these representations and warranties may require SCUSA to repurchase loans previously sold to on- or off-balance sheet trusts or other third parties. As of March 31, 2015, SCUSA had no repurchase requests outstanding. In the opinion of SCUSA management, the potential exposure of other recourse obligations related to SCUSA’s retail installment contract sales agreements will not have a material adverse effect on SCUSA’s consolidated financial position, results of operations, or cash flows.

Santander has provided guarantees on the covenants, agreements, and obligations of SCUSA under the governing documents of its warehouse facilities and privately issued amortizing notes. These guarantees are limited to the obligations of SCUSA as servicer.

Under terms of the Chrysler Agreement, SCUSA must make revenue sharing payments to Chrysler and also must make gain-sharing payments when residual gains on leased vehicles exceed a specified threshold.

SCUSA has a flow agreement with Bank of America whereby SCUSA is committed to sell up to $300 million of eligible loans to the bank each month through May 2018. SCUSA retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at time of sale.

SCUSA has sold loans to Citizens Bank of Pennsylvania ("CBP") under terms of a flow agreement and predecessor sale agreements. SCUSA retains servicing on the sold loans and will owe CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis.

In connection with the bulk sale of Chrysler Capital leases, SCUSA is obligated to make quarterly payments to the purchaser sharing residual losses for lease terminations with losses over a specific percentage threshold. The estimated fair value of this guarantee was $2 million as of March 31, 2015.

On March 31, 2015, SCUSA executed a forward flow asset sale agreement with a third party under terms of which SCUSA is committed to sell at least $200 million of charged off loan receivables in bankruptcy status.

Periodically, SCUSA is party to or otherwise involved in various lawsuits and other legal proceedings that arise in the ordinary course of business. On August 26, 2014, a purported securities class action lawsuit was filed in the United States District Court, Southern District of New York. On October 6, 2014, another purported securities class action lawsuit was filed in the District Court of Dallas County, Texas and was subsequently removed to the United States District Court, Northern District of Texas. Both lawsuits were filed against SCUSA, certain current and former directors and executive officers of SCUSA and certain institutions that served as underwriters in the IPO. Each lawsuit was brought by a purported stockholder of SCUSA seeking to represent a class consisting of all those who purchased or otherwise acquired securities pursuant and/or traceable to SCUSA's Registration Statement and Prospectus issued in connection with the IPO. Each complaint alleges that the Registration Statement and Prospectus contained misleading statements concerning SCUSA’s auto lending business and underwriting practices. Each lawsuit asserts claims under Section 11 and Section 15 of the Securities Act and seeks damages and other relief. On February 17, 2015, the purported class action lawsuit pending in the United States District Court, Northern District of Texas, was voluntarily dismissed without prejudice.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Further, SCUSA is party to or are otherwise involved periodically in reviews, investigations, proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the Federal Reserve, the CFPB, the Department of Justice (the "DOJ"), the SEC, the Federal Trade Commission and various state regulatory agencies. Currently, such proceedings include a civil subpoena from the DOJ under The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since 2007. Additionally, on October 28, 2014, SCUSA received a preservation letter and request for documents from the SEC requesting the preservation and production of documents and communications that, among other things, relate to the underwriting and securitization of auto loans since January 1, 2011. SCUSA also has received civil subpoenas from various state Attorneys General requesting similar documents and communications. SCUSA is complying with these requests for information and document preservation.

On February 25, 2015, SCUSA entered into a consent order with the DOJ (the "DOJ Order"), approved by the United States District Court for the Northern District of Texas, that resolves the DOJ's claims against SCUSA that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the Servicemembers Civil Relief Act. The consent requires SCUSA to pay a civil fine in the amount of fifty-five thousand dollars, as well as at least $9.4 million to affected service members consisting of ten thousand dollars plus compensation for any lost equity (with interest) for each repossession by SCUSA and five thousand dollars for each instance where SCUSA sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder, as well as requires SCUSA to undertake additional remedial measures.

SCUSA does not believe that there are any proceedings, threatened or pending, that, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations, or liquidity of SCUSA.

Other Off-Balance Sheet Risk

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

Litigation

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

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter. The Company does not presently anticipate that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material effect on its financial position.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a loss contingency that is probable and estimable, at which time an accrued liability is established with respect to such loss contingency. The Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established. For certain legal matters in which the Company is involved, the Company is able to estimate a range of reasonably possible losses. For other matters for which a loss is probable or reasonably possible, such an estimate is not possible. Management currently estimates that it is reasonably possible that the Company could incur losses in an aggregate amount of up to approximately $7.7 million in excess of the accrued liability, if any, with it also being reasonably possible that the Company could incur no such losses in these matters. This estimated range of reasonably possible losses represents the estimate of possible losses over the life of such legal matters, which may span an indeterminable number of years, and is based on information available as of March 31, 2015.

The matters for which it is reasonably possible that the Company will incur a significant loss are described below. The Company may include in some of the descriptions of individual disclosed matters certain quantitative information related to the plaintiff's claim against the Company as alleged in the plaintiff's pleadings or other public filings or otherwise based on publicly available information. While information of this type may provide insight into the potential magnitude of a matter, it does not necessarily represent the Company's estimate of reasonably possible loss or its judgment as to any currently appropriate accrual. Refer to Note 12 for disclosure regarding the lawsuit filed by the Company against the IRS/United States.

Other Regulatory and Governmental Matters

Foreclosure Matters

On May 22, 2013, the Bank received a subpoena from the U.S. Attorney's Office for the Southern District of New York seeking information regarding claims for foreclosure expenses incurred in connection with the foreclosure of loans insured or guaranteed by the Federal Housing Agency, FNMA or FHLMC. The Bank is cooperating with the investigation; however, there can be no assurance that claims or litigation will not arise from this matter.

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

On January 7, 2013, the Bank and nine other mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing reached an agreement in principle with the OCC and the Federal Reserve to make cash payments and provide other assistance to borrowers. On February 28, 2013, the agreements were finalized with all ten mortgage servicing companies, including the Bank. Other assistance includes reductions of principal on first and second liens, payments to assist with short sales, deficiency balance waivers on past foreclosures and short sales, and forbearance assistance for unemployed homeowners. As of January 24, 2013, twelve other mortgage servicing companies subject to enforcement action for deficient practices in mortgage loan servicing and foreclosure processes also reached an agreement with the OCC or the Federal Reserve, as applicable.

As a result of this agreement, the participating servicers, including the Bank, ceased their independent foreclosure reviews, which involved case-by-case reviews, and replaced them with a broader framework allowing eligible borrowers to receive compensation in a more timely manner. This arrangement has not eliminated all of the Company's risks associated with foreclosures, since it does not protect the Bank from potential individual borrower claims, class actions lawsuits, actions by state attorneys general, or actions by the DOJ or other regulators. In addition, all of the other terms of the Order are still in effect.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Under the agreement, the Bank has paid $6.2 million into a remediation fund, the majority of which has been distributed to borrowers, and will engage in foreclosure avoidance activities, such as loan modifications and short sales over the next two years in an aggregate principal amount of $9.9 million. In return, the OCC waived any civil money penalties that could have been assessed against the Bank. During 2013, the Company submitted for credit from the OCC mortgage loans in the amount of $74.1 million, which represents the principal balance of mortgage loans for which the Bank completed foreclosure avoidance activities with its borrowers. As of March 31, 2015, the Bank had already exceeded its requirements under the settlement agreement. The OCC is requiring the Bank to engage a consultant to validate that the submissions the Bank has made to the OCC qualify as foreclosure avoidance activities under the terms of the agreement.

The Bank represents 0.17% of the total $9.3 billion settlement among the banks and is the smallest participant in the agreement. The total $16.1 million related to the remediation fund and mortgage modifications was fully reserved.

Identity Theft Protection Product Matter

The Bank has been in discussions to address concerns that some customers may have paid for but did not receive certain benefits of an identity theft protection product from a third-party vendor. The Bank remains in discussions with the third-party vendor on potential remedial actions to impacted customers. To date, the Bank has made $37.6 million in total remediation payments to customers. On April 17, 2015, the OCC announced that it had reached an agreement with the Bank that resolved issues related to the sale and servicing of the identity theft protection product (the "Consent Order"). Pursuant to the Consent Order, the Bank has paid a civil monetary penalty of $6 million and agreed to remediate customers who paid for but may not have received certain benefits of the identify theft protection product. As indicated above, as of December 31, 2014, all customers were refunded amounts paid for product enrollment. The Bank is in the process of further re-mediating customers whose checking accounts may have been charged an overdraft fee or credit card accounts an over limit and finance fee as a result of the identity theft protection product fees. In reaching this agreement, the Bank has cooperated fully with the OCC and will comply fully with the terms of the Consent Order.

Marketing of Overdraft Coverage

On April 1, 2014, the Bank received a civil investigative demand (“CID”) from the CFPB. The CID requests information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for automatic teller machine and/or onetime debit card transactions. A second CID related to the same overdraft coverage program was received on February 10, 2015. Pursuant to the terms of the CIDs, the information obtained by the CFPB will be used to determine whether the Bank is in compliance with laws administered by the CFPB. The Bank is cooperating with the investigation; however there can be no assurance that claims or litigation will not arise from this matter.

The Company's practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including those described above.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 15. RELATED PARTY TRANSACTIONS

The Company has various debt agreements with Santander. For a listing of these debt agreements, see Note 12 to the Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2014. The Company and its affiliates also entered into or were subject to various service agreements with Santander and its affiliates. Each of these agreements was made in the ordinary course of business and on market terms. A list and description of these agreements can be found in Note 22 to the Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

NOTE 16. FAIR VALUE

General

As of March 31, 2015, $20.0 billion of the Company’s total assets consisted of financial instruments measured at fair value on a recurring basis, including financial instruments for which the Company elected the FVO. Approximately $10.5 million of these financial instruments were measured using quoted market prices for identical instruments or Level 1 inputs. Approximately $17.7 billion of these financial instruments were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $2.3 billion of these financial instruments were measured using model-based techniques, or Level 3 inputs, and represented approximately 11.7% of total assets measured at fair value and approximately 1.9% of total consolidated assets.

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

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

•Level 2 - Assets and liabilities valued based on observable market data for similar instruments. Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly.

•Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market, and instruments valued based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require. Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing services, pricing models with internally developed assumptions, DCF methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. When available, the Company attempts to use quoted market prices or matrix pricing in active markets to determine fair value and classifies such items as Level 1 or Level 2 assets or liabilities. If quoted market prices in active markets are not available, fair value is determined using third-party broker quotes and/or DCF models incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using broker quotes and/or DCF models are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

The Company values assets and liabilities based on the principal market on which each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market. In the absence of observable market transactions, the Company considers liquidity valuation adjustments to reflect the uncertainty in pricing the instruments. The fair value of a financial asset is measured on a stand-alone basis and cannot be measured as a group, with the exception of certain financial instruments held and managed on a net portfolio basis. In measuring the fair value of a nonfinancial asset, the Company assumes the highest and best use of the asset by a market participant, not just the intended use, to maximize the value of the asset. The Company also considers whether any credit valuation adjustments are necessary based on the counterparty's credit quality.

Any models used to determine fair values or validate dealer quotes based on the descriptions below are subject to review and testing as part of the Company's model validation and internal control testing processes.

The Bank's Market Risk Department is responsible for determining and approving the fair values of all assets and liabilities valued at fair value, including our Level 3 assets and liabilities. Price validation procedures are performed and the results are reviewed for Level 3 assets and liabilities by the Market Risk Department. Price validation procedures performed for these assets and liabilities can include comparing current prices to historical pricing trends by collateral type and vintage, comparing prices by product type to indicative pricing grids published by market makers, and obtaining corroborating dealer prices for significant securities.

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

There were no transfers between Levels 1, 2 and 3 during the three-month period ended March 31, 2015 for any assets or liabilities valued at fair value on a recurring basis. During the three-month period ended March 31, 2014, the Company transferred certain of its ABS from Level 2 to Level 3 due to limited price transparency in connection with their limited trading activity. There were no other transfers between Levels 1, 2 and 3 during the three-month period ended March 31, 2014.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of March 31, 2015 and December 31, 2014.



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2015
	(in thousands)
Financial assets:
US Treasury and government agency securities	$	—	$	2,154,164	$	—	$	2,154,164
Corporate debt	—		2,139,039		—		2,139,039
Asset-backed securities	—		1,483,368		1,514,517		2,997,885
Equity securities	10,475		—		—		10,475
State and municipal securities	—		1,442,353		—		1,442,353
Mortgage backed securities	—		9,685,107		—		9,685,107
Total investment securities available-for-sale	10,475		16,904,031		1,514,517		18,429,023
Retail installment contracts held for investment	—		—		676,097		676,097
Loans held-for-sale	—		316,026		—		316,026
Mortgage servicing rights	—		—		135,452		135,452
Derivatives:
Fair value	—		4,624		—		4,624
Cash flow	—		111		—		111
Mortgage banking interest rate lock commitments	—		—		6,999		6,999
Customer related	—		377,309		—		377,309
Foreign exchange	—		31,997		—		31,997
Mortgage servicing	—		2,237		—		2,237
Interest rate cap agreements	—		31,585		—		31,585
Other	—		8,781		23		8,804
Total financial assets	$	10,475	$	17,676,701	$	2,333,088	$	20,020,264
Financial liabilities:
Derivatives:
Fair value	$	—	$	4,239	$	—	$	4,239
Cash flow	—		38,369		—		38,369
Mortgage banking forward sell commitments	—		2,611		—		2,611
Customer related	—		340,666		—		340,666
Total return swap	—		1,422		282		1,704
Foreign exchange	—		30,228		—		30,228
Mortgage servicing	—		3,473		—		3,473
Interest rate swaps	—		14,767		—		14,767
Option for interest rate cap	—		31,614		—		31,614
Other	—		11,164		103		11,267
Total financial liabilities	$	—	$	478,553	$	385	$	478,938

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2014
	(in thousands)
Financial assets:
US Treasury and government agency securities	$	—	$	1,695,767	$	—	$	1,695,767
Corporate debt	—		2,182,401		—		2,182,401
Asset-backed securities	—		1,452,760		1,267,643		2,720,403
Equity securities	10,343		—		—		10,343
State and municipal securities	—		1,823,462		—		1,823,462
Mortgage backed securities	—		7,475,702		—		7,475,702
Total investment securities available-for-sale	10,343		14,630,092		1,267,643		15,908,078
Trading securities	—		833,936		—		833,936
Retail installment contracts held for investment	—		—		845,911		845,911
Loans held-for-sale	—		213,666		—		213,666
Mortgage servicing rights	—		—		145,047		145,047
Derivatives:
Fair value	—		2,943		—		2,943
Cash flow	—		7,619		—		7,619
Mortgage banking interest rate lock commitments	—		—		3,063		3,063
Customer related	—		289,240		—		289,240
Foreign exchange	—		20,033		—		20,033
Mortgage servicing	—		7,432		—		7,432
Interest rate swap agreements	—		535		—		535
Interest rate cap agreements	—		49,762		—		49,762
Other	—		6,536		7		6,543
Total financial assets	$	10,343	$	16,061,794	$	2,261,671	$	18,333,808
Financial liabilities:
Derivatives:
Fair value	$	—	$	1,759	$	—	$	1,759
Cash flow	—		20,552		—		20,552
Mortgage banking forward sell commitments	—		2,424		—		2,424
Customer related	—		252,955		—		252,955
Total return swap	—		1,736		282		2,018
Foreign exchange	—		17,390		—		17,390
Mortgage servicing	—		7,448		—		7,448
Interest rate swaps	—		12,743		—		12,743
Option for interest rate cap	—		49,806		—		49,806
Other	—		7,823		73		7,896
Total financial liabilities	$	—	$	374,636	$	355	$	374,991

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(in thousands)
March 31, 2015
Impaired loans held for investment	$	3,896	$	92,017	$	2,311	$	98,224
Foreclosed assets	—		12,985		—		12,985
Vehicle inventory	—		159,990		—		159,990

December 31, 2014
Impaired loans held for investment	$	—	$	101,218	$	67,699	$	168,917
Foreclosed assets	—		45,599		—		45,599
Vehicle inventory	—		136,136		—		136,136

Valuation Processes and Techniques

Impaired loans held for investment represents the recorded investment of impaired commercial loans for which the Company periodically records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Written offers to purchase a specific impaired loan are considered observable market inputs, which are considered Level 1. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties, which are considered Level 2 inputs. Loans for which the value of the underlying collateral is determined using a combination of real estate appraisals, field exams and internal calculations are considered Level 3 inputs. The inputs in the internal calculations include the loan balance, estimation of the collectability of the underlying receivables held by the customer used as collateral, sale and liquidation value of the inventory held by the customer used as collateral and historical loss-given-default parameters. In cases in which the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. The total carrying value of these loans was $51.6 million and $100.2 million at March 31, 2015 and December 31, 2014, respectively.

Foreclosed assets represents the recorded investment in assets taken in foreclosure of defaulted loans, and are primarily comprised of commercial and residential real property and generally measured at fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.

The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market levels of used car prices.

Fair Value Adjustments

The following table presents the increases and decreases in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Condensed Consolidated Statements of Operations relating to assets held at period-end:



	Statement of Operations Location	Three-Month Period Ended March 31,
		(in thousands)
		2015			2014
Impaired loans held for investment	Provision for credit losses	$	(570	)	$	(2,809	)
Foreclosed assets	Other administrative expense	(611		)	(223		)
		$	(1,181	)	$	(3,032	)

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Level 3 Rollforward for Recurring Assets and Liabilities

The tables below present the changes in all Level 3 balances for the three-month period ended March 31, 2015 and 2014, respectively.



Three-Month Period Ended March 31, 2015
	Investments Available-for-Sale			Retail Installment Contracts Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, December 31, 2014	$	1,267,643		$	845,911		$	145,047		$	2,715		$	2,261,316
Gains in other comprehensive income	4,779			—			—			—			4,779
Gains/(losses) in earnings	—			86,492			(6,990		)	3,826			83,328
Additions/Issuances	253,973			—			3,526			—			257,499
Settlements⁽¹⁾	(11,878		)	(256,306		)	(6,131		)	96			(274,219		)
Balance, March 31, 2015	$	1,514,517		$	676,097		$	135,452		$	6,637		$	2,332,703
Changes in unrealized gains (losses) included in earnings related to balances still held at March 31, 2015	$	—		$	86,492		$	(6,990	)	$	(110	)	$	79,392


(1)	Settlements include charge-offs, prepayments, pay downs and maturities.



