Santander Holdings USA, Inc. - Quarter Report: 2016 September (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 September 30, 2016



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 o. No þ.

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

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 October 31, 2016
Common Stock (no par value)		530,391,043 shares

Table of Contents

INDEX



	Page

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015	4

Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2016 and 2015	5

Condensed Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 30, 2016 and 2015	6

Condensed Consolidated Statements of Stockholder's Equity for the nine-month periods ended September 30, 2016 and 2015	7

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2016 and 2015	8

Notes to Condensed Consolidated Financial Statements	9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	90

Item 3. Quantitative and Qualitative Disclosures About Market Risk	142

Item 4. Controls and Procedures	142

PART II. OTHER INFORMATION	148

Item 1. Legal Proceedings	148

Item 1A. Risk Factors	148

Item 2. Unregistered Sales of Equity Securities and use of Proceeds	149

Item 3. Defaults upon Senior Disclosures	149

Item 4. Mine Safety Disclosures	149

Item 5. Other Information	149

Item 6. Exhibits	150

SIGNATURES	151


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

Table of Contents

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, many of which are beyond the Company's control. 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;


•	continued residual effects of recessionary conditions and the uneven spread of positive impacts of recovery on the U.S. economy and SHUSA's counterparties, including adverse impacts on levels of unemployment, loan utilization rates, delinquencies, defaults and counterparties' ability to meet credit and other obligations;


•	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 the 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 grow revenue, manage expenses, attract and retain highly-skilled people and raise capital necessary to achieve its business goals and comply with regulatory requirements and expectations;


•	SHUSA’s ability to timely develop competitive new products and services in a changing environment that are responsive to the needs of SHUSA's customers and are profitable to SHUSA, the acceptance of such products and services by customers, and the potential for new products and services to impose additional costs on SHUSA and expose SHUSA to increased operational risk;


•	changes or potential changes to the competitive environment, including changes due to regulatory and technological changes, the effects of industry consolidation and perceptions of SHUSA as a suitable service provider or counterparty;


•	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;


•	SHUSA's ability to control operational risks, data security breach risks and outsourcing risks, and the possibility of errors in quantitative models SHUSA uses to manage its business and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;

•

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, 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 that have affected and will affect SHUSA’s revenue and earnings negatively;


•	SHUSA's ability to promote a strong culture of risk management, operating controls, compliance oversight and governance that meets regulatory expectations;


•	competitors of SHUSA that may have greater financial resources or lower costs, may innovate more effectively, 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 or recover fewer overpayments compared to what has been accrued or paid as of period-end;


•	adverse publicity, whether specific to SHUSA or regarding other industry participants or industry-wide factors, or other reputational harm; and


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

Table of Contents

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.



2015 Amendment: OCC consent order signed by Santander Bank, National Association ("SBNA") on June 16, 2015 which amended prior orders signed by SBNA and the Office of the Comptroller of the Currency on April 13, 2011 and January 7, 2013		CRA: Community Reinvestment Act
ABS: Asset-backed securities		DCF: Discounted cash flow
ACL: Allowance for credit losses		DDFS: Dundon DFS LLC
ALLL: Allowance for loan and lease losses		Deka Lawsuit: purported securities class action lawsuit filed against SC on August 26, 2014
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation		DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
AOD: Assurance of Discontinuance		DOJ: Department of Justice
APR: Annual percentage rate		DOJ Order: Consent order signed by SC with the DOJ on February 25, 2015 that resolved claims related to certain of SC's repossession and collection activities
ASC: Accounting Standards Codification		DTI: Debt-to-income
ASU: Accounting Standards Update		ECOA: Equal Credit Opportunity Act
ATM: Automated teller machine		EPS: Enhanced Prudential Standards
Bank: Santander Bank, National Association		ETR: Effective tax rate
BB&T: BB&T Corp.		Exchange Act: Securities Exchange Act of 1934, as amended
BHC: Bank holding company		FASB: Financial Accounting Standards Board
BNY Mellon: Bank of New York Mellon		FBO: Foreign banking organization
BOLI: Bank-owned life insurance		FCA: Fiat Chrysler Automobiles US LLC
BSI: Banco Santander International		FDIC: Federal Deposit Insurance Corporation
CBP: Citizens Bank of Pennsylvania		Federal Reserve: Board of Governors of the Federal Reserve System
CCAR: Comprehensive Capital Analysis and Review		FHLB: Federal Home Loan Bank
CD: Certificate(s) of deposit		FHLMC: Federal Home Loan Mortgage Corporation
CEVF: Commercial equipment vehicle financing		FICO^®: Fair Isaac Corporation credit scoring model
CET1: Common equity tier 1		Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CFPB: Consumer Financial Protection Bureau		FNMA: Federal National Mortgage Association
Change in Control: First quarter 2014 change in control and consolidation of SC		FRB: Federal Reserve Bank
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC		FTP: funds transfer pricing
Chrysler Capital: trade name used in providing services under the Chrysler Agreement		FVO: Fair value option
CLTV: Combined loan-to-value		GAAP: Accounting principles generally accepted in the United States of America
CMO: Collateralized mortgage obligation		GAP: Guaranteed auto protection
CMP: Civil Monetary Penalty		GCB: Global Corporate Banking
CODM: Chief Operating Decision Maker		HQLA: High-quality liquid assets
Company: Santander Holdings USA, Inc.		IHC: U.S. intermediate holding company
Consent Order: Consent order signed by the Bank with the CFPB on July 14, 2016 regarding the Bank’s overdraft coverage practices for ATM and one-time debit card transactions		IPO: Initial public offering
Covered Fund: hedge fund or a private equity fund under the Volcker Rule		IRS: Internal Revenue Service
CPR: Changes in anticipated loan prepayment rates		ISDA: International Swaps and Derivatives Association, Inc.