Three-Month Period Ended March 31, 2014
	Investments Available-for-Sale			Retail Installment Contracts Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, December 31, 2013	$	52,940		$	—		$	141,787		$	164		$	194,891
Gains in other comprehensive income	1,048			—			—			—			1,048
Gains/(losses) in earnings	—			144,053			(4,459		)	1,046			140,640
Additions/Issuances	—			1,870,383			1,874			—			1,872,257
Settlements⁽¹⁾	(436		)	(498,083		)	(4,427		)	140			(502,806		)
Transfers into level 3	1,171,460			—			—			—			1,171,460
Balance, March 31, 2014	$	1,225,012		$	1,516,353		$	134,775		$	1,350		$	2,877,490
Changes in unrealized gains (losses) included in earnings related to balances still held at March 31, 2014	$	—		$	144,053		$	(4,459	)	$	(135	)	$	139,459

(1) Settlements include charge-offs, prepayments, pay downs and maturities.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Valuation Processes and Techniques - Recurring Fair Value Assets and Liabilities

The following is a description of the valuation techniques used for instruments measured at fair value on a recurring basis:

Securities Available-for-Sale and Trading Securities

Securities accounted for at fair value include both available-for-sale and trading securities portfolios. The Company utilizes a third-party pricing service to value its investment securities portfolios. Our primary pricing service has consistently proved to be a high quality third-party pricing provider. For those investments not valued by our pricing vendors, other trusted market sources are utilized. The vendors the Company uses provide pricing services on a global basis. The Company monitors and validates the reliability of vendor pricing on an ongoing basis, which can include pricing methodology reviews, performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and price validation testing. Price validation testing is performed independently of the risk-taking function and can include corroborating the prices received from third-party vendors with prices from another third-party source, reviewing valuations of comparable instruments, comparison to internal valuations, or by reference to recent sales of similar securities.

The classification of securities within the fair value hierarchy is based upon the activity level in the market for the security type and the observability of the inputs used to determine their fair value. Actively traded quoted market prices for investment securities available-for-sale, such as U.S. Treasury and government agency securities, corporate debt, state and municipal securities, and mortgage backed securities, are not readily available. The Company's principal markets for its investment securities are the secondary institutional markets with an exit price that is predominantly reflective of bid-level pricing in these markets. These investment securities are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing securities that incorporate relevant market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.

ABS is comprised primarily of collateralized loan obligations ("CLOs") and other ABS. Certain ABS are valued using DCF models. The DCF models are obtained from a third-party pricing vendor who uses observable market data and therefore are classified as Level 2. CLOs are initially valued by the provider using DCF models which consider inputs such as default correlation, credit spread, prepayment speed, conditional default rate and loss severity. The price produced by the model is then compared to recent trades for similar transactions. If there are differences between the model price and the market price, adjustments are made to the model so the final price approximates the market price. These CLO investments are, therefore, considered Level 2. Other ABS that could not be valued using a third-party pricing service are valued using an internally developed DCF model. When estimating the fair value using this model, the Company uses its best estimate of the key assumptions which include the discount rates and forward yield curves. The Company uses comparable bond indices based on industry, term, and rating to discount the expected future cash flows. Determining the comparability of assets involves significant subjectivity related to asset type differences, cash flows, performance and other inputs. The inability of the Company to corroborate the fair value of the ABS due to the limited available observable data on these ABS resulted in a fair value classification of Level 3.

The Company's equity securities are priced using net asset value per share, which is validated with a sufficient level of observable activity. Since the price is observable and unadjusted, these investments are considered Level 1.

Gains and losses on investments are recognized in the Condensed Consolidated Statements of Operations through Net gain on sale of investment securities.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Retail Installment Contracts Held for Investment

For certain retail installment contracts held for investment within loans held for investment, the Company has elected the FVO. The fair values of the retail installment contracts are estimated using the DCF model. When estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rate and adjustments to reflect voluntary prepayments, prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding of debt issuance and recent historical equity yields, and recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, retail installment contracts held for investment are classified as Level 3.

Loans Held-for-Sale

The fair values of LHFS are estimated using published forward agency prices to agency buyers such as the FNMA and the FHLMC. The majority of the residential mortgage LHFS portfolio is sold to these two agencies. The fair value is determined using current secondary market prices for portfolios with similar characteristics, adjusted for servicing values and market conditions.

These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation, but are not considered significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. See further discussion below in the FVO for Financial Assets and Financial Liabilities section below.

MSRs

The model to value MSRs estimates the present value of the future net cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue, offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential MSRs include changes in anticipated loan prepayment rates ("CPRs") and the discount rate, reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market-based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates, both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rates and servicing costs result in lower valuations of MSRs. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of MSRs. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing MSRs and are derived and/or benchmarked against independent public sources. Accordingly, MSRs are classified as Level 3 inputs. Gains and losses on MSRs are recognized on the Condensed Consolidated Statements of Operations through Mortgage banking income. See further discussion on MSRs in Note 9.

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


•	A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $5.2 million and $9.9 million, respectively, at March 31, 2015.


•	A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $4.3 million and $8.4 million, respectively, at March 31, 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

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

Derivatives

The valuation of these instruments is determined using widely accepted valuation techniques, including DCF analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount SHUSA would receive or pay to terminate the contract or agreement, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.

The Company incorporates credit valuation adjustments in the fair value measurement of its derivatives to reflect the respective counterparty's nonperformance risk in the fair value measurement of its derivatives, except for those derivative contracts with associated credit support annexes which provide credit enhancements, such as collateral postings and guarantees.

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

The DCF model is utilized to determine the fair value of the mortgage banking derivatives-interest rate lock commitments. The significant unobservable inputs for mortgage banking derivatives used in the fair value measurement of the Company's loan commitments are "pull through" percentage and the MSR value that is inherent in the underlying loan value. The pull through percentage is an estimate of loan commitments that will result in closed loans. Significant increases (decreases) in any of these inputs in isolation would result in significantly higher (lower) fair value measurements. Significant increases (decreases) in the fair value of a mortgage banking derivative asset (liability) results when the probability of funding increases (decreases). Significant increases (decreases) in the fair value of a mortgage loan commitment result when the embedded servicing value increases (decreases).

Gains and losses related to derivatives affect various line items in the Condensed Consolidated Statements of Operations. See Note 11 for a discussion of derivatives activity.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Level 3 Inputs - Significant Recurring Assets and Liabilities

The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring assets and liabilities.



	Fair Value at March 31, 2015		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	(in thousands)
Financial Assets:
Asset-backed securities
Financing bonds	$	1,459,208	Discounted Cash Flow	Discount Rate ⁽¹⁾	0.70% - 1.77% (1.14%)
Sale-leaseback securities	$	55,309	Consensus Pricing ⁽²⁾	Offered quotes ⁽³⁾	140.13	%
Retail installment contracts held for investment	$	676,097	Discounted Cash Flow	ABS ⁽⁴⁾	0.40	%
				Prepayment rate (CPR) ⁽⁵⁾	11.00	%
				Discount Rate ⁽⁶⁾	6.00% - 12.00% (9.47%)
				Recovery Rate ⁽⁷⁾	25.00% - 43.00% (35.07%)
Mortgage servicing rights	$	135,452	Discounted Cash Flow	Prepayment rate (CPR) ⁽⁸⁾	0.13% - 40.92% (11.72%)
				Discount Rate ⁽⁹⁾	9.90	%
Mortgage banking interest rate lock commitments	$	6,999	Discounted Cash Flow	Pull through percentage ⁽¹⁰⁾	76.09	%
				MSR value ⁽¹¹⁾	0.680% - 1.060% (0.97%)

(1) Based on the applicable term and discount index.

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

(3) Based on the nature of the input, a range or weighted average does not exist. For sale-lease back securities, the Company owns one security.

(4) Based on the historical default rate and adjustments to reflect voluntary prepayments.

(5) Based on the analysis of available data from a comparable market securitization of similar assets.

(6) Based on the cost of funding of debt issuance and recent historical equity yields.

(7) Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool.

(8) Average CPR projected from collateral stratified by loan type, note rate and maturity.

(9) Based on the nature of the input, a range or weighted average does not exist.

(10) Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:



	March 31, 2015
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	1,929,006	$	1,929,006	$	1,929,006	$	—	$	—
Available-for-sale investment securities	18,429,023		18,429,023		10,475		16,904,031		1,514,517
Loans held for investment, net	76,026,925		75,493,036		3,896		92,017		75,397,123
Loans held-for-sale	1,361,895		1,418,646		—		1,418,646		—
Restricted cash	2,801,427		2,801,427		2,801,427		—		—
Mortgage servicing rights	135,452		135,452		—		—		135,452
Derivatives	463,666		463,666		—		456,644		7,022

Financial liabilities:
Deposits	54,368,932		54,406,122		45,931,421		8,474,701		—
Borrowings and other debt obligations	42,813,441		43,267,027		—		31,853,477		11,413,550
Derivatives	478,938		478,938		—		478,553		385



	December 31, 2014
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	2,234,725	$	2,234,725	$	2,234,725	$	—	$	—
Available-for-sale investment securities	15,908,078		15,908,078		10,343		14,630,092		1,267,643
Trading securities	833,936		833,936		—		833,936		—
Loans held for investment, net	73,923,745		74,265,569		—		101,218		74,164,351
Loans held-for-sale	260,252		260,251		—		260,251		—
Restricted cash	2,024,838		2,024,838		2,024,838		—		—
Mortgage servicing rights	145,047		145,047		—		—		145,047
Derivatives	387,170		387,170		—		384,100		3,070

Financial liabilities:
Deposits	52,474,007		52,507,347		45,162,698		7,344,649		—
Borrowings and other debt obligations	39,709,653		40,147,937		—		30,355,610		9,792,327
Derivatives	374,991		374,991		—		374,636		355

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Valuation Processes and Techniques - Financial Instruments

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

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

Cash and amounts due from depository institutions

Cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. The related fair value measurements have been classified as Level 1, since their carrying value approximates fair value due to the short-term nature of the asset.

As of March 31, 2015 and December 31, 2014, the Company had $2.8 billion and $2.0 billion, respectively, of restricted cash. Restricted cash is related to cash restricted for investment purposes, cash posted for collateral purposes, cash advanced for loan purchases, and lockbox collections. Cash and cash equivalents, including restricted cash, have maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.

Debentures of FHLB

Other investments include debentures of the FHLB. The related fair value measurements have generally been classified as Level 2, as carrying value approximates fair value. The debentures of the FHLB matured in September 2014.

Loans held for investment, net

The fair values of loans are estimated based on groupings of similar loans, including but not limited to stratifications by type, interest rate, maturity, and borrower creditworthiness. Discounted future cash flow analyses are performed for these loans incorporating assumptions of current and projected voluntary prepayment speeds. Discount rates are determined using the Company's current origination rates on similar loans, adjusted for changes in current liquidity and credit spreads (if necessary). Because the current liquidity spreads are generally not observable in the market and the expected loss assumptions are based on the Company's experience, these are Level 3 valuations. Impaired loans are valued at fair value on a nonrecurring basis. See further discussion under "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis" above.

Deposits

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Borrowings and other debt obligations

Fair value is estimated by discounting cash flows using rates currently available to the Company for other borrowings with similar terms and remaining maturities. Certain other debt obligation instruments are valued using available market quotes for similar instruments, which contemplates issuer default risk. The related fair value measurements have generally been classified as Level 2. A certain portion of debt, relating to revolving credit facilities, is classified as Level 3. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements and, therefore, are considered to be Level 3.

Commitments to extend credit and standby letters of credit

Commitments to extend credit and standby letters of credit include the value of unfunded lending commitments and standby letters of credit, as well as the recorded liability for probable losses. The Company’s pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company’s loan commitments and letters of credit are competitive with other financial institutions operating in markets served by the Company.

The liability for probable losses is estimated by analyzing unfunded lending commitments and standby letters of credit for commercial customers and segregating by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, result in the estimation of the reserve for probable losses.

These instruments and the related reserve are classified as Level 3. The Company believes that the carrying amounts, which are included in Other liabilities, are reasonable estimates of the fair value of these financial instruments.

Fair Value Option for Financial Assets and Financial Liabilities

LHFS

The Company's LHFS portfolio primarily consists of residential mortgages and retail installment contracts. Retail installment contracts that are held-for-sale are accounted for at the lower of cost or market while the Company adopted the FVO on residential mortgage loans classified as held-for-sale, which allows the Company to record the mortgage LHFS portfolio at fair market value compared to the lower of cost, net of deferred fees, deferred origination costs, or market. The Company economically hedges its residential LHFS portfolio, which is reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value, but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value, which reduces earnings volatility, as the amounts more closely offset.

Retail installment contracts held for investment

To reduce accounting and operational complexity, the Company elected the FVO for certain of its retail installment contracts held for investment in connection with the Change in Control. These loans consisted of all of SCUSA’s retail installment contracts accounted for by SCUSA under ASC 310-30, as well as all of SCUSA’s retail installment contracts that were more than 60 days past due at the date of the Change in Control, which collectively had an aggregate outstanding unpaid principal balance of $2.6 billion with a fair value of $1.9 billion at the date of the Change in Control.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

The following table summarizes the difference between the fair value and the principal balance of LHFS and retail installment contracts measured at fair value as of March 31, 2015.



	Fair Value		Aggregate Unpaid Principal Balance		Difference
	(in thousands)
Loans held-for-sale	$	316,026	$	311,533	$	4,493
Nonaccrual loans	—		—		—

Retail installment contracts held for investment	$	676,097	$	873,481	$	(197,384	)
Nonaccrual loans	51,474		88,859		(37,385		)

Interest income on the Company’s LHFS and retail installment contracts held for investment is recognized when earned based on their respective contractual rates in Interest income on loans in the Condensed Consolidated Statements of Operations. The accrual of interest is discontinued and reversed once the loans become more than 90 days past due for LHFS and more than 60 days past due for retail installment contracts held for investment.

Residential MSRs

The Company elected to account for its existing portfolio of residential MSRs at fair value. This election created greater flexibility with regards to any ongoing decisions relating to risk management of the asset by mitigating the effects of changes to the residential MSRs' fair value through the use of risk management instruments.

The Company's residential MSRs had an aggregate fair value of $135.5 million at March 31, 2015. Changes in fair value totaling a loss of $7.0 million were recorded in net mortgage banking income in the Condensed Consolidated Statement of Operations during the three-month period ended March 31, 2015.

NOTE 17. BUSINESS SEGMENT INFORMATION

Business Segment Products and Services

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

•

The Retail Banking segment is primarily comprised of the Bank's branch locations and residential mortgage business. The branch locations offer a wide range of products and services to customers, and attract deposits by offering a variety of deposit instruments including demand and interest-bearing demand deposit accounts, money market and savings accounts, CDs and retirement savings products. The branch locations also offer consumer loans such as credit cards, home equity loans and lines of credit, as well as business banking and small business loans to individuals. Effective in the second quarter of 2014, Retail Banking segment also includes investment services and provides annuities, mutual funds, managed monies, and insurance products and acts as an investment brokerage agent to the customers of the Retail Banking segment.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)


•	The Auto Finance & Alliances segment currently provides indirect consumer leasing as well as commercial loans to dealers and financing for commercial vehicles and municipal equipment. The Auto Finance and Alliances segment includes certain activity related to the Bank's intercompany agreements with SCUSA.

In conjunction with the Chrysler Agreement, the Bank has an agreement with SCUSA under which SCUSA provides the Bank with the first right to review and assess Chrysler dealer lending opportunities and, if the Bank elected, to provide the proposed financing. Historically and through September 30, 2014, SCUSA provided servicing under this arrangement. Effective October 1, 2014, the servicing of all Chrysler Capital receivables from dealers, including receivables held by the Bank and by SCUSA, were transferred to the Bank. The agreements executed in connection with this transfer require SCUSA to permit the Bank the first right to review and assess Chrysler Capital dealer lending opportunities and require the Bank to pay SCUSA a relationship management fee based upon the performance and yields of Chrysler Capital dealer loans held by the Bank. All intercompany revenue and fees between the Bank and SCUSA are eliminated in the consolidated results of SHUSA.

On January 17, 2014, the Bank entered into a direct origination agreement with SCUSA under which the Bank has the first right to review and approve all prime Chrysler Capital consumer vehicle lease applications. SCUSA may review any applications declined by the Bank for SCUSA’s own portfolio. SCUSA provides servicing and receives an origination fee on all leases originated under this agreement. During April 2015, the Bank and SCUSA decided not to renew this direct origination agreement which expired by its terms on May 9, 2015. The Company is currently evaluating the expiration of this agreement including the potential impact to its Auto Finance & Alliance segment and related goodwill.


•	The Real Estate and Commercial Banking segment offers commercial real estate loans, multi-family loans, commercial loans, and the Bank's related commercial deposits. This segment also provides financing and deposits for government entities and niche product financing for specific industries, including oil and gas and mortgage warehousing, among others.

•

The Global Banking & Markets and Large Corporate Banking ("GBM") segment serves the needs of global commercial and institutional customers by leveraging the international footprint of the Santander group to provide financing and banking services to corporations with over $500 million in annual revenues. GBM's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.

•

SCUSA is a specialized consumer finance company focused on vehicle finance and personal lending products. SCUSA’s primary business is the indirect origination of retail installment contracts, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with a ten-year private label financing agreement with the Chrysler Group that became effective May 1, 2013, SCUSA offers a full spectrum of auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand. These products and services include consumer retail installment contracts and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SCUSA also originates vehicle loans through a web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile, recreational and marine vehicle portfolios for other lenders. Additionally, SCUSA has several relationships through which it provides personal loans, private label credit cards and other consumer finance products.

SCUSA has entered into a number of intercompany agreements with the Bank as described above as part of the Auto Finance & Alliances segment. All intercompany revenue and fees between the Bank and SCUSA are eliminated in the consolidated results of SHUSA.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)

The Other category includes earnings from the investment portfolio, interest from the non-strategic assets portfolio, interest expense on the Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.

For segment reporting purposes, SCUSA continues to be managed as a separate business unit. The Company’s segment results, excluding SCUSA, are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of the segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The methodology includes a liquidity premium adjustment, which considers an appropriate market participant spread for commercial loans and deposits by analyzing the mix of borrowings available to the Company with comparable maturity periods.

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

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

During the first quarter of 2014, certain management and business line changes were announced as the Company reorganized its management reporting in order to improve its structure and focus to better align management teams and resources with the business goals of the Company and to provide enhanced customer service to its clients. These changes became effective for reporting purposes during the second quarter. Accordingly, the following changes were made within the Company's reportable segments to provide greater focus on each of its core businesses:


•	The Investment Services business unit was combined with the Retail Banking business unit.


•	The CEVF line, formerly included in the Specialty and Government Banking business unit, was moved into the Auto Finance and Alliances business unit.


•	The Specialty and Government Banking business unit was combined with the Real Estate and Commercial Banking business unit.

Prior period results have been recast to conform to the new composition of these reportable segments.

During the first quarter of 2015, certain management and business line changes were announced, which will be effective for reporting purposes during the second quarter of 2015. Management is in the process of evaluating the impact of the changes on the Company's reportable segments.

Certain segments previously deemed quantitatively significant no longer met the threshold and have been combined with the Other category as of March 31, 2015. Prior period results have been recast to conform to the new composition of the reportable segment.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)

Results of Segments

The following tables present certain information regarding the Company’s segments.



For the Three-Month Period Ended	SHUSA excluding SCUSA															Non-GAAP measure⁽⁴⁾
March 31, 2015	Retail Banking			Auto Finance & Alliances			Real Estate and Commercial Banking			Global Banking & Markets and Large Corporate			Other⁽²⁾			SCUSA⁽³⁾		SCUSA Purchase Price Adjustments			Eliminations			Total
	(dollars in thousands)
Net interest income	$	190,460		$	19,263		$	126,720		$	49,164		$	13,692		$	1,160,005	$	94,768		$	87		$	1,654,159
Total non-interest income	69,981			82,172			22,080			17,584			22,386			422,970		38,317			(10,093		)	665,397
Provision/(release) for credit losses	19,595			2,931			(9,766		)	3,221			31,019			605,982		219,202			—			872,184
Total expenses	284,968			78,127			53,928			23,073			111,134			546,318		(7,142		)	(8,046		)	1,082,360
Income/(loss) before income taxes	(44,122		)	20,377			104,638			40,454			(106,075		)	430,675		(78,975		)	(1,960		)	365,012

Intersegment (expense)/ revenue⁽¹⁾	67,154			(6,640		)	(72,433		)	(9,251		)	21,170			—		—			—			—
Total average assets	18,099,568			5,037,233			22,969,672			10,595,017			29,180,879			32,940,082		—			—			118,822,451


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


(2)	Other is not considered a segment and includes earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and holding company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


(3)	Management of SHUSA manages SCUSA by analyzing the pre-Change in Control results of SCUSA as disclosed in this column.


(4)	Purchase Price Adjustments represents the impact that SCUSA purchase marks had on the results of SCUSA included within the consolidated operations of SHUSA, while eliminations eliminate intercompany transactions.



For the Three- Month Period Ended	SHUSA excluding SCUSA														Non-GAAP measure⁽⁴⁾
March 31, 2014	Retail Banking		Auto Finance & Alliances			Real Estate and Commercial Banking			Global Banking & Markets and Large Corporate			Other⁽²⁾			SCUSA⁽³⁾		SCUSA Purchase Price Adjustments			Eliminations			Total
	(dollars in thousands)
Net interest income	$	213,065	$	18,865		$	118,689		$	41,591		$	(9,162	)	$	1,062,202	$	70,991		$	(344,136	)	$	1,172,105
Total non-interest income	86,893		6,060			26,342			22,524			28,363			239,311		83,228			(60,004		)	432,717
Gain on Change in Control	—		—			—			—			—			—		2,428,539			—			2,428,539
Provision/(release) for credit losses	9,209		(5		)	4,667			2,438			(16,309		)	698,578		(137,794		)	(225,454		)	335,330
Total expenses	254,535		10,436			46,432			17,130			123,227			473,583		90,549			(245,611		)	770,281
Income/(loss) before income taxes	36,214		14,494			93,932			44,547			(87,717		)	129,352		2,630,003			66,925			2,927,750

Intersegment revenue/(expense)⁽¹⁾	62,611		(2,152		)	(83,738		)	(9,040		)	32,319			—		—			—			—
Total average assets	18,796,940		2,348,331			22,374,949			8,443,066			26,529,244			18,287,600		—			—			96,780,130


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


(2)	Other is not considered a segment and includes earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and holding company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


(3)	Management of SHUSA manages SCUSA by analyzing the pre-Change in Control results of SCUSA as disclosed in this column.


(4)	Purchase Price Adjustments represents the impact that SCUSA purchase marks had on the results of SCUSA included within the consolidated operations of SHUSA, while eliminations adjust for the one month that SHUSA accounted for SCUSA as an equity method investment and eliminate intercompany transactions.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)

NON-GAAP FINANCIAL MEASURES

The Chief Operating Decision Maker ("CODM"), as described by ASC 280, Segment Reporting, manages SCUSA on a historical basis by reviewing the results of SCUSA on a pre-Change in Control basis. The Results of Segments table discloses SCUSA's operating information on the same basis that it is reviewed by SHUSA's CODM to reconcile to SCUSA's GAAP results, purchase price adjustments and accounting for SCUSA as an equity method investment. The Company's non-GAAP information has limitations as an analytical tool, and the reader should not consider it in isolation, or as a substitute for analysis of our results or any performance measures under GAAP as set forth in our financial statements. The reader should compensate for these limitations by relying primarily on our GAAP results and using this non-GAAP information only as a supplement to evaluate the Company's performance.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

EXECUTIVE SUMMARY

Santander Holdings USA, Inc. ("SHUSA") is the parent company of Santander Bank, National Association, (the "Bank"), a national banking association, and owns approximately 61% of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SCUSA"), a consumer finance company focused on vehicle finance and personal lending products. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander").

The Bank's main office is in Wilmington, Delaware. The Bank, previously named Sovereign Bank, National Association, changed its name to Santander Bank, National Association on October 17, 2013. The Bank's principal markets are in the Mid-Atlantic and Northeastern United States. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loan and investment portfolios. In addition, the Bank generates non-interest income from a number of sources, including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance ("BOLI"). The principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The volumes, and accordingly the financial results, of the Bank are affected by the economic environment, including interest rates and consumer and business confidence and spending, as well as the competitive conditions within the Bank's geographic footprint.

SCUSA is headquartered in Dallas, Texas, and its primary business is the indirect origination of retail installment contracts, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. SCUSA also offers a full spectrum of auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand. These products and services include consumer retail installment contracts and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SCUSA also originates vehicle loans through a web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SCUSA has several relationships through which it provides unsecured consumer loans, private-label credit cards and other consumer finance products.

On January 22, 2014, SCUSA's registration statement for an initial public offering ("IPO") of shares of its common stock (the “SCUSA Common Stock”), was declared effective by the SEC. Prior to the IPO, the Company owned approximately 65% of the shares of SCUSA's common stock.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the first quarter of 2015, the U.S. economy grew slowly and market results signaled pessimism about the slow growth of the U.S. economy while unemployment dropped only slightly.

The unemployment rate in March 2015 improved to 5.5%, down from 5.6% at December 31, 2014 and 6.7% one year ago. According to the U.S Bureau of Labor Statistics, the job growth is primarily attributed to the professional and business services, retail trade, and health care sectors.

Early indicators for first quarter results were generally positive, despite concerns in the first quarter about the slow growth of the economy, which were evident in market results. The total year-to-date returns for the following indices, based on closing prices, at March 31, 2015 were:



		March 31, 2015
Dow Jones Industrial Average		(0.3)%
S&P 500		0.4%
NASDAQ Composite		13.4%

At its March 2015 meeting, the Federal Open Market Committee (the “FOMC”) announced its plans to maintain the Fed funds rate target at 0-.25%. and the targeted inflation rate at 2.0%. While the federal funds rate has remained on target, the inflation rate remains just under 2.0%. In late 2014, the FOMC also announced its plan to discontinue its agency mortgage backed securities ("MBS") and long-term Treasury securities purchase programs, citing "substantial improvement in the outlook for the labor market" and strength in the overall economy to support progress towards maximum employment and price stability. As of its March statement, the FOMC had not decided on timing for its initial increase in the target ranges for either measure, but calls an increase at its April 2015 meeting "unlikely."

The 10-year Treasury bond rate at the end of the first quarter was 1.93%, down from 2.17% at December 31, 2014 and 2.72% at March 31, 2014. Over the past year, the 10-year Treasury bond rate decreased 79 basis points. Mortgage origination activity declined in the fourth quarter of 2014, down 7.4% from the third quarter of 2014 and 14.7% from the fourth quarter of 2013. Declines in fourth quarter origination activity are consistent with historical trends. At the time of filing this Form 10-Q, first quarter origination activity results were not available, but forecasts projected increased activity in Q1 2015 that would exceed origination activity of the first quarter of 2014.

Despite the trends in consumer mortgage origination, the most recent indicators show that commercial real estate and multifamily originations have increased compared with both the prior quarter and prior year. In addition, the ratio of non-performing loans ("NPLs") to total loans has declined for U.S banks, with a decrease of 53.6% from March 31, 2014 to December 31, 2014 evidence of improving credit quality and downward trends in general allowance reserves. First quarter 2015 data was not fully available at the time of issuance.

Changing market conditions are considered a significant risk factor to the Company. The continued low interest rate environment presents challenges in the growth of net interest income for the banking industry, which continues to rely on non-interest activities to support revenue growth. Changing market conditions and political uncertainty could have an overall impact on the Company's results of operations and financial condition. Such conditions could also impact the Company's credit risk, and the associated provision for credit losses and legal expense could increase.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

European Exposure

Concerns about the European Union’s sovereign debt and the future of the euro have caused uncertainty for financial markets globally. Other than borrowing agreements and related party transactions with Santander, as further described in the Financial Condition section of the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") Notes to the Condensed Consolidated Financial Statements, the Company's exposure to European countries includes the following:



	March 31, 2015
Country	Covered Bonds		Financial Institution Bonds		Non-Financial Institutions Bonds		Total
	(in thousands)
France	$	—	$	143,377	$	4,956	$	148,333
Germany	—		—		138,903		138,903
Great Britain	—		118,962		279,791		398,753
Italy	—		48,761		57,523		106,284
Netherlands	—		48,911		—		48,911
Norway	—		—		7,995		7,995
Portugal	—		—		41,000		41,000
Spain	93,787		77,867		44,319		215,973
Sweden	—		77,856		—		77,856
Switzerland	—		14,969		—		14,969
	$	93,787	$	530,703	$	574,487	$	1,198,977

The market value of the Company's European exposure at March 31, 2015 was $1.2 billion.



	December 31, 2014
Country	Covered Bonds		Financial Institution Bonds		Non-Financial Institutions Bonds		Total
	(in thousands)
France	$	—	$	143,475	$	4,953	$	148,428
Germany	—		—		139,233		139,233
Great Britain	—		119,048		295,436		414,484
Italy	—		48,765		57,803		106,568
Netherlands	—		49,886		—		49,886
Norway	—		—		7,994		7,994
Portugal	—		—		41,081		41,081
Spain	93,938		78,098		61,355		233,391
Sweden	—		77,847		—		77,847
Switzerland	—		14,970		—		14,970
	$	93,938	$	532,089	$	607,855	$	1,233,882

The market value of the Company's European exposure at December 31, 2014 was $1.3 billion.

These investments are included within corporate debt securities discussed in Note 4 to the Condensed Consolidated Financial Statements. The Company's total exposure to European entities decreased $34.9 million, or 2.8%, from December 31, 2014 to March 31, 2015.

As of March 31, 2015, the Company had approximately $247.1 million of loans that were denominated in a currency other than the USD.

Overall, gross exposure to the foregoing countries was approximately 1.0% of the Company's total assets as of March 31, 2015, and no more than 1% was to any given country or third party. The Company currently does not have credit protection on any of these exposures, nor does it provide lending services in Europe. The Company transacts with various European banks as counterparties to interest rate swaps and foreign currency transactions for its hedging and customer-related activities; however, these derivatives transactions are generally subject to master netting and collateral support agreements, which significantly limit the Company’s exposure to loss.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Management conducts periodic stress tests of our significant country risk exposures, analyzing the direct and indirect impacts on the risk of loss from various macroeconomic and capital markets scenarios. We do not have significant exposure to foreign country risks because our foreign portfolio is relatively small. However, we have identified exposure to increased loss from U.S. borrowers associated with the potential indirect impact of a European downturn on the U.S. economy. We mitigate these potential impacts through our normal risk management processes, which include active monitoring and, if necessary, the application of loss mitigation strategies.

Credit Rating Actions

The following table presents Moody's and Standard & Poor's ("S&P") credit ratings for the Bank, SHUSA, Santander and the Kingdom of Spain as of March 31, 2015:



	BANK		SHUSA		SANTANDER		SPAIN
	Moody's	S&P	Moody's	S&P	Moody's	S&P	Moody's	S&P
LT Senior Debt	Baa1	BBB	Baa2	BBB	Baa1	BBB+	Baa2	BBB
ST Deposits	P-2	A-2	P-2	A-2	P-2	A-2	P-2	A-2
Outlook	Stable	Stable	Negative	Stable	Stable	Stable	Positive	Stable

In 2014, the ratings for the Company and the Bank were affirmed. SHUSA funds its operations independently of the other entities owned by Santander, and believes its business is not necessarily closely related to the business or outlook of other entities owned by Santander. During 2014, S&P upgraded the long-term senior debt rating of Santander from BBB to BBB+. S&P also upgraded the Kingdom of Spain's long-term debt rating from BBB- to BBB and short-term deposits rating from A-3 to A-2. Future adverse changes in the credit ratings of Santander or the Kingdom of Spain could also further adversely impact SHUSA's or its subsidiaries' credit ratings, and any other adverse change in the condition of Santander could adversely affect SHUSA.

On March 16, 2015 Moody's published its new bank rating methodology. On March 17, 2015 Moody's announced multiple rating actions following the publication of its new methodology. The rating actions affect 1,021 of 1,934 rated banking entities which include operating banks, holding companies, subsidiaries, special purpose issuance conduits, branches and other entities for which Moody's has assigned ratings to at least one debt class. Moody's noted that for most US banking entities their deposit ratings are on review for upgrade and their bank-level senior unsecured debt and issuer ratings are on review for downgrade. These rating actions reflect the Loss Given Failure component of Moody's new methodology. For the Bank, Moody's would upgrade its deposit rating by 2 notches (from Baa1 to A2) and downgrade its senior unsecured debt rating by 1 notch from Baa1 to Baa2. SHUSA's ratings were not placed under review by Moody's.

Santander's ratings from Moody's were also put under review on March 17, 2015 due to the new rating methodology. Moody's placed Santander's senior debt and deposit ratings on review for upgrade.

At this time, SCUSA is not rated by the major credit rating agencies.

The Bank estimates a one or two notch downgrade by either S&P or Moody's would require the Bank to post up to an additional $3.6 million or $5.6 million, respectively, to comply with existing derivative agreements.

REGULATORY MATTERS

The activities of the Company and the Bank are subject to regulation under various U.S. federal laws, including the Bank Holding Company Act, the Federal Reserve Act, the National Bank Act, the Federal Deposit Insurance Act, the Truth-in-Lending Act (which governs disclosures of credit terms to consumer borrowers), the Truth-in-Savings Act, the Equal Credit Opportunity Act (the "ECOA"), the Fair Credit Reporting Act (which governs the provision of consumer information to credit reporting agencies and the use of consumer information), the Fair Debt Collection Practices Act (which governs the manner in which consumer debts may be collected by collection agencies), the Home Mortgage Disclosure Act (which requires financial institutions to provide certain information about home mortgage and refinanced loans), the Servicemember Civil Relief Act, the Unfair and Deceptive Practices Act, the Real Estate Settlement Procedures Act, and the Electronic Funds Transfer Act (which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services), as well as other federal and state laws.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

SCUSA is also subject to regulatory oversight from the Board of Governors of the Federal Reserve System ("Federal Reserve") for bank holding company ("BHC") regulatory purposes as SCUSA is a subsidiary of SHUSA.

Dodd-Frank Wall Street Reform and Consumer Protection Act ("DFA")

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

More specifically, the DFA imposes heightened prudential requirements on BHCs with at least $50.0 billion in total consolidated assets (often referred to as “systemically important financial institutions”), which includes the Company, and requires the Federal Reserve to establish prudential standards for such BHCs that are more stringent than those applicable to other BHCs, including standards for risk-based requirements and leverage limits; heightened capital standards, including eliminating trust preferred securities as Tier 1 regulatory capital; enhanced risk-management requirements; and credit exposure reporting and concentration limits. These changes are expected to impact the profitability and growth of the Company.

The DFA mandates an enhanced supervisory framework, which means that the Company is subject to annual stress tests by the Federal Reserve, and the Company and the Bank are required to conduct semi-annual and annual stress tests, respectively, reporting results to the Federal Reserve and the Office of the Comptroller of the Currency (the "OCC"). The Federal Reserve also has discretionary authority to establish additional prudential standards, on its own or at the Financial Stability Oversight Council's recommendation, regarding contingent capital, enhanced public disclosures, short-term debt limits, and otherwise as it deems appropriate.

Under the Durbin Amendment to the DFA, in June 2011 the Federal Reserve issued the final rule implementing debit card interchange fee and routing regulation. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are “reasonable and proportional” to the costs incurred by issuers for electronic debit transactions, and prohibits network exclusivity arrangements on debit cards to ensure merchants have choices in how debit card transactions are routed.

The DFA established the Consumer Financial Protection Bureau (the "CFPB"), which has broad powers to set the requirements for the terms and conditions of financial products. This has resulted in and is expected to continue to result in increased compliance costs and reduced revenue.

In March 2013, the CFPB issued a bulletin recommending that indirect vehicle lenders, which include SCUSA, take steps to monitor and impose controls over dealer mark up policies whereby dealers charge consumers higher interest rates, with the markup shared between the dealer and the lender. Dealers are allowed to mark up interest rates by a maximum of 2.00%, but in October 2013 SCUSA reduced their maximum compensation (participation from 2.00% (industry practice) to 1.75%.) We believe this restriction removes the dealers' incentive to mark up rates beyond 1.75%. We plan to continue to evaluate this policy for effectiveness and may make further changes to strengthen oversight of dealers and markup.

The CFPB is also conducting supervisory audits of large vehicle lenders and has indicated it intends to study and take action with respect to possible ECOA “disparate impact” credit discrimination in indirect vehicle finance. If the CFPB enters into a consent decree with one or more lenders on disparate impact claims, it could negatively impact the business of the affected lenders, and potentially the business of dealers and other lenders in the vehicle finance market. This impact on dealers and lenders could increase SCUSA's regulatory compliance requirements and associated costs. On July 23, 2014, an automotive finance industry publication reported on complaints related to automotive finance institutions filed with the CFPB over the first half of 2014 compared to the prior year. SCUSA believes that the rise in CFPB complaints for SCUSA over the last year is attributable to portfolio growth, including its entire serviced portfolio (on- and off-book) and consumer credit quality. Based on an internal analysis, SCUSA believes that it was at fault in less than 6% of its CFPB complaints. SCUSA logs and investigates all complaints, and tracks each complaint until it is resolved or otherwise settled.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The Company routinely executes interest rate swaps for the management of its asset-liability mix, and also executes such swaps with its borrower clients. Under the DFA, the Bank is required to post collateral with certain of its counterparties and clearing exchanges. While clearing these financial instruments offers some benefits and additional transparency in valuation, the systems requirements for clearing execution add operational complexities to the business and accordingly increase operational risk exposure.