Table of Contents




IT: Information technology		RSUs: Restricted stock units
Lending Club: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquired loans under flow agreements		RV: Recreational vehicle
LCR: Liquidity coverage ratio		RWA: Risk-weighted assets
LHFI: Loans held-for-investment		S&P: Standard & Poor's
LHFS: Loans held-for-sale		Santander: Banco Santander, S.A.
LIBOR: London Interbank Offered Rate		Santander NY: New York branch of Banco Santander, S.A.
LTD: Long-term debt		Santander UK: Santander UK plc
LTV: Loan-to-value		SBNA: Santander Bank, National Association
MBS: Mortgage-backed securities		SC: Santander Consumer USA Holdings Inc. and its subsidiaries
Massachusetts AG: Massachusetts Attorney General		SC Common Stock: Common shares of SC
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations		SCF: Statement of Cash Flows
MSR: Mortgage servicing right		SCI: Santander Consumer International PR, LLC
MVE: Market value of equity		SDART: Santander Drive Auto Receivables Trust, a SC securitization platform
NCI: Non-controlling interest		SDGT: Specially Designated Global Terrorist
NMD: Non-maturity deposits		SEC: Securities and Exchange Commission
NPL: Non-performing loans		Securities Act: Securities Act of 1933, as amended
NSFR: Net stable funding ratio		Separation Agreement: Agreement entered into by Thomas Dundon, the former Chief Executive Officer of SC, DDFS, SC and Santander on July 2, 2015
OCC: Office of the Comptroller of the Currency		SHUSA: Santander Holdings USA, Inc.
OEM: Original equipment manufacturer		SIS: Santander Investment Securities Inc.
OIS: Overnight indexed swap		SPE: Special purpose entity
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		Sponsor Holdings: Sponsor Auto Finance Holding Series LP
OREO: Other real estate owned		SSLLC: Santander Securities, LLC
OTTI: Other-than-temporary impairment		TDR: Troubled debt restructuring
Parent Company: the parent holding company of Santander Bank, National Association and other consolidated subsidiaries		TLAC: Total loss absorbing capacity
REIT: Real estate investment trust		Trusts: Securitization trusts
RIC: Retail installment contracts		VIE: Variable interest entity

Table of Contents

PART 1- FINANCIAL INFORMATION



Item 1.	Condensed Consolidated Financial Statements

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	September 30, 2016			December 31, 2015
	(in thousands)
ASSETS
Cash and cash equivalents	$	11,829,746		$	9,447,003
Investment securities:
Available-for-sale at fair value	16,637,851			21,741,172
Trading securities	5,959			248
Other investments	747,847			1,027,363
Loans held-for-investment ^{(1) (5)}	86,894,339			87,025,786
Allowance for loan and lease losses ⁽⁵⁾	(3,814,282		)	(3,246,145		)
Net loans held-for-investment	83,080,057			83,779,641
Loans held-for-sale ⁽²⁾	3,009,587			3,190,067
Premises and equipment, net ⁽³⁾	985,371			1,026,800
Leased vehicles, net ⁽⁵⁾⁽⁶⁾	9,760,119			8,377,835
Accrued interest receivable ⁽⁵⁾	574,736			635,331
Equity method investments	257,913			266,569
Goodwill	4,454,925			4,454,925
Intangible assets, net	614,419			667,276
Bank-owned life insurance	1,753,164			1,727,267
Restricted cash ⁽⁵⁾	3,256,902			2,630,508
Other assets ^{(4) (5)}	2,262,291			2,134,827
TOTAL ASSETS	$	139,230,887		$	141,106,832
LIABILITIES
Accrued expenses and payables	$	2,838,589		$	2,779,077
Deposits and other customer accounts	67,704,125			65,583,430
Borrowings and other debt obligations ⁽⁵⁾	44,604,370			49,828,582
Advance payments by borrowers for taxes and insurance	196,408			171,137
Deferred tax liabilities, net	567,739			230,578
Other liabilities ⁽⁵⁾	856,404			666,928
TOTAL LIABILITIES	116,767,635			119,259,732
STOCKHOLDER'S EQUITY
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 and 10,500,000 shares authorized, 8,000 and 3,008,000 shares outstanding at September 30, 2016 and December 31, 2015, respectively)	195,445			270,445
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both September 30, 2016 and December 31, 2015)	16,601,196			16,629,822
Accumulated other comprehensive loss	(54,535		)	(170,530		)
Retained earnings	3,014,239			2,672,393
TOTAL SHUSA STOCKHOLDER'S EQUITY	19,756,345			19,402,130
Noncontrolling interest	2,706,907			2,444,970
TOTAL STOCKHOLDER'S EQUITY	22,463,252			21,847,100
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	139,230,887		$	141,106,832

(1) Loans held-for-investment ("LHFI") includes $217.5 million and $328.7 million of loans recorded at fair value at September 30, 2016 and December 31, 2015, respectively.

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

(3) Net of accumulated depreciation of $1.2 billion and $970.8 million at September 30, 2016 and December 31, 2015, respectively.

(4) Includes mortgage servicing rights ("MSRs") of $129.9 million and $151.5 million at September 30, 2016 and December 31, 2015, respectively, for which the Company has elected the FVO. See Note 8 to these Condensed Consolidated Financial Statements for additional information.

(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 6 to these Condensed Consolidated Financial Statements for additional information.

(6) Net of accumulated depreciation of $2.6 billion and $1.9 billion at September 30, 2016 and December 31, 2015, respectively.

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2016			2015			2016			2015

	(in thousands)
INTEREST INCOME:
Loans	$	1,889,077		$	1,918,248		$	5,755,173		$	5,821,900
Interest-earning deposits	13,400			5,733			41,890			14,894
Investment securities:
Available-for-sale	60,844			85,707			235,851			241,150
Other investments	7,641			10,826			25,224			40,090
TOTAL INTEREST INCOME	1,970,962			2,020,514			6,058,138			6,118,034
INTEREST EXPENSE:
Deposits and other customer accounts	64,288			72,929			213,135			215,678
Borrowings and other debt obligations	285,544			235,085			863,186			684,327
TOTAL INTEREST EXPENSE	349,832			308,014			1,076,321			900,005
NET INTEREST INCOME	1,621,130			1,712,500			4,981,817			5,218,029
Provision for credit losses	687,912			954,070			2,200,154			3,004,723
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	933,218			758,430			2,781,663			2,213,306
NON-INTEREST INCOME:
Consumer fees	120,956			114,021			381,943			305,460
Commercial fees	50,728			53,694			153,640			160,448
Mortgage banking income, net	22,537			32,061			50,005			87,177
Equity method investments gain/(loss), net	421			1,624			(4,719		)	(5,543		)
Bank-owned life insurance	14,150			15,590			44,315			44,430
Lease income	483,929			364,634			1,365,519			1,017,711
Miscellaneous income	35,637			229,658			94,842			674,969
TOTAL FEES AND OTHER INCOME	728,358			811,282			2,085,545			2,284,652
Other-than-temporary impairment recognized in earnings	—			—			(44		)	(1,092		)
Net (loss)/gain on sale of investment securities	(364		)	(2,309		)	58,595			16,990
Net (loss)/gain recognized in earnings	(364		)	(2,309		)	58,551			15,898
TOTAL NON-INTEREST INCOME	727,994			808,973			2,144,096			2,300,550
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits	426,162			402,635			1,282,094			1,169,459
Occupancy and equipment expenses	156,611			140,116			453,687			433,780
Technology expense	56,449			55,144			183,039			163,205
Outside services	57,742			89,658			207,472			211,826
Marketing expense	35,944			26,308			77,986			61,559
Loan expense	101,101			89,907			307,992			285,660
Lease expense	338,077			261,668			953,142			755,945
Other administrative expenses	109,189			109,027			310,078			310,115
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES	1,281,275			1,174,463			3,775,490			3,391,549
OTHER EXPENSES:
Amortization of intangibles	17,174			19,245			52,860			59,144
Deposit insurance premiums and other expenses	17,950			14,917			56,966			46,446
Loss on debt extinguishment	10,228			—			88,672			—
Investment expense on qualified affordable housing projects	619			35			1,041			119
Impairment of capitalized software	—			—			19			—
TOTAL OTHER EXPENSES	45,971			34,197			199,558			105,709
INCOME BEFORE INCOME TAX PROVISION	333,966			358,743			950,711			1,016,598
Income tax provision	108,320			217,753			339,968			416,387
NET INCOME INCLUDING NONCONTROLLING INTEREST	225,646			140,990			610,743			600,211
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	77,672			75,383			257,419			221,980
NET INCOME ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC.	$	147,974		$	65,607		$	353,324		$	378,231

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2016			2015			2016			2015
	(in thousands)
NET INCOME INCLUDING NONCONTROLLING INTEREST	$	225,646		$	140,990		$	610,743		$	600,211
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments, net of tax ⁽¹⁾	53,828			(27,713		)	6,528			(35,614		)
Net unrealized (losses)/gains on available-for-sale investment securities, net of tax	(66,418		)	84,058			112,786			61,623
Pension and post-retirement actuarial (losses)gains, net of tax	(4,449		)	621			(3,319		)	1,672
TOTAL OTHER COMPREHENSIVE (LOSS)/INCOME, NET OF TAX	(17,039		)	56,966			115,995			27,681
COMPREHENSIVE INCOME	208,607			197,956			726,738			627,892
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	77,672			75,383			257,419			221,980
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA	$	130,935		$	122,573		$	469,319		$	405,912

(1) Excludes $9.9 million and $(11.8) million of other comprehensive income/(loss) attributable to NCI for the three-month and nine-month periods ended September 30, 2016, respectively. There was no material other comprehensive income attributable to NCI for the three-month and nine-month periods ended September 30, 2015.