Provisions of the DFA relating to the applicability of state consumer protection laws to national banks, including the Bank, became effective in July 2011. Questions may arise as to whether certain state consumer financial laws that were previously preempted by federal law are no longer preempted as a result of these new provisions. Depending on how such questions are resolved, the Bank may experience an increase in state-level regulation of its retail banking business and additional compliance obligations, revenue impacts and costs. SCUSA already is subject to such state-level regulation.

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

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

Basel III

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

The new rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios that, when fully phased in, will require banking organizations, including SHUSA and the Bank, to maintain a minimum common equity tier 1 ("CET1") ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to average consolidated assets for the quarter. The effective date of these requirements for SHUSA and the Bank was January 1, 2015.

A capital conservation buffer of 2.5% above each of these levels (to be phased in over three years starting in 2016, beginning at 0.625% and increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019) will be required for banking institutions and BHCs to avoid restrictions on their ability to make capital distributions, including paying dividends.

The final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights ("MSRs"), deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities are deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 for SHUSA and the Bank is to begin on January 1, 2015 and be phased in over three years.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

As of March 31, 2015, the Bank's and SHUSA's CET1 ratio under Basel III, on a fully phased-in basis under the standardized approach, were 13.34% and 10.86%, respectively. Under the transitions provided under Basel III, the Bank's and SHUSA's CET1 ratio under the standardized approach, were 13.78% and 11.85%, respectively. The calculation of the CET1 ratio under both a fully phased in and transition basis is based on management's interpretation of the final rules adopted by the Federal Reserve in July 2013. As part of the implementation of any regulations, Management interprets the rules in order to implement the new regulations. If the regulators would interpret the rules differently, there could be an impact to the results of the calculation which may have a negative impact to the calculation of CET1. As mentioned above, the minimum required CET1 ratio is comprised of the 4.5% minimum and the 2.5% conservation buffer. On that basis, we believe that, as of March 31, 2015, the Company would remain above regulatory minimums under the currently enacted capital adequacy requirements of Basel III, including when implemented on a fully phased-in basis.

See the Bank Regulatory Capital section of this MD&A for the Company's ratios under Basel III standards. The implementation of certain regulations and standards relating to regulatory capital could disproportionately affect our regulatory capital position relative to that of our competitors, including those that may not be subject to the same regulatory requirements as the Company.

Historically, regulation and monitoring of bank and BHC liquidity has been addressed as a supervisory matter, both in the U.S. and internationally, without required formulaic measures. The Basel III liquidity framework will require banks and BHCs to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation going forward. One test, referred to as the liquidity coverage ratio ("LCR"), is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to its expected net cash outflow for a 30-day time horizon. The other, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium and long-term funding of the assets and activities of banking entities over a one-year time horizon.

On October 24, 2013, the Federal Reserve, FDIC, and OCC issued a proposal to implement the Basel III LCR for certain internationally active banks and nonbank financial companies and a modified version of the LCR for certain depository institution holding companies that are not internationally active. On September 3, 2014, the agencies approved the final LCR rule. The agencies stressed that LCR is a key component in their effort to strengthen the liquidity soundness of the U.S. financial sector and is used to complement the broader liquidity regulatory framework and supervisory process such as Enhanced Prudential Standards ("EPS") and Comprehensive Capital Analysis and Review ("CCAR"). The agencies have mandated a phased implementation approach where the most globally important covered companies (more than $700 billion in assets) and large regionals ($250 billion to $700 billion in assets) are required to report their LCR calculation beginning January 1, 2015. Smaller covered companies (more than $50 billion in assets) such as SHUSA are required to report their LCR calculation monthly beginning January 1, 2016. Based on management's interpretation of the final rule that will be effective on January 1, 2016, SHUSA's LCR was in excess of the regulatory minimum of 90% which will increase to 100% on January 1, 2017.

On October 31, 2014, the Basel Committee on Banking Supervision issued the final standard for the NSFR. The NSFR requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities, thus reducing the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure and potentially lead to broader systemic stress. NSFR will become a minimum standard by January 1, 2018.

The U.S. notice of proposed rule-making on NSFR is expected to be published in 2015.

Stress Tests and Capital Adequacy

Pursuant to the DFA, as part of the Federal Reserve's annual CCAR, certain banks and BHCs, including the Company and the Bank, are required to perform stress tests and submit capital plans to the Federal Reserve and the OCC on an annual basis, and to receive a notice of non-objection to those capital plans from the Federal Reserve and the OCC before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. As a consolidated subsidiary of SHUSA, SCUSA is included in our stress tests and capital plans. On March 26, 2014, the Federal Reserve announced that, based on qualitative concerns, it objected to the 2014 period capital plans. The Federal Reserve did not object to SHUSA’s payment of dividends on its outstanding class of preferred stock.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

On May 1, 2014, the Board of Directors of SCUSA declared the May SCUSA Dividend. The Federal Reserve informed SHUSA on May 22, 2014 that it does not object to SCUSA's payment of the May SCUSA Dividend, provided that Santander contribute at least $20.9 million of capital to SHUSA prior to such payment, so that SHUSA's consolidated capital position would be unaffected by the May SCUSA dividend. The Federal Reserve also informed SHUSA that, until the Federal Reserve issues a non-objection to SHUSA's capital plan, any future SCUSA dividend will require prior receipt of a written non-objection from the Federal Reserve. On May 28, 2014, SHUSA issued 84,000 shares of its common stock, no par value per share, to Santander in exchange for cash in the amount of $21 million.

On September 15, 2014, the Company entered into a written agreement with the Federal Reserve Bank (the "FRB") of Boston and the Federal Reserve. Under the terms of the written agreement, the Company must serve as a source of strength to the Bank; strengthen Board oversight of planned capital distributions by the Company and its subsidiaries; and not declare or pay, and not permit any non-bank subsidiary that is not wholly-owned by the Company to declare or pay, any dividends and not make, or permit any such subsidiary to make, any capital distribution, in each case without the prior written approval of the FRB of Boston.

On March 11, 2015, the Federal Reserve announced that SHUSA received an objection from the FRB to the 2015 capital plan SHUSA submitted on January 5, 2015. The FRB objected to SHUSA’s capital plan on qualitative grounds due to significant deficiencies in SHUSA’s capital planning process. Subject to the restrictions outlined above with respect to the written agreement, the FRB did not object to SHUSA’s payment of dividends on its outstanding class of preferred stock. The FRB did object to the requested payment of dividends on SCUSA Common Stock.

Enhanced Prudential Standards for Liquidity

On February 18, 2014, the Federal Reserve approved the final rule implementing certain of the EPS mandated by Section 165 of the DFA (the "Final Rule"). The Final Rule applies the EPS to (i) U.S. BHCs with $50 billion (and in some cases $10 billion) or more in total consolidated assets and (ii) foreign banking organizations ("FBOs") with a U.S. banking presence, through branches, agencies or depository institutions exceeding $50 billion in consolidated U.S. non-branch assets. The Final Rule implements, as new requirements for U.S. BHCs, Section 165’s risk management requirements (including requirements, duties and qualifications for a risk management committee and chief risk officer), liquidity stress testing and buffer requirements. U.S. BHCs with total consolidated assets of $50 billion or more on June 30, 2014 are subject to the liquidity requirements as of January 1, 2015.

Foreign Banking Organizations

On February 18, 2014, the Federal Reserve issued the Final Rule to strengthen regulatory oversight of FBOs. Under the Final Rule, FBOs with global assets of $50 billion or more and U.S. non-branch assets of $10 billion or more must consolidate U.S. subsidiary activities under a U.S. intermediate holding company ("IHC"). In addition, the Final Rule requires U.S. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS, heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander is subject to both of the above provisions of the Final Rule. As a result of this rule, Santander could be required to transfer its U.S. non-bank subsidiaries currently outside of the Company to the Company, which would become an IHC, or establish a top-tier IHC structure that would include all of its U.S. bank and non-bank subsidiaries. As required under the Final Rule, the Company submitted its IHC implementation plan to the Federal Reserve on December 31, 2014. A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a U.S. BHC with more than $50 billion in total consolidated assets, the Company was subject to EPS as of January 1, 2015. The IHC must be formed, with all but 10% of the non-BHC assets included, by July 1, 2016. Other standards of the Final Rule will be phased in through January 1, 2018.

Bank Regulations

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

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

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

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

During the period covered by this quarterly report:


•	Santander UK holds frozen savings and current accounts for two customers resident in the U.K. who are currently designated by the U.S. for terrorism. The accounts held by each customer were blocked after the customer's designation and have remained blocked and dormant throughout the first quarter of 2015. No revenue has been generated by Santander UK on these accounts.

•

An Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the Weapons of Mass Destruction Proliferators ("NPWMD") designation, holds a mortgage with Santander U.K. that was issued prior to any such designation. No further draw-down has been made (or would be allowed) under this mortgage, although Santander U.K. continues to receive repayment installments. In the first quarter of 2015, total revenue in connection with this mortgage was approximately £800, while net profits were negligible relative to the overall profits of Santander U.K. Santander U.K. does not intend to enter into any new relationships with this customer, and any disbursements will only be made in accordance with applicable sanctions. The same Iranian national also holds two investment accounts with Santander Asset Management UK Limited. The accounts have remained frozen during the first quarter of 2015. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue for the Santander group in connection with the investment accounts was approximately £70 while net profits in the first quarter of 2015 were negligible relative to the overall profits of Santander.

In addition, the Santander group has certain legacy export credits and performance guarantees with Bank Mellat, which are included in the U.S. Department of the Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List. Santander entered into two bilateral credit facilities in February 2000 in an aggregate principal amount of €25.9 million. Both credit facilities matured in 2012. In addition, in 2005 Santander participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matures on July 6, 2015. As of March 31, 2015, Santander was owed €1.8 million under this credit facility.

Santander has not been receiving payments from Bank Mellat under any of these credit facilities in recent years. Santander has been and expects to continue to be repaid any amounts due by official export credit agencies, which insure between 95% and 99% of the outstanding amounts under these credit facilities. No funds have been extended by Santander under these facilities since they were granted.

The Santander group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations - either under tender documents or under contracting agreements - of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007. However, should any of the contractors default in their obligations under the public bids, the Santander group would not be able to pay any amounts due to Bank Sepah or Bank Mellat because any such payments would be frozen pursuant to Council Regulation (EU) No. 961/2010.

In the aggregate, all of the transactions described above resulted in approximately €8,300 in gross revenues and approximately €45,000 net loss to the Santander group in the first quarter of 2015, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Santander group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount - which payment would be frozen as explained above (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). Accordingly, the Santander group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2015 AND 2014



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
Net interest income	$	1,654,159		$	1,172,105
Provision for credit losses	(872,184		)	(335,330		)
Total non-interest income	665,397			2,861,256
General and administrative expenses	(1,049,696		)	(738,514		)
Other expenses	(32,664		)	(31,767		)
Income before income taxes	365,012			2,927,750
Income tax provision	(112,973		)	(1,050,107		)
Net income	$	252,039		$	1,877,643

The Company reported pre-tax income of $365.0 million for the three-month period ended March 31, 2015, compared to pretax income of $2.9 billion for the three-month period ended March 31, 2014. Factors contributing to this decrease were as follows:


•	Net interest income increased $482.1 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This was primarily due to the increase in interest income on retail installment contracts and auto loan portfolios resulting from new originations.


•	The provision for credit losses increased $536.9 million for the three-month period ended March 31, 2015 compared to the corresponding period in 2014. This is primarily due to the increase in lease activity, as well as new originations in the loan portfolio that is held by the Company.


•	Total non-interest income decreased $2.2 billion for the three-month period ended March 31, 2015, compared to the corresponding periods in 2014. The decrease was primarily due to the one-time net gain recognized in 2014 related to the Change in Control.


•	Total general and administrative expenses increased $311.2 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014, primarily due to increased loan and lease expense, as well as outside services.


•	Other expenses increased $0.9 million for the three-month period ended March 31, 2015 compared to the corresponding period in 2014. This is primarily due to an increase in amortization expense of intangible assets due to three months of amortization in 2015 compared to two months of amortization in 2014. This increase was offset by a decrease in debt repurchase expenses.


•	The income tax provision decreased $937.1 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The decrease was due to lower taxable income in the current period.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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



CONDENSED CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
THREE-MONTH PERIODS ENDED MARCH 31, 2015 AND 2014
	2015 ⁽¹⁾							2014
	Average Balance			Tax Equivalent Interest		Yield/ Rate		Average Balance			Tax Equivalent Interest		Yield/ Rate
	(in thousands)
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	18,708,496		$	106,324	2.28	%	$	15,421,480		$	80,946	2.10	%
LOANS⁽²⁾:
Commercial loans	28,358,779			223,651		3.19	%	24,321,607			206,428		3.44	%
Multi-family	8,575,214			89,435		4.22	%	8,951,757			90,511		4.10	%
Consumer loans:
Residential mortgages	6,910,227			69,571		4.03	%	9,628,371			96,562		4.01	%
Home equity loans and lines of credit	6,190,517			54,503		3.57	%	6,251,233			55,285		3.59	%
Total consumer loans secured by real estate	13,100,744			124,074		3.81	%	15,879,604			151,847		3.84	%
Retail installment contracts and auto loans	23,153,207			1,190,504		20.85	%	13,682,965			754,359		22.36	%
Personal unsecured	2,712,367			181,057		27.07	%	1,163,908			108,085		37.66	%
Other consumer⁽³⁾	1,273,457			29,429		9.37	%	1,495,429			26,743		7.25	%
Total consumer	40,239,775			1,525,064		15.36	%	32,221,906			1,041,034		13.09	%
Total loans	77,173,768			1,838,150		9.65	%	65,495,270			1,337,973		8.27	%
Allowance for loan losses ⁽⁴⁾	(2,216,896		)	—		—	%	(929,141		)	—		—	%
NET LOANS	74,956,872			1,838,150		9.94	%	64,566,129			1,337,973		8.39	%
TOTAL EARNING ASSETS	93,665,368			$	1,944,474	8.41	%	79,987,609			$	1,418,919	7.18	%
Other assets⁽⁵⁾	25,157,083							16,792,521
TOTAL ASSETS	$	118,822,451						$	96,780,130
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest bearing demand deposits	$	11,595,623		$	12,840	0.45	%	$	10,649,866		$	6,862	0.26	%
Savings	3,903,245			1,202		0.12	%	3,961,582			1,275		0.13	%
Money market	22,056,441			30,355		0.57	%	19,011,112			18,989		0.41	%
Certificates of deposit	8,185,116			18,996		0.94	%	7,969,678			21,821		1.11	%
TOTAL INTEREST BEARING DEPOSITS	45,740,425			63,393		0.56	%	41,592,238			48,947		0.48	%
BORROWED FUNDS:
FHLB advances	7,157,556			43,381		2.45	%	7,875,018			72,082		3.70	%
Federal funds and repurchase agreements	24,722			8		0.14	%	—			—		—	%
Other borrowings	31,925,701			172,086		2.19	%	19,556,909			113,072		2.34	%
TOTAL BORROWED FUNDS ⁽⁶⁾	39,107,979			215,475		2.23	%	27,431,927			185,154		2.73	%
TOTAL INTEREST BEARING FUNDING LIABILITIES	84,848,404			278,868		1.33	%	69,024,165			234,101		1.37	%
Noninterest bearing demand deposits	7,943,049							7,912,706
Other liabilities⁽⁷⁾	3,304,254							1,712,563
TOTAL LIABILITIES	96,095,707							78,649,434
STOCKHOLDER’S EQUITY	22,726,744							18,130,696
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	118,822,451						$	96,780,130
TAXABLE EQUIVALENT NET INTEREST INCOME				$	1,665,606						$	1,184,818
NET INTEREST SPREAD ⁽⁸⁾						7.08	%						5.81	%
NET INTEREST MARGIN ⁽⁹⁾						7.20	%						5.99	%


(1)	Average balances are based on daily averages when available. When daily averages are unavailable, mid-month averages are substituted.


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


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


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


(5)	Other assets primarily includes goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, BOLI, accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and MSRs. Refer to Note 9 to the Condensed Consolidated Financial Statements for further discussion.


(6)	Refer to Note 10 to the Condensed Consolidated Financial Statements for further discussion.


(7)	Other liabilities primarily includes accounts payable and accrued expenses, derivative liabilities, net deferred tax liabilities and the unfunded lending commitments liability.


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


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

NET INTEREST INCOME



	Three-Month Period Ended March 31,
	2015		2014
	(in thousands)
INTEREST INCOME:
Interest-earning deposits	$	1,762	$	1,995
Investments available-for-sale	77,638		61,584
Other investments	19,068		8,107
Total interest income on investment securities and interest-earning deposits	98,468		71,686
Interest on loans	1,834,559		1,334,520
Total Interest Income	1,933,027		1,406,206
INTEREST EXPENSE:
Deposits and customer accounts	63,393		48,947
Borrowings and other debt obligations	215,475		185,154
Total Interest Expense	278,868		234,101
NET INTEREST INCOME	$	1,654,159	$	1,172,105

Net interest income increased $482.1 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This was primarily due to the interest income earned on growth in the retail installment contracts and auto loan portfolio, offset by an increase in interest expense on debt obligations due to one additional month of interest expense on SCUSA's debt obligations in 2015 compared with 2014.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $26.8 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The average balance of investment securities and interest-earning deposits for the three-month period ended March 31, 2015 was $18.7 billion with an average yield of 2.28%, compared to average balances of $15.4 billion with an average yield of 2.10% for the corresponding period in 2014. Overall, the increase in interest income on investment securities was primarily attributable to the increased interest from MBS and increased dividends on Federal Home Loan Bank ("FHLB") stock.

Interest Income on Loans

Interest income on loans increased $500.0 million for the three-month period ended March 31, 2015 compared to the corresponding period in 2014. The increase in interest income on loans was primarily due to the growth of the retail installment contract, auto loan and unsecured loan portfolios resulting from new originations. Interest income on the retail installment contract and auto loan portfolios and the unsecured loans portfolio increased $436.1 million and $73.0 million, respectively, for the three-month period ended March 31, 2015 compared to the corresponding period in 2014.