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

(in thousands)



	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	$	270,445	$	16,629,881		$	(128,267	)	$	4,095,256		$	4,052,395	$	24,919,710
Comprehensive income attributable to Santander Holdings USA, Inc.	—	—		—			27,681			378,231			—		405,912
Net income attributable to noncontrolling interest	—	—		—			—			—			221,980		221,980
Impact of Santander Consumer USA Holdings Inc. stock option activity	—	—		(2,004		)	—			—			70,028		68,024
Issuance of common stock	—			(16		)	—			16			—		—
Stock issued in connection with employee benefit and incentive compensation plans	—	—		1,901			—			—			—		1,901
Dividends paid on preferred stock	—	—		—			—			(15,872		)	—		(15,872		)
Balance, September 30, 2015	530,391	$	270,445	$	16,629,762		$	(100,586	)	$	4,457,631		$	4,344,403	$	25,601,655



	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, January 1, 2016	530,391	$	270,445		$	16,629,822		$	(170,530	)	$	2,672,393		$	2,444,970		$	21,847,100
Comprehensive income attributable to Santander Holdings USA, Inc.	—	—			—			115,995			353,324			—			469,319
Other comprehensive loss attributable to noncontrolling interest	—	—			—			—			—			(11,790		)	(11,790		)
Net income attributable to noncontrolling interest	—	—			—			—			—			257,419			257,419
Impact of Santander Consumer USA Holdings Inc. stock option activity	—	—			69			—			—			16,308			16,377
Redemption of Preferred Stock	—	(75,000		)	—			—			—			—			(75,000		)
Capital Distribution to Shareholder	—	—			(29,090		)	—			—			—			(29,090		)
Stock issued in connection with employee benefit and incentive compensation plans	—	—			395			—			—			—			395
Dividends paid on preferred stock	—	—			—			—			(11,478		)	—			(11,478		)
Balance, September 30, 2016	530,391	$	195,445		$	16,601,196		$	(54,535	)	$	3,014,239		$	2,706,907		$	22,463,252

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine-Month Period Ended September 30,
	2016			2015

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interest	$	610,743		$	600,211
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	2,200,154			3,004,723
Deferred tax expense	271,057			50,880
Depreciation, amortization and accretion	746,607			271,945
Net loss/(gain) on sale of loans	295,883			(127,890		)
Net gain on sale of investment securities	(58,595		)	(16,990		)
Gain on residential loan securitizations	—			(9,373		)
Net gain on sale of leased vehicles	(248		)	(22,548		)
Other-than-temporary impairment ("OTTI") recognized in earnings	44			1,092
Loss on debt extinguishment	88,672			—
Net loss on real estate owned and premises and equipment	8,382			5,510
Stock-based compensation	13,360			19,571
Equity loss on equity method investments	4,719			5,543
Originations of loans held-for-sale, net of repayments	(4,570,257		)	(5,611,262		)
Purchases of loans held-for-sale	(3,677		)	—
Proceeds from sales of loans held-for-sale	3,859,060			4,726,465
Purchases of trading securities	(505,254		)	(1,219,268		)
Proceeds from sales of trading securities	525,660			1,678,289
Net change in:
Revolving personal loans	(471,061		)	—
Other assets and bank-owned life insurance	(129,894		)	339,888
Other liabilities	250,102			(153,905		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	3,135,457			3,542,881

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale investment securities	6,755,298			2,765,461
Proceeds from prepayments and maturities of available-for-sale investment securities	7,897,204			4,325,199
Purchases of available-for-sale investment securities	(9,427,160		)	(11,706,908		)
Proceeds from sales of other investments	443,715			293,016
Proceeds from maturities of other investments	45			170
Purchases of other investments	(151,011		)	(451,641		)
Net change in restricted cash	(626,970		)	51,405
Proceeds from sales of loans held-for-investment	1,447,704			1,842,583
Proceeds from the sales of equity method investments	—			14,988
Distributions from equity method investments	4,244			11,708
Contributions to equity method and other investments	(24,057		)	(89,994		)
Purchases of loans held-for-investment	(162,154		)	(1,753,931		)
Net change in loans other than purchases and sales	(1,729,419		)	(7,454,267		)
Purchases of leased vehicles	(4,624,096		)	(4,738,987		)
Proceeds from the sale and termination of leased vehicles	1,740,389			1,758,531
Manufacturer incentives	1,076,593			991,326
Proceeds from sales of real estate owned and premises and equipment	54,205			60,817
Purchases of premises and equipment	(159,608		)	(190,159		)
Confirming receivable	—			106,000
NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES	2,514,922			(14,164,683		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	2,120,695			3,706,937
Net change in short-term borrowings	(418,856		)	(5,034,927		)
Net proceeds from long-term borrowings	35,337,224			41,022,868
Repayments of long-term borrowings	(32,824,455		)	(34,995,331		)
Proceeds from FHLB advances (with terms greater than 3 months)	4,700,000			14,200,000
Repayments of FHLB advances (with terms greater than 3 months)	(12,123,672		)	(4,870,000		)
Net change in advance payments by borrowers for taxes and insurance	25,271			42,377
Cash dividends paid to preferred stockholders	(11,478		)	(16,419		)
Proceeds from the issuance of common stock	2,635			87,213
Redemption of preferred stock	(75,000		)	—
NET CASH (USED IN) / PROVIDED BY FINANCING ACTIVITIES	(3,267,636		)	14,142,718

NET INCREASE IN CASH AND CASH EQUIVALENTS	2,382,743			3,520,916
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	9,447,003			6,890,158
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	11,829,746		$	10,411,074

NON-CASH TRANSACTIONS
Loans transferred to other real estate owned	61,186			73,110
Loans transferred from held-for-investment to held-for-sale, net	41,803			3,464,436
Unsettled purchases of investment securities	4,613			697,057
Residential loan securitizations	19,585			256,380

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

Santander Holdings USA, Inc. ("SHUSA") is the parent company (the "Parent Company") of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association; Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a consumer finance company focused on vehicle finance; Santander BanCorp (together with its subsidiaries, "Santander BanCorp"), a financial holding company headquartered in Puerto Rico which offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico; Santander Securities, LLC ("SSLLC"), a broker-dealer located in Puerto Rico, Banco Santander International ("BSI"), a financial services company located in Miami, FL which offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; Santander Investment Securities Inc. ("SIS"), a registered broker-dealer located in New York, NY providing services in investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed income securities; as well as several other subsidiaries. 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 Parent Company's two largest subsidiaries are the Bank and SC.

The Bank’s primary business consists of attracting deposits and providing other retail banking services through its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multifamily 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, and Delaware. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios.

SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC'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. Common shares of SC ("SC Common Stock") are listed for trading on the New York Stock Exchange (the "NYSE") under the trading symbol "SC."

Intermediate Holding Company

On February 18, 2014, the Board of Governors of the Federal Reserve System (the "Federal Reserve") issued the final rule implementing certain of the enhanced prudential standards mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Final Rule") to strengthen regulatory oversight of foreign banking organizations ("FBOs"). Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an Intermediate Holding Company ("IHC"). Due to its U.S. non-branch total consolidated asset size, Santander was subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS, SSLLC, as well as several other subsidiaries.

As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. The entities transferred approximately $14.1 billion of assets and approximately $11.8 billion of liabilities to the Company on July 1, 2016. The transfer added approximately $69.9 million and $68.8 million of net income to the Company for the nine-month periods ended September 30, 2016 and 2015 after the financial statements have been recast to reflect the operations of the commonly controlled entities for all periods presented as a change in reporting entity.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Basis of Presentation

The accounting and financial reporting policies of the Company conform to GAAP. These Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries, including the Bank, SC, and certain special purpose financing trusts utilized in financing transactions that are considered variable interest entities ("VIEs"). The Company consolidates VIEs for which it is deemed the primary beneficiary. The unaudited Condensed Consolidated Financial Statements have been prepared by the Company, pursuant to Securities and Exchange Commission ("SEC") regulations. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. All intercompany balances and transactions have been eliminated in consolidation. Where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements of Stockholder's Equity and Condensed Consolidated Statements of Cash Flows for the periods indicated, and contain adequate disclosure for a fair statement of this interim financial information. All adjustments are of a normal, recurring nature, except as otherwise disclosed.

Significant Accounting Policies

Management has identified accounting for consolidation, business combinations, the allowance for loan and lease losses ("ALLL") for originated and purchased loans and the reserve for unfunded lending commitments, loan modifications and troubled debt restructurings, goodwill, derivatives and hedge activities, and income taxes as the Company's critical accounting policies and estimates, in that they are important to the presentation of the Company's financial condition and results of operations, results of operations and cash flows and the accounting estimates related thereto 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/A for the year ended December 31, 2015.

Recently Adopted Accounting Policies

Since January 1, 2016, the Company adopted the following Financial Accounting Standards Board ("FASB") Accounting Standards Updates ("ASUs"), none of which had a material impact to the Company's Consolidated Financial Statements:

•

The Company adopted 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) on a prospective basis. This ASU was issued by the FASB in June 2014 and 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 Accounting Standards Codification ("ASC") 718 as it relates to awards with performance conditions that affect vesting should continue to be used to account for such awards.

•

The Company also adopted ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items on a prospective basis. This ASU was issued by the FASB in January 2015 and eliminates the concept of extraordinary items from GAAP, which previously required the separate classification, presentation, and disclosure of extraordinary events and transactions.