The average balance of total loans was $77.2 billion with an average yield of 9.65% for the three-month period ended March 31, 2015, compared to $65.5 billion with an average yield of 8.27% for the corresponding period in 2014. The increase in the average balance of total loans was primarily due to the growth of the retail installment contract and auto loan portfolios, as well as the personal unsecured loans portfolio. The average balance of retail installment contracts and auto loans, which comprised a majority of the increase, was $23.2 billion with an average yield of 20.85% for the three-month period ended March 31, 2015, compared to $13.7 billion with an average yield of 22.36% for the corresponding period in 2014.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts increased $14.4 million for the three-month period ended March 31, 2015 compared to the corresponding period in 2014. The average balance of total interest-bearing deposits was $45.7 billion with an average cost of 0.56% for the three-month period ended March 31, 2015 compared to an average balance of $41.6 billion with an average cost of 0.48% for the corresponding period in 2014. The increase in interest expense on deposits and customer-related accounts during the three-month period ended March 31, 2015 was primarily due to the increase in the volume of deposit accounts, along with a slight increase in average interest rates.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $30.3 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The increase in interest expense on borrowed funds was due to a $11.7 billion increase in total borrowings for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. In January, the Company held a debt offering and issued $1.0 billion in senior notes, which contributed to the increase. This was offset by a decrease in the average cost of interest on borrowed funds. The average balance of total borrowings was $39.1 billion with an average cost of 2.23% for the three-month period ended March 31, 2015, compared to an average balance of $27.4 billion with an average cost of 2.73% for the corresponding period in 2014.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the portfolio. The provision for credit losses for the three-month period ended March 31, 2015 was $872.2 million, compared to $335.3 million for the corresponding period in 2014. The increase in the provision can be attributed to the continued retail installment contracts and auto loans portfolio growth in the first quarter of 2015.

The following table presents the activity in the allowance for credit losses ("ACL") for the periods indicated:



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
Allowance for loan losses, beginning of period	$	2,108,817		$	834,337
Charge-offs:
Commercial	(19,310		)	(29,590		)
Consumer⁽²⁾	(956,811		)	(147,748		)
Total charge-offs	(976,121		)	(177,338		)
Recoveries:
Commercial	5,999			5,388
Consumer	504,478			72,875
Total recoveries	510,477			78,263
Charge-offs, net of recoveries	(465,644		)	(99,075		)
Provision for loan losses ⁽¹⁾	877,184			375,330
Other⁽²⁾:
Commercial	—			—
Consumer	(27,117		)	—
Allowance for loan losses, end of period	$	2,493,240		$	1,110,592

Reserve for unfunded lending commitments, beginning of period	$	132,641		$	220,000
Provision for unfunded lending commitments ⁽¹⁾	(5,000		)	(40,000		)
Loss on unfunded lending commitments	—			—
Reserve for unfunded lending commitments, end of period	127,641			180,000
Total allowance for credit losses, end of period	$	2,620,881		$	1,290,592


(1)	The provision for credit losses in the Condensed Consolidated Statement of Operations is the sum of the total provision for loan losses and provision for unfunded lending commitments.


(2)	Unallocated charge-offs for the three-months ended March 31, 2015 and 2014 is included in Consumer.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The Company's net charge-offs increased for the three-month period ended March 31, 2015, compared to the corresponding period in 2014, primarily related to growth in the retail installment contracts and auto loan portfolios, and the corresponding net charge-offs for that portfolio. Net charge-offs in the commercial portfolio decreased for the three-month period ended March 31, 2015, compared to the corresponding period in the prior year. The ratio of net loan charge-offs to average total loans was 0.6% for the three-month period ended March 31, 2015, compared to 0.2% for the three-month period ended March 31, 2014. Commercial loan net charge-offs as a percentage of average commercial loans, including multi-family loans, decreased to less than 0.1% for the three-month period ended March 31, 2015, compared to 0.1% for the three-month period ended March 31, 2014. Consumer loan net charge-offs as a percentage of average consumer loans increased to 1.1% for the three-month period ended March 31, 2015, compared to 0.2% for the corresponding period in the prior year. The increase in consumer charge-offs is primarily due to the activity associated with the Change in Control being fully reflective for the three-month period ended March 31, 2015 compared to the three-month period ended March 31, 2014.

NON-INTEREST INCOME



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
Consumer fees	$	98,039		$	82,964
Commercial fees	42,685			42,970
Mortgage banking income, net	17,863			12,947
Equity method investments	(7,354		)	19,642
Bank-owned life insurance	12,956			14,182
Lease income	398,385			115,402
Miscellaneous income	93,266			142,666
Net gain recognized in earnings	9,557			2,430,483
Total non-interest income	$	665,397		$	2,861,256

Total non-interest income decreased $2.2 billion for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The decrease was primarily due to the one-time gain recognized in 2014 related to the Change in Control.

Consumer Fees

Consumer fees increased $15.1 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to the increase in servicing fees that are associated with the Company's growing retail installment contract and auto loan portfolio.

Commercial Fees

Commercial fees decreased $0.3 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The decrease was primarily due to lower commercial deposit fees, offset by higher fees from commercial letters of credit.

Mortgage Banking Revenue



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
Mortgage and multi-family servicing fees	$	11,233		$	10,836
Net gains on sales of residential mortgage loans and related securities	6,204			3,197
Net gains on sales of multi-family mortgage loans	4,947			10,300
Net gains/(losses) on hedging activities	8,600			(2,500		)
Net losses from changes in MSR fair value	(6,990		)	(4,459		)
MSR principal reductions	(6,131		)	(4,427		)
Total mortgage banking income, net	$	17,863		$	12,947

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Mortgage banking income consisted of fees associated with servicing loans not held by the Company, as well as originations, amortization, and changes in the fair value of MSRs and recourse reserves. Mortgage banking income also includes gains or losses on the sale of mortgage loans, home equity loans, home equity lines of credit, and MBS. Lastly, gains or losses on mortgage banking derivative and hedging transactions are also included in Mortgage banking income.

Mortgage banking revenue increased $4.9 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This change was primarily due to an increase in the gains from hedging activities and the increase in the gains on sales of residential mortgage loans. These gains were partially offset by a decline in the fair value of MSRs, a principal reduction in MSRs, and a decrease in net gains on the sale of multi-family mortgage loans.

Since mid-2013, mortgage interest rates have remained relatively stable, resulting in relative stability in mortgage banking fee fluctuations from rate changes.

The following table details certain residential mortgage rates for the Bank as of the dates indicated:



	30-Year Fixed		15-Year Fixed
March 31, 2013	3.63	%	2.99	%
June 30, 2013	4.38	%	3.50	%
September 30, 2013	4.38	%	3.38	%
December 31, 2013	4.63	%	3.50	%
March 31, 2014	4.38	%	3.50	%
June 30, 2014	4.13	%	3.38	%
September 30, 2014	4.25	%	3.50	%
December 31, 2014	3.99	%	3.25	%
March 31, 2015	3.88	%	3.13	%

Other factors, such as portfolio sales, servicing, and re-purchases have continued to affect mortgage banking revenue.

Mortgage and multifamily servicing fees increased $0.4 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. At March 31, 2015 and March 31, 2014, the Company serviced mortgage and multifamily real estate loans for the benefit of others totaling $2.7 billion and $3.2 billion, respectively.

Net gains on sales of residential mortgage loans and related securities increased $3.0 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. For the three-month period ended March 31, 2015, the Company sold $365.6 million of loans for gains of $6.2 million, compared to $192.1 million of loans sold for gains of $3.2 million for the three-month period ended March 31, 2014.

The Company periodically sells qualifying mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association and Federal National Mortgage Association ("FNMA") in return for MBS issued by those agencies. The Company records these transactions as sales when the transfers meet all of the accounting criteria for a sale. For those loans sold to the agencies for which the Company retains the servicing rights, the Company recognizes the servicing rights at fair value. These loans are also generally sold with standard representation and warranty provisions, which the Company recognizes at fair value. Any difference between the carrying value of the transferred mortgage loans and the fair value of MBS, servicing rights, and representation and warranty reserves is recognized as gain or loss on sale.

Net gains on sales of multi-family mortgage loans was decreased $5.4 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The decrease is primarily due to a $5.0 million release in the FNMA recourse reserve.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

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

At March 31, 2015 and December 31, 2014, the Company serviced $2.4 billion and $2.6 billion, respectively, of loans for FNMA. These loans had a credit loss exposure of $152.8 million as of both March 31, 2015 and December 31, 2014, respectively, and losses, if any, resulting from representation and warranty defaults would be in addition to the credit loss exposure. The servicing asset for these loans has completely amortized.

The Company has established a liability related to the fair value of the retained credit exposure for multi-family loans sold to FNMA. This liability represents the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses the portfolio is projected to incur based upon internal specific information and an industry-based default curve with a range of estimated losses. As of March 31, 2015 and December 31, 2014, the Company had a liability of $35.8 million and $40.7 million, respectively, related to the fair value of the retained credit exposure for loans sold to FNMA under this program.

Net gains/(losses) on hedging activities increased $11.1 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This gain was primarily due to our hedging strategy in the current mortgage rate environment and the increase in the mortgage loan pipeline.

Net gains/(losses) from changes in MSR fair value decreased $2.5 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The carrying value of the related MSRs at March 31, 2015 and December 31, 2014 were $135.5 million and $145.0 million, respectively. The MSR asset fair value decrease for the three-month period ended March 31, 2015 was the result of decreased interest rates.

MSR principal reductions recognized a decrease of $1.7 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014, due to an increase in prepayments and mortgage refinancing.

Equity Method Investments

The Company recognized a decrease of $27.0 million on equity method investments for the three-month period ended March 31, 2015. The decrease in equity method investment was due to the Change in Control, which resulted in accounting for SCUSA as a consolidated subsidiary beginning January 28, 2014.

Bank-Owned Life Insurance

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI decreased $1.2 million, for the three-month period ended March 31, 2015, compared to the corresponding period in 2014.

Lease income

Lease income increased $283.0 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This increase was primarily due to the continued growth of the Company's lease portfolio.

Net gain recognized in earnings

Net gains recognized in earnings decreased $2.4 billion for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The decrease was primarily due to the one-time gain that the Company recognized in connection with the Change of Control of SCUSA during the first quarter of 2014. For additional information on the Change in Control, see Note 3 to the Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Miscellaneous Income

Miscellaneous income decreased $49.4 million for the three-month period ended March 31, 2015, compared to the corresponding periods in 2014. This was primarily due to the decrease of $14.0 million in capital markets revenue in the first three months of 2015.

GENERAL AND ADMINISTRATIVE EXPENSES



	Three-Month Period Ended March 31,
	2015		2014
	(in thousands)
Compensation and benefits	$	319,852	$	318,959
Occupancy and equipment expenses	129,166		119,203
Technology expense	42,089		40,270
Outside services	48,399		35,959
Marketing expense	14,341		14,100
Loan expense	105,431		69,137
Lease expense	321,958		88,611
Other administrative expenses	68,460		52,275
Total general and administrative expenses	$	1,049,696	$	738,514

Total general and administrative expenses increased $311.2 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. Factors contributing to this increase were as follows:

Compensation and benefits expense increased $0.9 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This increase was primarily due to the Company's investment in personnel through increased salary, headcount, and bonuses.

Occupancy and equipment expenses increased $10.0 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This increase was primarily due to the increase in office occupancy costs related to increased headcount along with higher building maintenance expenses throughout the Company.

Outside services increased $12.4 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to the $16.2 million increase in consulting service fees that relates to finance-related initiatives, including preparation for meeting the requirements of the IHC Final Rules.

Loan expense increased $36.3 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This increase was primarily due to higher collection expenses associated with the growing retail installment contracts portfolio.

Lease expense increased $233.3 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. This increase was primarily due to the continued growth of the Company's lease portfolio.

Other administrative expenses increased $16.2 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The primary cause was an increase in legal fees recognized during the quarter as part of the settlement of certain open legal matters.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

OTHER EXPENSES



	Three-Month Period Ended March 31,
	2015		2014
	(in thousands)
Amortization of intangibles	$	16,806	$	13,715
Deposit insurance premiums and other expenses	15,809		14,417
Loss on debt extinguishment	—		3,635
Investment expense on affordable housing projects	49		—
Total other expenses	$	32,664	$	31,767

Total other expenses increased $0.9 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The primary factors contributing to this increase were:

Amortization of intangibles increased $3.1 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to the addition of intangible assets in the first quarter of 2014 as a result of the Change in Control.

Deposit insurance premiums increased $1.4 million for the three-month period ended March 31, 2015, compared to 2014. This was primarily due to an increase in the average asset levels, offset by lower FDIC insurance premium rates and assessments than in the corresponding period in 2014.

There were no debt repurchases during the three-month period ended March 31, 2015 compared to $3.6 million of such expense in the corresponding period in 2014.

The Company incurred an investment expense on affordable housing projects of $49.0 thousand for the three-month period ended March 31, 2015. This expense was related to low income housing tax credit investments.

LINE OF BUSINESS RESULTS

General

The Company's segments consist of Retail Banking, Auto Finance & Alliances, Real Estate and Commercial Banking, Global Banking & Markets and Large Corporate Banking ("GBM"), and SCUSA at March 31, 2015. Prior to the closing of the IPO in January 2014, the Company accounted for its investment in SCUSA under the equity method. Following the closing of the IPO, the Company consolidated the financial results of SCUSA in the Company’s financial statements, effective January 28, 2014. For additional information with respect to the Company's reporting segments, see Note 17 to the Condensed Consolidated Financial Statements.

During the first quarter of 2014, certain management and business line changes were announced as the Company reorganized its management reporting in order to improve its structure and focus to better align management teams and resources with the business goals of the Company and to provide enhanced customer service to its clients. These changes became effective for reporting purposes during the second quarter of 2014. Accordingly, the following changes were made within the Company's reportable segments:


•	The Investment Services business unit was combined with the Retail Banking business unit.


•	The commercial equipment vehicle funding ("CEVF") line, formerly included in the Specialty and Government Banking business unit, was moved into the Auto Finance and Alliances business unit and


•	The Specialty and Government Banking business unit was combined with the Real Estate and Commercial Banking business unit.

Accordingly, prior period information has been recast for comparability.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Results Summary

Retail Banking

Net interest income decreased $22.6 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The average balance of the Retail Banking segment's gross loans was $15.3 billion for the three-month period ended March 31, 2015, compared to $18.2 billion for the corresponding period in 2014. The average balance of deposits was $37.3 billion for the three-month period ended March 31, 2015, compared to $36.5 billion for the corresponding period in 2014. Total non-interest income decreased $16.9 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014, primarily due to the decrease in sales of mortgage loans and MBS. The provision for credit losses increased $10.4 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. Total expenses increased $30.4 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014, primarily due to increased consulting service fees, which was mostly related to the CCAR plan, as well as increased maintenance expenses.

Total average assets for the three-month period ended March 31, 2015 were $18.1 billion, compared to $18.8 billion for the corresponding period in 2014. This decrease was primarily driven by decreases within the mortgage loan portfolio.

Auto Finance & Alliances

Net interest income increased $0.4 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. Total average gross loans were $3.2 billion for the three-month period ended March 31, 2015, compared to $2.3 billion for the corresponding period in 2014, driven by growth in the dealer lending and CEVF business lines. Total non-interest income increased $76.1 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014, due primarily to the launch of the indirect leasing segment in 2014. The provision for credit losses increased $2.9 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. Total expenses increased $67.7 million for the three-month period ended 2015, compared to the corresponding period in 2014.

Total average assets were $5.0 billion for the three-month period ended March 31, 2015, compared to $2.3 billion for the corresponding period in 2014. Total average deposits were $115.0 million for the three-month period ended March 31, 2015, compared to $59.3 million for the corresponding period in 2014.

Real Estate and Commercial Banking

Net interest income increased $8.0 million during the three-month period ended March 31, 2015, compared to the corresponding period in 2014. Driven by growth in the special industries portfolio, the average balance of this segment's gross loans increased to $23.1 billion during the three-month period ended March 31, 2015, compared to $22.6 billion for the corresponding period in 2014. The average balance of deposits increased to $11.3 billion during the three-month period ended March 31, 2015, compared to $9.8 billion during the corresponding period in 2014. Total non-interest income decreased $4.3 million during the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The release of credit provisions was $9.8 million for the three-month period ended March 31, 2015, compared to a provision of $4.7 million for the corresponding period of 2014. Total expenses increased $7.5 million during the three-month period ended March 31, 2015, compared to the corresponding period in 2014.

Total average assets which includes the related ACL were $23.0 billion for the three-month period ended March 31, 2015, compared to $22.4 billion for the corresponding period in 2014.

100

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Global Banking & Markets and Large Corporate

Net interest income increased $7.6 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The average balance of this segment's gross loans was $8.6 billion for the three-month period ended March 31, 2015, compared to $6.9 billion for the corresponding period in 2014. The average balance of deposits was $1.5 billion for the three-month period ended March 31, 2015, compared to $1.1 billion for the corresponding period in 2014. Total non-interest income decreased $4.9 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The provision for credit losses increased $0.8 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. Total expenses increased $5.9 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014.

Total average assets were $10.6 billion for the three-month period ended March 31, 2015, compared to $8.4 billion for the corresponding period in 2014.

Other

Net interest income increased $22.9 million for the three-month period ended March 31, 2015, compared to the corresponding period of the preceding year. Total non-interest income decreased $6.0 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. The provision for credit losses was $31.0 million for the three-month period ended March 31, 2015, compared to a provision release of $16.3 million during the corresponding period in 2014. Total expenses decreased $12.1 million during the three-month period ended March 31, 2015 compared to the corresponding period in 2014.

Average assets were $29.2 billion for the three-month period ended March 31, 2015, compared to $26.5 billion for the corresponding period of the prior year.

SCUSA

From December 2011 until January 28, 2014, SCUSA was accounted for as an equity method investment. In 2014, SCUSA's results of operations were consolidated with SHUSA. SCUSA is managed as a separate business unit, with its own systems and processes, and is reported as a separate segment. For more information, see Note 3 to the Condensed Consolidated Financial Statements.

Net interest income increased $97.8 million for the three-month period ended March 31, 2015, compared to the corresponding period of the prior year. Total non-interest income increased $183.7 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. These increases in income are primarily attributable to increases in loans and total assets during the year. The provision for credit losses decreased $92.6 million for the three-month period ended March 31, 2015, compared to the corresponding period in 2014. Total expenses increased $72.7 million during the three-month period ended March 31, 2015, compared to the corresponding period in 2014.

Average assets were $32.9 billion for the three-month period ended March 31, 2015, compared to $18.3 billion for the corresponding period of the prior year.

INCOME TAX PROVISION

An income tax provision of $113.0 million was recorded for the three-month period ended March 31, 2015, compared to $1.1 billion for the corresponding period in 2014. This resulted in an effective tax rate of 31.0% for the three-month period ended March 31, 2015, compared to 35.9% for the corresponding period in 2014. The lower tax rate in 2015 was primarily due to the deferred tax expense recorded on the book gain resulting from the Change in Control recognized during the first quarter of 2014.

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

101

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's loan portfolio⁽¹⁾ consisted of the following at the dates provided:



	March 31, 2015				December 31, 2014				March 31, 2014
	Amount		Percent		Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial loans:
Commercial real estate loans	$	8,799,757	11.0	%	$	8,739,233	11.5	%	$	8,945,429	12.0	%
Commercial and industrial loans and other commercial	21,007,323		26.3	%	19,195,638		25.2	%	15,999,110		21.5	%
Multi-family	8,552,911		10.7	%	8,705,890		11.4	%	9,365,927		12.6	%
Total Commercial Loans	38,359,991		48.0	%	36,640,761		48.1	%	34,310,466		46.1	%
Consumer loans secured by real estate:
Residential mortgages	7,014,276		8.8	%	6,969,309		9.1	%	9,613,704		12.9	%
Home equity loans and lines of credit	6,171,981		7.7	%	6,206,980		8.1	%	6,206,354		8.4	%
Total consumer loans secured by real estate	13,186,257		16.5	%	13,176,289		17.2	%	15,820,058		21.3	%
Consumer loans not secured by real estate:
Retail installment contracts and auto loans	24,405,668		30.6	%	22,475,665		29.5	%	21,070,407		28.4	%
Personal unsecured loans	2,696,815		3.4	%	2,696,820		3.5	%	1,558,553		2.1	%
Other consumer	1,233,329		1.5	%	1,303,279		1.7	%	1,553,593		2.1	%
Total Consumer Loans	41,522,069		52.0	%	39,652,053		51.9	%	40,002,611		53.9	%
Total Loans	$	79,882,060	100.0	%	$	76,292,814	100.0	%	$	74,313,077	100.0	%
Total Loans with:
Fixed	$	47,485,271	59.4	%	$	45,661,781	59.9	%	$	46,724,897	62.9	%
Variable	32,396,789		40.6	%	30,631,033		40.1	%	27,588,180		37.1	%
Total Loans	$	79,882,060	100.0	%	$	76,292,814	100.0	%	$	74,313,077	100.0	%

(1) Includes LHFS

Commercial loans (excluding multi-family loans) increased approximately $1.8 billion, or 6.6%, from December 31, 2014 to March 31, 2015, and increased $4.8 billion, or 19.4%, from March 31, 2014 to March 31, 2015. The increases from December 31, 2014 and March 31, 2014 were primarily due to organic large loan originations in the commercial and industrial line of business.

Multi-family loans decreased $153.0 million, or 1.8%, from December 31, 2014 to March 31, 2015, and decreased $813.0 million, or 8.7%, from March 31, 2014 to March 31, 2015. The decreases from December 31, 2014 and March 31, 2014 were primarily due to paydowns and runoff activity during the period.

Consumer loans secured by real estate, including LHFS, increased $10.0 million, or 0.1%, from December 31, 2014 to March 31, 2015, and decreased $2.6 billion, or 16.6%, from March 31, 2014 to March 31, 2015. The primary drivers of the decrease from March 31, 2014 were residential mortgage loan securitization transactions of approximately $2.1 billion, as well as the NPL sale of approximately $484.2 million, both of which occurred in 2014.

The consumer loan portfolio not secured by real estate increased $1.9 billion, or 7.1%, from December 31, 2014 to March 31, 2015, and increased $4.2 billion, or 17.3%, from March 31, 2014 to March 31, 2015. The increases from December 31, 2014 and March 31, 2014 were primarily due to loan origination growth within the retail installment contract and auto loans portfolio.

102

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

NON-PERFORMING ASSETS

Non-performing assets decreased during the period, to $1.5 billion, or 1.2% of total assets, at March 31, 2015, compared to $1.8 billion, or 1.5% of total assets, at December 31, 2014, primarily due to a decrease in NPLs in the retail installment contract and auto loan portfolio.

Nonperforming assets consist of nonaccrual loans and leases, which represent loans and leases no longer accruing interest, other real estate owned properties, and other repossessed assets. When interest accruals are suspended, accrued interest income is reversed, with accruals charged against earnings. The Company generally places all commercial loans and consumer loans secured by real estate on nonaccrual status at 90 days past due for interest, principal or maturity, or earlier if it is determined that the collection of principal or interest on the loan is in doubt. For certain individual portfolios, including the retail installment contract portfolio, nonaccrual status may begin at 60 days past due. Personal unsecured loans, including credit cards, generally continue to accrue interest until they are 180 days delinquent, at which point they are charged-off and all interest is removed from interest income.

In general, when the borrower's ability to make required interest and principal payments has resumed and collectability is no longer believed to be in doubt, the loan or lease is returned to accrual status. Generally, commercial loans categorized as nonaccrual remain in nonaccrual status until the payment status is current and an event occurs that fully remediates the impairment or the loan demonstrates a sustained period of performance without a past due event, and there is reasonable assurance as to the collectability of all amounts due. Within the residential mortgage and home equity portfolios, the accrual status is generally systematically driven, so that if the customer makes a payment that brings the loan below 90 days past due, the loan automatically returns to accrual status.

Commercial

Commercial NPLs decreased $3.6 million from December 31, 2014 to March 31, 2015. At March 31, 2015, commercial NPLs accounted for 0.6% of total commercial loans, compared to 0.6% of total commercial loans at December 31, 2014. The decrease in commercial NPLs was primarily attributable to overall improvements in credit quality, including decreased delinquencies, troubled debt restructurings ("TDRs"), and net charge-offs.

Consumer Secured by Real Estate

The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of March 31, 2015 and December 31, 2014, respectively:



	March 31, 2015						December 31, 2014
	Residential mortgages ⁽¹⁾			Home equity loans and lines of credit			Residential mortgages⁽¹⁾			Home equity loans and lines of credit
	(dollars in thousands)

Non-performing loans	$	212,122		$	140,321		$	231,316		$	142,026
Total loans	$	7,014,276		$	6,171,981		$	6,969,309		$	6,206,980
NPLs as a percentage of total loans	3.0		%	2.3		%	3.3		%	2.3		%
NPLs in foreclosure status	44.2		%	14.3		%	38.9		%	13.7		%

(1) Includes LHFS

The NPL ratio is significantly higher for the Company's residential mortgage loan portfolio compared to its consumer loans secured by real estate portfolio due to a number of factors, including: the prolonged workout and foreclosure resolution processes for residential mortgage loans; differences in risk profiles; and mortgage loans located outside the Northeast and Mid-Atlantic United States.

Resolution challenges with low foreclosure sales continue to impact both residential mortgage and consumer loans secured by real estate portfolio NPL balances, but foreclosure inventory decreased quarter-over-quarter. The foreclosure moratorium was lifted and activity resumed in the fourth quarter of 2011, but delays in Pennsylvania, New Jersey, New York, and Massachusetts limited the decline in NPL balances and contributed to a higher NPL ratio. As of March 31, 2015, foreclosures in all states except Delaware and Washington, D.C. were moving forward. Both Delaware and Washington, D.C. are delayed due to new legal complexities surrounding documentation required to initiate new foreclosure proceedings.

103

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

A new foreclosure law was enacted in Massachusetts in August 2012, and the Massachusetts Division of Banks issued its final rules on the implementation of the new foreclosure law in June 2013. These final rules require lenders to offer loan modification terms to certain borrowers prior to proceeding with foreclosure, unless the lender is able to prove that modification would result in greater losses for the bank or that the borrower has rejected the offer. Lenders are also required to send notice to borrowers regarding their right to request a modification. Breach notices for Massachusetts foreclosures recommenced in September 2013.

The following table represents the concentration of foreclosures by state as a percentage of total foreclosures at March 31, 2015 and December 31, 2014, respectively:



	March 31, 2015	December 31, 2014

New Jersey	27.1%	29.9%
New York	18.4%	18.1%
Pennsylvania	10.5%	13.0%
Massachusetts	22.6%	11.7%
All other states	21.4%	27.3%

The foreclosure closings issue has a greater impact on the residential mortgage portfolio than the consumer real estate secured portfolio due to the larger volume of loans in first lien position in that portfolio which have equity upon which to foreclose. Exclusive of Chapter 7 bankruptcy NPL accounts, approximately 82.2% of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only 49.0% of the 90+ day delinquent loan balances in the consumer real estate secured portfolio are secured by a first lien. Consumer real estate secured NPLs may get charged off more quickly due to the lack of equity to foreclose from a second lien position.

The Alt-A segment consists of loans with limited documentation requirements and a portion of which were originated through brokers outside the Bank's geographic footprint. At March 31, 2015 and December 31, 2014, the residential mortgage portfolio included the following Alt-A loans:



	March 31, 2015			December 31, 2014
	(dollars in thousands)

Alt-A loans	$	615,375		$	637,327
Alt-A loans as a percentage of the residential mortgage portfolio	10.0		%	9.1		%
Alt-A loans designated "out-of-footprint"	$	241,276		$	250,591
Alt-A loans designated as "out-of-footprint" as a percentage of Alt-A loans	39.2		%	39.3		%
Alt-A loans in NPL status	$	62,231		$	67,668
Alt-A loans in NPL status as a percentage of residential mortgage NPLs	10.1		%	29.3		%

The performance of the Alt-A segment has remained poor, averaging a 10.1% NPL ratio for the year-to-date in 2015. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of 1.5% per month. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the first quarter of 2009, when the portfolio was placed in run-off, compared to 10.1% at March 31, 2015. As the Alt-A segment runs off and higher quality residential mortgages are added to the portfolio, the shift in product mix is expected to lower NPL balances.

Finally, the proportion of out-of-footprint loans is significantly higher in the residential mortgage portfolio than in the consumer loans secured by real estate portfolio. Historically, the NPL ratio for out-of-footprint loans has been higher compared to in-footprint lending. A total of $597.0 million, or 8.5%, of the residential mortgage loan portfolio was originated with collateral located outside the Bank’s geographic footprint as of March 31, 2015. Out-of-footprint NPL balances for the residential mortgage loan portfolio were $24.2 million, or 4.1% of out-of-footprint balances, as of March 31, 2015. The out-of-footprint NPL balance represented 11.4% of the total NPL balance of the residential mortgage loan portfolio. In comparison, the consumer loans secured by real estate portfolio has significantly less out-of-footprint loans, with a total of $40.0 million, or 0.6%, originated with collateral located outside the Bank’s geographic footprint. The out-of-footprint NPL balance represented only 4.1% of the total NPL balance for the consumer loans secured by real estate portfolio.

104

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Consumer Not Secured by Real Estate

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

NPLs in the consumer loans not secured by real estate portfolio decreased $281.9 million from December 31, 2014 to March 31, 2015. At March 31, 2015, non-performing consumer loans not secured by real estate accounted for 2.5% of total consumer loans not secured by real estate, compared to 3.7% of total consumer loans not secured by real estate at December 31, 2014. This decrease was attributable to a decline in the overall aging of the retail installment contracts and auto loans portfolio.

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



	March 31, 2015			December 31, 2014
	(dollars in thousands)
Non-accrual loans:
Commercial:
Commercial real estate	$	153,304		$	167,780
Commercial and industrial	69,527			58,794
Multi-family	9,746			9,639
Total commercial loans	232,577			236,213
Consumer:
Residential mortgages	212,122			231,316
Consumer loans secured by real estate	140,321			142,026
Consumer loans not secured by real estate	705,021			986,954
Total consumer loans	1,057,464			1,360,296

Total non-accrual loans	1,290,041			1,596,509

Other real estate owned	52,157			65,051
Repossessed vehicles	140,801			136,136
Other repossessed assets	161			11,375
Total other real estate owned and other repossessed assets	193,119			212,562
Total non-performing assets	$	1,483,160		$	1,809,071

Past due 90 days or more as to interest or principal and accruing interest	$	84,567		$	93,152
Annualized net loan charge-offs to average loans ⁽²⁾	2.4		%	2.6		%
Non-performing assets as a percentage of total assets	1.2		%	1.5		%
NPLs as a percentage of total loans	1.6		%	2.1		%
Non-performing assets as a percentage of total loans, real estate owned and repossessed assets	1.9		%	2.4		%
ACL as a percentage of total non-performing assets ⁽¹⁾	176.7		%	123.9		%
ACL as a percentage of total NPLs ⁽¹⁾	203.2		%	140.4		%


(1)	The ACL is comprised of the allowance for loan losses and the reserve for unfunded lending commitments, and is included in Other liabilities.


(2)	Annualized net loan charge-offs to average loans is calculated as annualized net loan charge-offs divided by the average loan balance for the three-month period ended March 31, 2015.

No commercial loans were 90 days or more past due and still accruing interest as of March 31, 2015. Potential problem loans are loans not currently classified as NPLs for which management has doubts about the borrowers’ ability to comply with the present repayment terms. These assets are principally loans delinquent more than 30 days but less than 90 days. Potential problem commercial loans totaled approximately $69.3 million and $71.8 million at March 31, 2015 and December 31, 2014, respectively. Potential problem consumer loans amounted to $2.7 billion and $3.4 billion at March 31, 2015 and December 31, 2014, respectively. Management has included these loans in its evaluation and reserved for them during the respective periods.

105

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

TROUBLED DEBT RESTRUCTURINGS ("TDRs")

TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of the customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal.

TDRs are generally placed in nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after demonstrating at least six consecutive months of sustained payments following modification, as long as the Company believes the principal and interest of the restructured loan will be paid in full. For the retail installment contract portfolio, loans may return to accrual status when the balance is remediated to current status. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.

The following table summarizes TDRs at the dates indicated:



	March 31, 2015		December 31, 2014
	(in thousands)
Performing
Commercial	$	171,367	$	186,789
Residential mortgage	91,839		83,597
Other consumer	2,698,846		1,847,403
Total performing	2,962,052		2,117,789
Non-performing
Commercial	64,765		74,308
Residential mortgage	66,086		70,624
Other consumer	261,405		232,307
Total non-performing	392,256		377,239
Total	$	3,354,308	$	2,495,028

Total non-performing TDRs increased $15.0 million from December 31, 2014 to March 31, 2015. This change was primarily attributable to the retail installment contracts and auto loans acquired in the Change in Control during the first quarter of 2014 which included non-prime loans.

Commercial

Performing commercial TDRs increased from 71.5% of total commercial TDRs at December 31, 2014 to 72.6% of total commercial TDRs at March 31, 2015. This improvement is attributable to improving credit quality and performance among commercial borrowers, including fewer new TDRs and a rise in cured TDRs when compared with the prior year.

Residential Mortgages

Performing residential mortgage TDRs increased from 54.2% of total residential mortgage TDRs at December 31, 2014 to 58.2% of total residential TDRs at March 31, 2015. This improvement is attributable to an increase in cured TDRs when compared with the prior year.

Other Consumer Loans

Performing other consumer loan TDRs increased from 88.8% of total other consumer loan TDRs at December 31, 2014 to 91.2% of total other consumer loan TDRs at March 31, 2015. This increase was attributable to the credit quality seen in the retail installment contracts and auto loan portfolio, many of which are considered sub-prime loans.

106

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

In accordance with our policies and guidelines, we, at times, offer payment deferrals to borrowers on our retail installment contracts, under which the consumer is allowed to move up to three delinquent payments to the end of the loan. Our policies and guidelines limit the number and frequency of deferrals that may be granted to one deferral every six months and eight months over the life of a loan. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments have been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.

At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.

We evaluate the results of our deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, we believe that payment deferrals granted according to our policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off by us. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of our allowance for loan losses are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the allowance for loan losses and related provision for loan losses. Changes in these ratios and periods are considered in determining the appropriate level of allowance for loan losses and related provision for loan losses.

If a customer’s financial difficulty is not temporary, we may agree, or be required by a bankruptcy court, to grant a modification involving one or a combination of the following: a reduction in interest rate, a reduction in the loan's principal balance, or an extension of the maturity date. The servicer also may grant concessions on our revolving personal loans in the form of principal or interest rate reductions or payment plans.

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

ALLOWANCE FOR CREDIT LOSSES

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

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



	March 31, 2015				December 31, 2014
	Amount		% of Loans to Total Loans		Amount		% of Loans to Total Loans
	(dollars in thousands)
Allocated allowance:
Commercial loans	$	408,867	48.0	%	$	396,489	48.0	%
Consumer loans	2,013,074		52.0	%	1,679,304		52.0	%
Unallocated allowance	71,299		imm.		33,024		imm.
Total allowance for loan losses	2,493,240		100.0	%	2,108,817		100.0	%
Reserve for unfunded lending commitments	127,641				132,641
Total ACL	$	2,620,881			$	2,241,458

107

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

General

The ACL increased $379.4 million from December 31, 2014 to March 31, 2015. This increase in the ACL was attributable to the continued growth in the Company's retail installment contract and auto loans and unsecured loan portfolios.

Management regularly monitors the condition of the Company's portfolio, considering factors such as historical loss experience, trends in delinquency and NPLs, changes in risk composition and underwriting standards, the experience and ability of staff, and regional and national economic conditions and trends.

The risk factors inherent in the ACL are continuously reviewed and revised by management when conditions indicate that the estimates initially applied are different from actual results. The Company also performs a comprehensive analysis of the ACL on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted quarterly.

The factors supporting the ACL do not diminish the fact that the entire ACL is available to absorb losses in the loan portfolio and related commitment portfolio. The Company’s principal focus is to ensure the adequacy of the total ACL.

The ACL is subject to review by banking regulators. The Company’s primary bank regulators regularly conduct examinations of the ACL and make assessments regarding its adequacy and the methodology employed in its determination.

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g., less than 90 days) or insignificant shortfall in the amount of payments does not necessarily result in the loan being identified as impaired. Impaired loans are defined as all TDRs plus non-accrual commercial loans in excess of $1 million. In addition, the Company may perform a specific reserve analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant. The Company performs a specific reserve analysis on certain loans in the commercial classes of financing receivables, regardless of loan size.

Commercial

For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3.0 million), the Company has specialized credit officers, a monitoring unit, and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For the commercial loan portfolios, risk ratings are assigned to each loan to differentiate risk within the portfolio, reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrower’s current risk profile and the related collateral position. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower’s risk rating on at least an annual basis, and more frequently if warranted. This reassessment process is managed by credit officers and is overseen by the Credit Monitoring group to ensure consistency and accuracy in risk ratings, as well as the appropriate frequency of risk rating reviews by the Company’s credit officers. The Company’s Credit Risk Review Committee assesses whether the Company’s Credit Risk Review Framework, risk management guidelines established by the Company’s Board and applicable laws and regulations are being followed, and reports key findings and relevant information to the Board. The Company’s Internal Audit group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded below a certain level, the Company’s Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management’s strategies for the customer relationship going forward.

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

If a loan is identified as impaired and is not collateral-dependent, impairment is measured based on a discounted cash flow methodology.