•

The Company also adopted ASU 2015-02, Consolidation (Topic 820): Amendments to the Consolidation Analysis, which the FASB issued in February 2015. This ASU changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, this ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities ("VOEs"); eliminates the presumption that a general partner should consolidate a limited partnership; potentially changes the consolidation conclusions of reporting entities that are involved with VIEs, in particular those that have fee arrangements and related party arrangements; and provides a scope exception for reporting entities with interests held in certain money market funds and similar unregistered money market funds. As the adoption did not result in any significant impact to the Company’s Consolidated Financial Statements, it did not result in a retrospective or modified retrospective application.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

•

The Company also adopted ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) on a retrospective basis. This ASU removes the requirement to categorize investments fair valued using the net asset value per share practical expedient within the fair value hierarchy. It also modifies disclosure requirements to include only investments for which the entity elects to use the practical expedient rather than the prior guidance which required disclosures for all investments eligible to use the practical expedient.

•

The Company also adopted ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments on a prospective basis. This amendment eliminates the requirement to account for adjustments to provisional amounts recognized in a business combination retrospectively. Instead, the acquirer will recognize the adjustments to provisional amounts during the period in which the adjustments are determined, including the effect on earnings of any amounts the acquirer would have recorded in previous periods if the accounting had been completed at the acquisition date.

Subsequent Events

The Company evaluated events from the date of the Condensed Consolidated Financial Statements on September 30, 2016 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 three-month period ended September 30, 2016 other than the transaction disclosed in Note 10, Note 14, and Note 15 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. In August 2015, the FASB issued ASU 2015-14, which formalized the deferral of the effective date of the amendment for a period of one-year from the original effective date. Following the issuance of ASU 2015-14, the amendment will be effective for the Company for the first annual period ending beginning after December 15, 2017. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which revises the structure of the indicators to provide indicators of when the entity is the principal or agent in a revenue transaction, and eliminated two of the indicators (“the entity’s consideration is in the form of a commission” and “the entity is not exposed to credit risk”) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract. In April 2016, the FASB also issued ASU 2016-10, which clarifies the implementation guidance on identifying promised goods or services and on determining whether an entity's promise to grant a license with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). The amendments, collectively, 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 ASU 2014-09 and the related updates to it on its financial position, results of operations and disclosures.

In August 2014, the FASB 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 its 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires that equity investments, except those accounted for under the equity method of accounting or which result in consolidation of the investee, be measured at fair value with changes in the fair value being recorded in net income. However, equity investments that do not have readily determinable fair values will be measured at cost less impairment, if any, plus the effect of changes resulting from observable price transactions in orderly transactions or for the identical or similar investment of the same issuer. This amendment also simplifies the impairment assessment of equity instruments that do not have readily determinable fair values, eliminates the requirement to disclose methods and assumptions used to estimate fair value of instruments measured at their amortized cost on the balance sheet, requires that the disclosed fair values of financial instruments represent "exit price," requires entities to separately present in other comprehensive income the portion of the total change in fair value of a liability resulting from instrument-specific credit risk when the FVO has been elected for that liability, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes, and clarifies that an entity should evaluate the need for a valuation allowance on its deferred tax asset related to its available-for-sale securities in combination with its other deferred tax assets. This amendment will be effective for the Company for the first reporting period beginning after December 15, 2017, with earlier adoption permitted by public entities on a limited basis. Adoption of this amendment must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values for which it should be applied prospectively. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this update supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases. The new guidance requires lessees to evaluate whether a lease is a finance lease using criteria that are similar to what lessees use today to determine whether they have a capital lease. Leases not classified as finance leases are classified as operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for under an approach similar to today’s guidance for operating leases. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. Adoption of the amendment must be applied on a modified retrospective approach. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This new guidance clarifies that a change in the counterparties to a derivative contract (i.e. a novation), in and of itself does not require the de-designation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Adoption of the new guidance can be applied on a modified retrospective or prospective basis. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This new guidance clarifies that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis of hybrid financial instruments. In other words, a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. However, as required under existing guidance, companies will still need to evaluate other relevant embedded derivative guidance, such as whether the payoff from the contingent put or call option is adjusted based on changes in an index other than interest rates or credit risk, and whether the debt involves a substantial premium or discount. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. The new guidance is required to be adopted on a modified retrospective basis to all existing and future debt instruments. 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 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

In March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323). This new guidance eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead, the equity method of accounting should be applied prospectively from the date significant influence is obtained. Investors should add the cost of acquiring the additional interest in the investee (if any) to the current basis of their previously held interest. The new standard also provides specific guidance for available-for-sale securities that become eligible for the equity method of accounting. In those cases, any unrealized gain or loss recorded within accumulated other comprehensive income should be recognized in earnings at the date the investment initially qualifies for the use of the equity method of accounting. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Adoption of the new guidance can be applied only a prospective basis for investments those qualify for the equity method of accounting after the effective date. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). This new guidance simplifies certain aspects related to income taxes, the Statement of Cash Flows ("SCF"), and forfeitures when accounting for share-based payment transactions. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Certain of the amendments related to timing of the recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to the presentation of the SCF should be applied retrospectively. All other provisions may be applied on a prospective or modified retrospective basis. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This new guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The new guidance will be effective for the Company for the first reporting period beginning after December 15, 2019, with earlier adoption permitted. Adoption of the new guidance can be applied only on a prospective basis as a cumulative-effect adjustment to retained earnings. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. This update amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The ASU’s amendments add or clarify guidance on eight cash flow issues including debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The guidance will be effective for the fiscal year beginning after December 15, 2017, including interim periods within that year. Early adoption is permitted, including adoption in an interim period, however any adjustments should be reflected as of the beginning of the fiscal year that includes the period of adoption. All of the amended guidance must be adopted in the same period. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.