108

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

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

The portion of the allowance for loan losses related to the HFI commercial portfolio increased from $396.5 million at December 31, 2014 (1.08% of commercial loans) to $408.9 million at March 31, 2015 (1.07% of commercial loans). The primary factor resulting in the decrease of ACL coverage is a result of improved portfolio risk distribution related to portfolio credit quality (lower levels of classified and non-accruing loans). In addition, there has been a decrease in probability of default rates associated with commercial loans that has resulted in a decrease in reserve balances.

Consumer

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

For both residential mortgage and home equity loans, loss severity assumptions are incorporated in the loan loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various combined loan-to-value ("CLTV") bands in these portfolios. CLTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current CLTV. The Company's allowance for loan losses incorporates the refreshed CLTV information to update the distribution of defaulted loans by CLTV as well as the associated loss given default for each CLTV band. Reappraisals at the individual property level are not considered cost-effective or necessary on a recurring basis; however, reappraisals are performed on certain higher risk accounts to support line management activities and default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted.

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

As of March 31, 2015, the Company had $673.0 million and $5.3 billion of consumer home equity loans and lines of credit, which included $296.0 million and $3.0 billion, or 44.0% and 55.8%, in junior lien positions, respectively. Loss severity rates on these consumer home equity loans and lines of credit in junior lien positions were 57.0% and 69.4%, respectively, as of March 31, 2015.

To ensure the Company has captured losses inherent in its home equity portfolios, the Company estimates its allowance for loan losses for home equity loans and lines of credit by segmenting its portfolio into sub-segments based on the nature of the portfolio and certain risk characteristics such as product type, lien positions, and origination channels. Projected future defaulted loan balances are estimated within each portfolio sub-segment by incorporating risk parameters, including the current payment status as well as historical trends in delinquency rates. Other assumptions, including prepayment and attrition rates, are also calculated at the portfolio sub-segment level and incorporated into the estimation of the likely volume of defaulted loan balances. The projected default volume is stratified across CLTV ratio bands, and a loss severity rate for each CLTV band is applied based on the Company's historical net credit loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market, or industry conditions, or changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral.

109

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The Company considers the delinquency status of its senior liens in cases in which the Company services the lien. The Company currently services the senior lien on 24.3% of junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.0% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impacts to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown. Beginning in 2014, the Company began considering the actual delinquency status of senior liens serviced by other servicers through the use of credit bureau data.

The Company's allowance models and reserve levels are back-tested on a quarterly basis to ensure that both remain within appropriate ranges. As a result, management believes that the current allowance for loan losses is maintained at a level sufficient to absorb inherent losses in the portfolio.

Depository and lending institutions in the U.S. generally are expected to experience a significant volume of home equity lines of credit that will be approaching the end of their draw periods over the next several years, following the growth in home equity lending experienced during 2003 through 2007. As a result, many of these home equity lines of credit will either convert to amortizing loans or have principal due as balloon payments. The percentage of the Company's current home equity lines of credit that are expected to reach the end of their draw periods prior to January 1, 2019 is approximately 3.2% and not considered significant. The Company's home equity lines of credit originated prior to 2007 are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 15 years, along with amortizing repayment periods of up to 15 years. The Company's home equity lines of credit generated after 2007 are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 10 years, along with amortizing repayment periods of up to 20 years. We currently monitor delinquency rates for amortizing and non-amortizing lines, as well as other credit quality metrics including Fair Isaac Corporation credit scoring model score and LTV ratio. Our home equity lines of credit are generally underwritten considering fully drawn and fully amortizing levels. As a result, we currently do not anticipate a significant deterioration in credit quality when these home equity lines of credit begin to amortize.

For retail installment contracts and personal unsecured loans, the Company estimates the allowance for loan losses at a level considered adequate to cover probable credit losses inherent in the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company’s judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan losses.

The allowance for consumer loans was $2.0 billion and $1.7 billion at March 31, 2015 and December 31, 2014, respectively. The allowance as a percentage of HFI consumer loans was 5.0% at March 31, 2015 and 4.3% at December 31, 2014. The increase in the allowance for consumer loans is primarily attributable to continued growth in the Company's retail installment contract and auto loans and unsecured loan portfolios.

Unallocated

Additionally, the Company reserves for certain inherent, but undetected, losses that are probable within the loan portfolio. This is considered to be reasonably sufficient to absorb imprecisions of models or to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated allowance for loan and lease loss positions are considered in light of these factors. The unallocated allowance for loan losses was $71.3 million at March 31, 2015 and $33.0 million at December 31, 2014.

110

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Reserve for Unfunded Lending Commitments

In addition to the allowance for loan and lease losses, the Company estimates probable losses related to unfunded lending commitments. The reserve for unfunded lending commitments consists of two elements: (i) an allocated reserve, which is determined by an analysis of historical loss experience and risk factors, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, and (ii) an unallocated reserve to account for a level of imprecision in management's estimation process. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses, and this reserve is classified within Other liabilities on the Company's Consolidated Balance Sheet. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the allowance for loan losses.

The reserve for unfunded lending commitments decreased from $132.6 million at December 31, 2014 to $127.6 million at March 31, 2015. This decrease was due to a continued shift from off-balance sheet lending commitments, primarily to commercial customers, to loans or lines of credit included on the Company's balance sheet as financing receivables. As a result of these shifts, the net impact of the decrease in the reserve for unfunded lending commitments to the overall ACL is immaterial.

INVESTMENT SECURITIES

Investment securities consist primarily of MBS, tax-free municipal securities, corporate debt securities, asset-backed securities ("ABS") and stock in the FHLB and the FRB. MBS consist of pass-through, collateralized mortgage obligations, and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s at the date of issuance. The Company’s available-for-sale investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.

Total investment securities available-for-sale increased $2.5 billion to $18.4 billion at March 31, 2015, compared to $15.9 billion at December 31, 2014. This increase was primarily driven by activity within the MBS portfolio. MBS increased by $2.2 billion primarily due to $2.8 billion of investment purchases, offset by maturities of $0.6 billion during the first quarter of 2015. For additional information with respect to the Company’s investment securities, see Note 4 in the Notes to the Condensed Consolidated Financial Statements.

There were no trading securities held at March 31, 2015, compared to $833.9 million at December 31, 2014.

Other investments, which consists of FHLB stock and FRB stock, increased from $817.0 million at December 31, 2014 to $853.7 million at March 31, 2015 primarily due to purchases of FHLB and FRB stock, partially offset by the FHLB's repurchase of its stock.

The average life of the available-for-sale investment portfolio (excluding certain ABS) at March 31, 2015 was approximately 4.22 years, compared to 4.11 years at December 31, 2014. The average effective duration of the investment portfolio (excluding certain ABS) at March 31, 2015 was approximately 2.70 years. The actual maturities of MBS available-for-sale will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.

111

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

GOODWILL

Goodwill totaled $8.9 billion at both March 31, 2015 and December 31, 2014.

The following table shows goodwill by reporting unit at March 31, 2015:



	Retail Banking	Auto Finance & Alliances	Real Estate and Commercial Banking	GBM	SCUSA	Total
	(in thousands)
Goodwill at March 31, 2015	$1,815,729	$71,522	$1,406,048	$131,130	$5,467,582	$8,892,011

At March 31, 2015, goodwill represented 7.2% and 39.0% of total assets and total stockholder's equity, respectively, compared to 7.5% of total assets and 39.5% of total stockholder's equity at December 31, 2014.

The Company completed its annual goodwill impairment test as of October 1, 2014, and the results of the 2014 impairment test validated that the fair values exceeded the carrying values for the reporting units which had goodwill at the testing date. No impairment indicators were noted since the annual review and, accordingly, no impairment test has been performed.

The Company expects to perform its next annual goodwill impairment test at October 1, 2015.

DEFERRED TAXES AND OTHER TAX ACTIVITY

The Company's net deferred tax balance was a liability of $1.0 billion at both March 31, 2015 and December 31, 2014. The net deferred tax balance remained primarily unchanged quarter over quarter due to decrease to the net deferred tax liability from the change in cumulative temporary differences, net operating loss carryforwards and tax credits, that was offset by a decrease to the net deferred tax asset related to investment and market-related unrealized losses.

The Company has a lawsuit pending against the United States in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of the two financing transactions, the Company paid foreign taxes of $264.0 million from 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the Internal Revenue Service ("IRS") disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million. The Company has paid the taxes, penalties and interest associated with the IRS adjustments for all tax years, and the lawsuit will determine whether the Bank is entitled to a refund of the amounts paid. The Company has recorded a receivable in other assets for the amount of these payments, less a tax reserve of $125.9 million, as of March 31, 2015.

On October 17, 2013, the Court issued a written opinion in favor of the Company relating to a motion for partial summary judgment on a significant issue in the case. The Company subsequently filed a motion for summary judgment requesting the Court to conclude the case in its entirety and enter a final judgment awarding the Company a refund of all amounts paid. In response, the IRS filed a motion opposing the Company's motion, and filed a cross-motion for summary judgment requesting that the Court enter a final judgment in the IRS' favor. The Company anticipates that the Court will make a determination as to whether further proceedings are required at the District Court level to resolve any remaining legal or factual issues, which could affect the Company's entitlement to some or all of the refund. The Company expects the IRS to appeal any decision in favor of the Company. In 2013, two different federal courts decided cases involving similar financing structures entered into by the Bank of New York Mellon Corp. and BB&T Corp. (referred to as the Salem Financial Case) in favor of the IRS. Bank of New York Mellon Corp. and BB&T Corp. have filed notices of appeal in their respective cases. The Company remains confident in its position and believes its reserve amount adequately provides for potential exposure to the IRS related to these items. As this litigation progresses over the next 24 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $125.9 million to an increase of $294.0 million.

112

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

OTHER ASSETS

Other assets at March 31, 2015 were $1.9 billion, compared to $2.9 billion at December 31, 2014. The decrease in other assets was primarily due to activity in income tax receivables, and miscellaneous assets and receivables, offset by an increase in derivative assets.

Income tax receivables decreased $364.8 million primarily due to the decrease in accrued federal tax receivables.

Miscellaneous assets and receivables decreased $697.4 million primarily due to investment trades unsettled at the end of 2014 that were received by March 31, 2015. These unsettled trades were primarily related to the sale of trading securities between December 31, 2014 and March 31, 2015. These decreases were offset by an $85.2 million increase in derivative assets primarily due to an increase in capital market trading.

DEPOSITS AND OTHER CUSTOMER ACCOUNTS

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

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



	March 31, 2015				December 31, 2014
	Balance		Percent of total deposits		Balance		Percent of total deposits
	(dollars in thousands)
Interest-bearing demand deposits	$	10,715,880	19.7	%	$	10,864,395	20.7	%
Non-interest-bearing demand deposits	8,065,976		14.9	%	7,998,870		15.2	%
Savings	3,979,384		7.3	%	3,863,064		7.4	%
Customer repurchase agreements	984,897		1.8	%	988,790		1.9	%
Money market	22,185,284		40.8	%	21,447,579		40.9	%
Certificates of deposit	8,437,511		15.5	%	7,311,309		13.9	%
Total Deposits	$	54,368,932	100.0	%	$	52,474,007	100.0	%

Total deposits and other customer accounts increased $1.9 billion from December 31, 2014 to March 31, 2015. The increase in deposits was due to increases in CDs, money markets accounts, and savings accounts, offset by a decrease in other interest-bearing accounts. The increase in deposits was primarily comprised of increases in CDs of $1.1 billion, or 15.4%, and money market accounts of $737.7 million, or 3.4%, due mainly to continuing better economic conditions encouraging movement from certain interest-bearing investments to CDs and savings accounts.

Interest-bearing deposit accounts decreased $148.5 million, or 1.4%, primarily due to the shift in deposits to CDs. The Company continues to focus its efforts on repositioning its account mix and increasing lower-cost deposits. The cost of deposits increased from 0.48% for the first quarter of 2014 to 0.56% for the first quarter of 2015.

Demand deposit overdrafts that have been reclassified as loan balances were $36.5 million and $51.3 million at March 31, 2015 and December 31, 2014, respectively. Time deposits of $250,000 or more totaled $1.4 billion and $993.4 million at March 31, 2015 and December 31, 2014, respectively.

113

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

BORROWINGS AND OTHER DEBT OBLIGATIONS

The Company has term loans and lines of credit with Santander and other third-party lenders. The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. Collateralized advances are available from the FHLB if certain standards related to creditworthiness are met. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. In addition, SCUSA has warehouse lines of credit and securitizes some of its retail installment contracts, which are structured secured financings. Total borrowings and other debt obligations at March 31, 2015 were $42.8 billion, compared to $39.7 billion at December 31, 2014. Total borrowings increased $3.1 billion primarily due to $1.0 billion of new debt issued by the Bank, $2.4 billion of new public and private securitizations, and a $1.6 billion increase in SCUSA's warehouse facilities in order to support loan and lease growth during the first quarter. These increases were partially offset by scheduled principal repayment activity within the securitizations. See further detail on borrowings activity in Note 10 to the Condensed Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 7 and Note 14 to the Condensed Consolidated Financial Statements, and Liquidity and Capital Resources analysis.

BANK REGULATORY CAPITAL

Our capital priorities are to support client growth, business investment, and maintain appropriate capital in light of economic uncertainty and the Basel III framework. We continue to improve our capital levels and ratios through retention of quarterly earnings.

The Company is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At March 31, 2015 and December 31, 2014, respectively, the Bank met the well-capitalized capital ratio requirements. The Company's capital levels exceeded the ratios required for BHCs.

For a discussion of Basel III, which became effective for SHUSA and the Bank on January 1, 2015, including the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned Regulatory Matters within this MD&A.

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

Federal banking laws, regulations and policies also limit the Bank's ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank's total distributions to the holding company within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) the Bank is not adequately capitalized at the time. In addition, the OCC's prior approval would be required if the Bank's examination or Community Reinvestment Act ratings fall below certain levels or the Bank is notified by the OCC that it is a problem association or in troubled condition. In addition, the Bank must obtain the OCC's prior written approval to make any capital distribution until it has positive retained earnings. Under a written agreement with the FRB of Boston, the Company must not declare or pay, and must not permit any non-bank subsidiary that is not wholly-owned by the Company, including SCUSA, to declare or pay, any dividends, and the Company must not make, or permit any such subsidiary to make, any capital distribution, in each case without the prior written approval of the FRB of Boston.

Any dividend declared and paid or return of capital has the effect of reducing the Bank's capital ratios. The Bank did not declare and pay any return of capital to SHUSA during the three-month period ended March 31, 2015.

114

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The following schedule summarizes the actual capital balances of the Bank and SHUSA at March 31, 2015:



	BANK

	March 31, 2015		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽¹⁾
Common equity tier 1 capital ratio	13.78	%	6.50	%	4.50	%
Tier 1 capital ratio	13.78	%	8.00	%	6.00	%
Total capital ratio	15.28	%	10.00	%	8.00	%
Leverage ratio	12.73	%	5.00	%	4.00	%



	SHUSA

	March 31, 2015		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽¹⁾
Common equity tier 1 capital ratio	11.85	%	6.50	%	4.50	%
Tier 1 capital ratio	13.16	%	8.00	%	6.00	%
Total capital ratio	15.11	%	10.00	%	8.00	%
Leverage ratio	12.71	%	5.00	%	4.00	%

(1) As defined by OCC regulations.

LIQUIDITY AND CAPITAL RESOURCES

Overall

The Company continues to maintain strong liquidity positions. Liquidity represents the ability of the Company to obtain cost-effective funding to meet the needs of customers as well as the Company's financial obligations. Factors that impact the liquidity position of the Company include loan origination volumes, loan prepayment rates, the maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, the Company's credit ratings, investment portfolio cash flows, the maturity structure of the Company's wholesale funding, and other factors. These risks are monitored and managed centrally. The Bank's Asset/Liability Committee reviews and approves the liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements.

Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would: increase its borrowing costs; require it to replace funding lost due to the downgrade, which may include the loss of customer deposits; and limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the Economic and Business Environment section of this MD&A.

Sources of Liquidity

Company and Bank

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

115

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

On September 15, 2014, the Company entered into a written agreement with the FRB of Boston. Under the terms of the written agreement, the Company must serve as a source of strength to the Bank; strengthen Board oversight of planned capital distributions by the Company and its subsidiaries; and not declare or pay, and not permit any nonbank subsidiary that is not wholly-owned by the Company to declare or pay, any dividends and not make, or permit any such subsidiary to make, any capital distribution, in each case without the prior written approval of the FRB of Boston.

SCUSA

SCUSA requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. SCUSA funds its operations through its lending relationships with 14 third-party banks and Santander, as well as through securitizations in the ABS market and large flow agreements. SCUSA seeks to issue debt that appropriately matches the cash flows of the assets that it originates. SCUSA has over $3.8 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the three months ended March 31, 2015, SCUSA completed on-balance sheet funding transactions totaling over $3 billion, including:


•	a $1.25 billion securitization on its Santander Drive Auto Receivables Trust ("SDART") platform;


•	a $712 million securitization on its relaunched Drive Auto Receivables Trust ("DRIVE"), deeper subprime platform;


•	top-ups of two private amortizing facilities totaling $610 million; and


•	two private amortizing lease facilities totaling $494 million.

SCUSA also completed $1.5 billion in asset sales, including a $561 million third-party lease sale and $919 million in recurring monthly sales with its third-party flow partners, in addition to executing one of its periodic sales of charged off assets for $38 million in proceeds.

Since March 31, 2015, SCUSA has executed two additional securitizations, raising an additional $2 billion in proceeds. For additional information regarding SCUSA's debt, see Note 10 in the Notes to the Condensed Consolidated Financial Statements.

Institutional borrowings

The Company regularly projects its funding needs under various stress scenarios and maintains contingency plans consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash, unencumbered liquid assets, and capacity to borrow at the FHLB and the FRB’s discount window.

Available Liquidity

As of March 31, 2015, the Bank had approximately $24.1 billion in committed liquidity from the FHLB and the FRB. Of this amount, $11.6 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At March 31, 2015 and December 31, 2014, liquid assets (cash and cash equivalents, LHFS, and securities available-for-sale exclusive of securities pledged as collateral) totaled approximately $16.0 billion and $13.7 billion, respectively. These amounts represented 29.5% and 26.1% of total deposits at March 31, 2015 and December 31, 2014, respectively. In addition to liquid assets, the Company also has available liquidity from federal funds counterparties of $1.0 billion. Management believes that the Company has ample liquidity to fund its operations.

116

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Cash and cash equivalents



	Three-Month Period Ended March 31,
	2015			2014
	(in thousands)
Net cash provided by operating activities	$	1,777,665		$	1,068,915
Net cash (used in)/provided by investing activities	(7,142,312		)	(3,122,685		)
Net cash provided by/(used in) financing activities	5,058,928			1,312,395

Cash provided by operating activities

Net cash provided by operating activities was $1.8 billion for the three-month period ended March 31, 2015, which is comprised of net income of $0.3 billion, $0.9 billion of provision for credit losses, $0.9 billion in proceeds from sales of LHFS, and $0.8 billion in proceeds from sales of trading securities, offset by $1.2 billion of originations of LHFS, net of repayments.

Net cash provided by operating activities was $1.1 billion for the three-month period ended March 31, 2014, mainly driven by $1.2 billion in proceeds from sales of LHFS.

Cash used in investing activities

For the three-month period ended March 31, 2015, net cash used in investing activities was $7.1 billion, primarily due to $3.9 billion of purchases of investment securities available-for-sale, $4.0 billion in loan purchases and activity, and $1.5 billion in leased vehicle purchases, offset by $1.8 billion of investment sales, maturities and repayments and $0.6 billion in proceeds from sales of leased vehicles.

For the three-month period ended March 31, 2014, net cash used in investing activities was $3.1 billion, primarily due to $3.5 billion in loan purchases and activity and $0.8 billion in leased vehicle purchases, offset by $0.7 billion in proceeds from sales of loans held for investment.

Cash provided by financing activities

For the three-month period ended March 31, 2015, net cash provided by financing activities was $5.1 billion, which was primarily due to a $1.9 billion increase in deposits and an increase in net borrowing activity of $3.1 billion.

Net cash provided by financing activities for the three-month period ended March 31, 2014 was $1.3 billion, which was primarily driven by an increase in proceeds from the issuance of common stock of $1.8 billion and an increase in deposits of $0.8 billion, offset by net borrowing activity of $1.3 billion.

See the Condensed Consolidated Statement of Cash Flows ("SCF") for further details on the Company's sources and uses of cash.

Credit Facilities

Third-Party Revolving Credit Facilities

Warehouse Lines

Warehouse lines are used to fund new originations. Each line specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. Warehouse lines are generally backed by auto retail installment contracts and, in some cases, leases or personal loans. These credit lines generally have one- or two-year commitments, staggered maturities and floating interest rates. SCUSA maintains daily funding forecasts for originations, acquisitions, and other large outflows such as tax payments in order to balance the desire to minimize funding costs with its liquidity needs.

117

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

SCUSA's warehouse lines generally have net spread, delinquency, and net loss ratio limits. These limits are generally calculated based on the portfolio collateralizing the line; however, for two of the warehouse lines, delinquency and net loss ratios are calculated with respect to the serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased over-collateralization requirements or, in the case of limits calculated with respect to the specific portfolio underlying certain credit lines, result in an event of default under these agreements. If an event of default occurred under one of these agreements, the lender could elect to declare all amounts outstanding under the impacted agreement to be immediately due and payable, enforce its interests against collateral pledged under the agreement, restrict SCUSA's ability to obtain additional borrowings under the agreement, and/or remove SCUSA as servicer. SCUSA has never had a warehouse line terminated due to failure to comply with any ratio or meet any covenant. A default under one of these lines could be enforced only with respect to that line.

SCUSA maintains a credit facility with seven banks providing an aggregate commitment of $4.3 billion for the exclusive use of providing short-term liquidity needs to support Chrysler retail financing. This facility can be used for both loan and lease financing. The facility requires reduced advance rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.

Repurchase Facility

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

Total Return Swap

SCUSA also obtained financing through a total return swap under which it pledged retained subordinated bonds on its own securitizations as collateral for a financing facility that included a requirement that it settle with the counterparty at maturity an amount based on the change in the fair value of the underlying bonds during the term of the facility. This facility matured in May 2015.

Santander Credit Facilities

Santander historically has provided, and continues to provide, SCUSA's business with significant funding support in the form of committed credit facilities. Through its New York branch ("Santander NY"), Santander provides SCUSA with $4.5 billion of long-term committed revolving credit facilities.

The facilities offered through Santander NY's branch are structured as three- and five-year floating rate facilities, with current maturity dates of December 31, 2016 and 2018. Santander has the option to allow SCUSA to continue to renew the term of these facilities annually going forward, thereby maintaining the three- and five-year maturities. These facilities currently permit unsecured borrowing, but generally are collateralized by retail installment contracts as well as securitization note payables and residuals owned by SCUSA. Any secured balances outstanding under the facilities at the time of their maturity will amortize to match the maturities and expected cash flows of the corresponding collateral.

There was an average outstanding balance of $3.8 billion under the facilities offered through Santander NY's branch during the three-month period ended March 31, 2015. The maximum outstanding balance during this period was $4.1 billion.

Santander also serves as the counterparty for many of SCUSA's derivative financial instruments.

118

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Secured Structured Financings

SCUSA's secured structured financings primarily consist of public, SEC-registered securitizations. SCUSA also executes private securitizations under Rule 144A of the Securities Act and privately issues amortizing notes.

SCUSA obtains long-term funding for its receivables through securitizations in the ABS market. The ABS market provides an attractive source of funding due to its cost efficiency, a large and deep investor base, and terms that appropriately match the cash flows of the debt to the cash flows of the underlying assets. The term structure of a securitization generally locks in fixed-rate funding for the life of the underlying fixed-rate assets, and the matching amortization of the assets and liabilities provides committed funding for the collateralized loans throughout their terms. In certain cases, SCUSA may choose to issue floating rate securities based on the market conditions; in such cases, SCUSA generally executes hedging arrangements outside of the Trust to lock in its cost of funds. Because of prevailing market rates, SCUSA did not issue ABS in 2008 or 2009, but began issuing ABS again in 2010. SCUSA has been the largest issuer of retail auto ABS in the U.S. since 2011. SCUSA has issued a total of over $40 billion in retail auto ABS since 2010.

SCUSA executes each securitization transaction by selling receivables to the Trusts that issue ABS to investors. To attain specified credit ratings for each class of bonds, these transactions have credit enhancement requirements in the form of subordination, restricted cash accounts, excess cash flow, and over-collateralization, which result in more receivables being transferred to the Trusts than the amount of ABS they issue.

Excess cash flows result from the difference between the finance and interest income received from the obligors on the receivables and the interest paid to the ABS investors, net of credit losses and expenses. Initially, excess cash flows generated by the Trusts are used to pay down outstanding debt of the securitization trusts (the "Trusts"), increasing over-collateralization until the targeted level of assets has been reached. Once the targeted level of over-collateralization is reached and maintained, excess cash flows generated by the Trusts are released to SCUSA as distributions. SCUSA also receives monthly servicing fees as servicer for the Trusts. SCUSA's securitizations each require an increase in credit enhancement levels if cumulative net losses, as defined in the documents underlying each ABS transaction, exceed a specified percentage of the pool balance. None of SCUSA's securitizations has a cumulative net loss percentage above its limit.

SCUSA's on-balance sheet securitization transactions utilize bankruptcy-remote special purpose entities ("SPEs"), which are also variable interest entities ("VIEs"), that meet the requirements to be consolidated in our financial statements. Following a securitization, the finance receivables and notes payable related to the securitized retail installment contracts remain on our Condensed Consolidated Balance Sheet. We recognize finance and interest income as well as fee income on the collateralized retail installment contracts and interest expense on the ABS issued. We also record a provision for credit losses to cover inherent credit losses on the retail installment contracts. While these Trusts are included in our Condensed Consolidated Financial Statements, they are separate legal entities. The finance receivables and other assets sold to the Trusts are owned by them, are available only to satisfy the notes payable related to the securitized retail installment contracts, and are not available to SCUSA's or those of our creditors or our other subsidiaries.

SCUSA has completed four securitizations year-to-date in 2015. SCUSA currently has 31 securitizations outstanding in the market with a cumulative ABS balance of approximately $17 billion. Its securitizations generally have several classes of notes, with principal paid sequentially based on seniority and any excess spread distributed to the residual holder. SCUSA generally retains the lowest bond class and the residual interest in each securitization, and uses the proceeds from the securitization to repay borrowings outstanding under its credit facilities, originate and acquire new loans and leases, and for general corporate purposes. SCUSA generally exercises clean-up call options on its securitizations when the collateralization pool balance reaches 10% of its original balance.

SCUSA periodically issues amortizing notes in private placements that are structured similarly to its public securitizations and securitizations which are issued under Rule 144A of the Securities Act to banks and conduits. SCUSA's securitizations and private issuances are collateralized by vehicle retail installment contracts, loans and vehicle leases.

119

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Flow Agreements

In addition to its credit facilities and secured structured financings, at March 31, 2015 SCUSA had flow agreements in place with Bank of America and Citizens Bank of Pennsylvania ("CBP") for Chrysler Capital retail installment contracts, with another third party for charged off assets, and with the Bank for Chrysler Capital consumer vehicle leases and dealer loans.

SCUSA enters into flow agreements under which assets are sold on a periodic basis to provide funding for new originations. These assets are not on SCUSA's balance sheet, but may provide a gain or loss on sale and a stable stream of servicing fee income.

SCUSA has a flow agreement with Bank of America under which SCUSA is committed to sell up to $300.0 million of eligible Chrysler Capital loans to that bank each month through May 2018. For loans sold, SCUSA retains the servicing rights and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale.

SCUSA also has sold Chrysler Capital loans to CBP under terms of a flow agreement and predecessor sale agreements. SCUSA retains servicing on the sold loans and will owe CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis.

Off-Balance Sheet Financing

SCUSA periodically executes Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Because all of the notes and residual interests in these securitizations are issued to third parties, SCUSA records these transactions as true sales of the retail installment contracts securitized, and removes the sold assets from its condensed consolidated balance sheets. SCUSA did not execute any such transactions during the three-month period ended March 31, 2015. In April 2015, SCUSA executed its first off-balance sheet securitization of 2015, selling $769 million of gross retail installment contracts.

On March 31, 2015, SCUSA executed its first bulk sale of leases to a third party. Due to accelerated depreciation permitted for tax purposes, this sale generated a large taxable gain that SCUSA has deferred through a qualified like-kind exchange program. In order to qualify for this deferral, SCUSA is required to maintain the sale proceeds in escrow until reinvested in new lease originations. Because the sale proceeds were also needed to pay down the third-party credit facilities under which it had financed the leases prior to their sale, SCUSA increased its borrowings on its related party credit facilities until the sale proceeds are fully reinvested over the 180 days following the sale.

Uses of Liquidity

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

Dividends and Stock Issuances

In February 2014, the Company issued 7.0 million shares of common stock to Santander in exchange for cash in the amount of $1.75 billion. Also in February 2014, the Company raised $750.0 million of capital by issuing 3.0 million shares of common stock to Santander in exchange for canceling debt of an equivalent amount.

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

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

At March 31, 2015, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.

There were no dividends declared or paid during the three-month period ended March 31, 2015. As of March 31, 2015, the Company had 530,391,043 shares of common stock outstanding.

120

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

CONTRACTUAL OBLIGATIONS

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



	Payments Due by Period
	Total		Less than 1 year		Over 1 yr to 3 yrs		Over 3 yrs to 5 yrs		Over 5 yrs
	(in thousands)
FHLB advances ⁽¹⁾	$	9,187,526	$	5,082,631	$	3,797,512	$	307,383	$	—
Notes payable - revolving facilities	11,411,944		1,729,974		7,856,970		1,825,000		—
Notes payable - secured structured financings	17,941,257		340,809		4,498,773		7,346,648		5,755,027
Other debt obligations ^{(1) (2)}	5,355,024		1,197,607		2,421,416		1,495,601		240,400
Junior subordinated debentures due to capital trust entities ^{(1) (2)}	245,215		161,780		83,435		—		—
Certificates of deposit ⁽¹⁾	8,506,579		6,903,616		1,564,318		38,645		—
Non-qualified pension and post-retirement benefits	69,921		6,741		13,542		13,928		35,710
Operating leases⁽³⁾	696,304		114,023		198,278		142,510		241,493
Total contractual cash obligations	$	53,413,770	$	15,537,181	$	20,434,244	$	11,169,715	$	6,272,630


(1)	Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at March 31, 2015. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.


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


(3)	Does not include future expected sublease income.

Excluded from the above table are deposits of $45.9 billion that are due on demand by customers. Additionally, $142.5 million of tax liabilities associated with unrecognized tax benefits have been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with those obligations.

The Company is a party to financial instruments and other arrangements with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. See further discussion on these risks in Note 11 and Note 15 to the Condensed Consolidated Financial Statements.

ASSET AND LIABILITY MANAGEMENT

Interest Rate Risk

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

121

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month London Interbank Offered Rate. Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income simulations, shocks to those net interest income simulations, and scenario and market value analyses and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions on new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.

Further information on risk factors can be found under Part II, Item 1A Risk Factors, in this Quarterly Report on Form 10-Q for the quarter-ended March 31, 2015.

Net Interest Income Simulation Analysis

The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.

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



If interest rates changed in parallel by the amounts below at March 31, 2015	The following estimated percentage increase/(decrease) to net interest income would result
Down 100 basis points	(1.95	)%
Up 100 basis points	1.15	%
Up 200 basis points	2.19	%

Market Value of Equity ("MVE") Analysis

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

Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at March 31, 2015 and December 31, 2014.



	The following estimated percentage increase/(decrease) to MVE would result
If interest rates changed in parallel by	March 31, 2015		December 31, 2014
Down 100 basis points	(3.08	)%	(2.28	)%
Up 100 basis points	(0.28	)%	(0.40	)%
Up 200 basis points	(1.58	)%	(1.74	)%

122

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Limitations of Interest Rate Risk Analyses

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

Uses of Derivatives to Manage Interest Rate and Other Risks

To mitigate interest rate risk and, to a lesser extent, foreign exchange, equity and credit risks, the Company uses derivative financial instruments to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows.

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

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

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

The Company's derivative portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.

The Company typically retains the servicing rights related to residential mortgage loans that are sold. Residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 9 to the Condensed Consolidated Financial Statements.

The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.

We also utilize forward contracts to manage market risk associated with certain expected investment securities sales and equity options, which manage our market risk associated with certain customer deposit products.

For additional information on foreign exchange contracts, derivatives and hedging activities, see Note 11 to the Condensed Consolidated Financial Statements.

123



Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Incorporated by reference from Part I, Item 2, MD&A — Asset and Liability Management above.



Item 4.	Controls and Procedures

Evaluation of Disclosure Controls

We carried out an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation and as reported in our September 30, 2014 Form 10-Q and 10-Q/A filings made in respect of the third quarter of 2014, we concluded that we did not have adequate controls designed and in place over the preparation and review of the Consolidated Condensed SCF and financial statement disclosures in Note 5, whereby errors were made during 2014 that were not identified in a timely manner. As a result of this material weakness, other errors were made during the quarters ended March 31, June 30, and September 30, 2014 related to the SCF for those periods which were not identified in a timely manner. These additional errors were identified and corrected in connection with the preparation of the 2014 our Form 10-K for 2014.

While the errors were concluded to not be material, the control deficiencies could result in a material misstatement of the SCF and Notes to the Consolidated Financial Statements that might not be prevented or detected. Accordingly, management has concluded that the control deficiencies constitute a material weakness.

Status of Remediation of the Material Weakness in Internal Control Over Financial Reporting

We are currently working to remediate the material weakness described above. We have reviewed the design of our current process to prepare and review the SCF and Notes to the Consolidated Financial Statements, and we are currently implementing additional measures to remediate the underlying causes that gave rise to the material weakness, primarily through additional reviews at a detailed level, the implementation of improved processes, and enhancements to documented controls.

We believe these measures will remediate the control deficiencies identified above and will strengthen our internal control over financial reporting for the preparation and review of the SCF and Notes to the Consolidated Financial Statements. We currently are targeting to complete the implementation of the control enhancements during 2015. We will test the ongoing operating effectiveness of the new controls subsequent to implementation, and consider the material weakness remediated after the applicable remedial controls operate effectively for a sufficient period of time.

Changes in Internal Control over Financial Reporting

Other than as described above, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

124

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION



Item 1	— Legal Proceedings

Reference should be made to Note 12 to the Condensed Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service and Note 14 to the Condensed Consolidated Financial Statements for SHUSA’s litigation disclosure, which are incorporated herein by reference.



Item 1A	— Risk Factors

The Company is subject to a number of risks potentially impacting its business, financial condition, results of operations and cash flows. There have been no material changes from the risk factors set forth under Part I, Item IA, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.



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

Not applicable.



Item 3	— Defaults upon Senior Securities

None.



Item 4	— Mine Safety Disclosures

None.



Item 5	— Other Information

None.

125



Item 6	— Exhibits



(2.1	)	Transaction Agreement, dated as of October 13, 2008, between Santander Holdings USA, Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 2.1 to SHUSA's Current Report on Form 8-K filed October 16, 2008) (Commission File Number 333-172807)

(3.1	)	Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 30, 2009) (Commission File Number 333-172807)

(3.2	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.'s Current Report on Form 8-K filed March 27, 2009) (Commission File Number 333-172807)

(3.3	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed February 5, 2010) (Commission File Number 333-172807)

(3.4	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.2 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed June 21, 2011) (Commission File Number 333-172807)

(3.5	)	Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 30, 2012) (Commission File Number 333-172807)

(4.1	)	Santander Holdings USA, Inc. has certain debt obligations outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of Santander Holdings USA, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Quarterly Report on Form 10-Q. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request.

(10.1	)	Underwriting Agreement dated January 22, 2014 among Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters listed therein, SCUSA, SCUSA Illinois, Santander Holdings USA, Inc and the other Selling Stockholders listed in Schedule II thereto (Incorporated by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed January 28, 2014 (Commission File Number 001-16581)

(10.2	)	Shareholders Agreement dated January 28, 2014 among the Company, SCUSA, Sponsor Holdings, DDFS, Thomas G. Dundon and Banco Santander, S.A. (Incorporated by reference to Exhibit 1.2 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 28, 2014 (Commission File Number 001-16581)

(31.1	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

(31.3	)	Comptroller certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

(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 (Filed herewith)

(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 (Filed herewith)

(32.3	)	Comptroller certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

(101	)	Interactive Data File (XBRL). (Filed herewith)

126

SIGNATURES

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



		SANTANDER HOLDINGS USA, INC. (Registrant)
Date:	May 13, 2015	/s/ Scott E. Powell
		Scott E. Powell
		President and Chief Executive Officer (Authorized Officer)


Date:	May 13, 2015	/s/ Gerald P. Plush
		Gerald P. Plush
		Chief Financial Officer and Senior Executive Vice President


Date:	May 13, 2015	/s/ Guillermo Sabater
		Guillermo Sabater
		Comptroller and Senior Executive Vice President

127