which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This eliminates the current exception for all intra-entity transfers of an asset other than inventory that requires deferral of the tax effects until the asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the Company for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early adoption is permitted at the beginning of an annual reporting period for which annual or interim financial statements have not been issued or made available for issuance. 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 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810), Interest Held Through Related Parties That Are Under Common Control. which amends the guidance in U.S. GAAP on related parties that are under common control. Specifically, the new ASU requires that a single decision maker consider indirect interests held by related parties under common control on a proportionate basis in a manner consistent with its evaluation of indirect interests held through other related parties. The guidance will be effective for the fiscal year beginning after December 15, 2016, including interim periods within that year. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (A consensus of the FASB Emerging Issues Task Force), which requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts shown on the statement of cash flows and that the statement of cash flows explain changes in restricted cash during the period. The guidance will be effective for the Company for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, however, adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the adoption of this ASU to have an impact on its financial position or result of operations and expects the impact to be disclosure only.

NOTE 3. 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:



	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury securities	$	726,956	$	2,316	$	(8	)	$	729,264
Corporate debt securities	—		36		—			36
Asset-backed securities ("ABS")	1,683,275		13,922		(1,789		)	1,695,408
Equity securities	11,097		5		(272		)	10,830
State and municipal securities	31		—		—			31
Mortgage-backed securities ("MBS"):
U.S. government agencies - Residential	5,511,875		31,461		(12,926		)	5,530,410
U.S. government agencies - Commercial	921,954		16,086		(1,530		)	936,510
FHLMC and FNMA - Residential debt securities ⁽¹⁾	7,716,136		42,628		(47,744		)	7,711,020
FHLMC and FNMA - Commercial debt securities	23,794		537		(10		)	24,321
Non-agency securities	21		—		—			21
Total investment securities available-for-sale	$	16,595,139	$	106,991	$	(64,279	)	$	16,637,851

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. INVESTMENT SECURITIES (continued)



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury securities	$	4,015,214	$	2,090	$	(5,709	)	$	4,011,595
Corporate debt securities	1,476,801		10,060		(11,248		)	1,475,613
Asset-backed securities	1,763,178		7,826		(1,494		)	1,769,510
Equity securities	10,894		1		(408		)	10,487
State and municipal securities	748,696		19,616		(432		)	767,880
Mortgage-backed securities:
U.S. government agencies - Residential	4,099,386		10,675		(36,877		)	4,073,184
U.S. government agencies - Commercial	1,006,161		3,347		(7,153		)	1,002,355
FHLMC and FNMA - Residential debt securities	8,636,745		10,556		(153,128		)	8,494,173
FHLMC and FNMA - Commercial debt securities	138,094		723		(2,487		)	136,330
Non-agency securities	45		—		—			45
Total investment securities available-for-sale	$	21,895,214	$	64,894	$	(218,936	)	$	21,741,172

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.

During the nine-month period ended September 30, 2015, the Company sold $234.6 million of qualifying residential loans to FHLMC in return for $243.9 million of mortgage-backed securities ("MBS") issued by FHLMC resulting in a net realized gain on sale of $9.8 million which is included in Mortgage banking income, net line of the Company's Condensed Consolidated Statement of Operations.

As of September 30, 2016 and December 31, 2015, the Company had investment securities available-for-sale with an estimated fair value of $8.6 billion and $4.3 billion, respectively, pledged as collateral, which was comprised of the following: $6.1 billion and $3.2 billion, respectively, were pledged to secure public fund deposits; $1.5 billion and $117.6 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $539.0 million and $623.0 million, respectively, were pledged to deposits with clearing organizations; and $408.0 million and $395.8 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At September 30, 2016 and December 31, 2015, the Company had $39.1 million and $65.3 million, respectively, of accrued interest related to investment securities which is included in the Accrued interest receivable line of the Company's Condensed Consolidated Balance Sheet.

The Company's state and municipal bond portfolio primarily consists of general obligation bonds of states, cities, counties and school districts. In March 2016, the Company decided to sell the entire municipal bond portfolio to reduce non-high quality liquid assets ("HQLA"), and to take gains to help cover the early terminations charges taken on Federal Home Loan Bank ("FHLB") advances.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. INVESTMENT SECURITIES (continued)

Contractual Maturity of Debt Securities

Contractual maturities of the Company’s debt securities available-for-sale at September 30, 2016 are as follows:



	Amortized Cost		Fair Value
	(in thousands)
Due within one year	$	1,386,518	$	1,390,402
Due after 1 year but within 5 years	844,893		857,116
Due after 5 years but within 10 years	239,594		241,487
Due after 10 years	14,113,037		14,138,016
Total	$	16,584,042	$	16,627,021

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 September 30, 2016 and December 31, 2015 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:



	September 30, 2016
	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 securities	$	54,871	$	(8	)	$	—	$	—		$	54,871	$	(8	)
Asset-backed securities	$	69,078	$	(465	)	$	91,255	$	(1,324	)	$	160,333	$	(1,789	)
Equity securities	—		—			10,077		(272		)	10,077		(272		)
Mortgage-backed securities:
U.S. government agencies - Residential	2,161,863		(7,588		)	573,776		(5,338		)	2,735,639		(12,926		)
U.S. government agencies - Commercial	—		—			106,442		(1,530		)	106,442		(1,530		)
FHLMC and FNMA - Residential debt securities	985,252		(3,632		)	2,135,268		(44,112		)	3,120,520		(47,744		)
FHLMC and FNMA - Commercial debt securities	466		(10		)	—		—			466		(10		)
Total	$	3,271,530	$	(11,703	)	$	2,916,818	$	(52,576	)	$	6,188,348	$	(64,279	)

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. INVESTMENT SECURITIES (continued)



	December 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 securities	$	2,323,244	$	(5,709	)	$	—	$	—		$	2,323,244	$	(5,709	)
Corporate debt securities	775,366		(5,269		)	152,486		(5,979		)	927,852		(11,248		)
Asset-backed securities	300,869		(1,083		)	35,126		(411		)	335,995		(1,494		)
Equity securities	596		(7		)	9,748		(401		)	10,344		(408		)
State and municipal securities	15,665		(119		)	26,024		(313		)	41,689		(432		)
Mortgage-backed securities:
U.S. government agencies - Residential	1,723,439		(11,528		)	954,916		(25,349		)	2,678,355		(36,877		)
U.S. government agencies - Commercial	367,706		(3,382		)	114,038		(3,771		)	481,744		(7,153		)
FHLMC and FNMA - Residential debt securities	4,650,327		(38,013		)	2,127,962		(115,115		)	6,778,289		(153,128		)
FHLMC and FNMA - Commercial debt securities	115,347		(2,487		)	—		—			115,347		(2,487		)
Total	$	10,272,559	$	(67,597	)	$	3,420,300	$	(151,339	)	$	13,692,859	$	(218,936	)

OTTI

Management evaluates all investment securities 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 ("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 material OTTI in earnings related to its investment securities in the three-month and nine-month periods ended September 30, 2016. In 2015, the Company implemented a strategy to improve the Bank's liquidity by selling non-HQLA and reinvesting the funds into high-quality-liquid assets. During the nine-month period ended September 30, 2015, nine securities with a book value of $377.0 million in an unrealized loss position had not yet been sold. Because the Company could no longer assert that it did not have the intent to sell these securities, the Company determined that the impairment was other-than-temporary. As a result, these securities were written down to fair value, resulting in a $1.1 million OTTI charge.

Management has concluded that the unrealized losses on its debt and equity securities for which it has not recognized OTTI (which were comprised of 217 individual securities at September 30, 2016) 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 for the Company's debt securities, 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 3. 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 September 30,					Nine-Month Period Ended September 30,
	2016		2015			2016			2015
	(in thousands)
Proceeds from the sales of available-for-sale securities	$	—	$	497,182		$	6,755,298		$	2,765,461

Gross realized gains	$	—	$	533		$	60,328		$	23,592
Gross realized losses	—		(2,526		)	(2,558		)	(5,229		)
OTTI	—		—			(44		)	(1,092		)
Net realized (losses)/gains ⁽¹⁾	$	—	$	(1,993	)	$	57,726		$	17,271

(1) Excludes the net realized gains/(losses) related to Trading Securities.

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

The Company recognized $57.7 million for the nine-month period ended September 30, 2016 in net gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the nine-month period ended September 30, 2016 was primarily comprised of the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, the corporate debt securities were sold off with a book value of $1.4 billion for a gain of $5.9 million, the sale of MBS, including FHLMC residential debt securities and CMOs, with a book value of $1.3 billion for a gain of $24.7 million, and the sale of state and municipal securities with a book value of $748.0 million for a gain of $19.9 million.

The Company recognized $2.0 million of losses and $17.3 million of gains for the three-month and nine-month periods ended September 30, 2015, respectively, in net (losses)/gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net loss realized for the three-month period ended September 30, 2015 was primarily comprised of the sale of corporate debt securities with a book value of $63.7 million for a gain of $0.4 million, and the sale of asset-backed securities ("ABS") with a book value of $419.6 million for a loss of $1.4 million. The net gain for the nine-month period ended September 30, 2015 was primarily comprised of the sale of state and municipal securities with a book value of $421.5 million for a gain of $12.1 million, the sale of corporate debt securities with a book value of $517.6 million for a gain of $7.0 million, and the sale of ABS with a book value of $683.9 million for a gain of $0.2 million, offset by OTTI of $1.1 million.

Trading Securities

The Company held $6.0 million of trading securities as of September 30, 2016, compared to $0.2 million held at December 31, 2015. 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 its trading securities portfolio to economically hedge the MSR portfolio.

Other Investments

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the Federal Reserve Bank (the "FRB") with aggregate carrying amounts of $708.2 million and $1.0 billion as of September 30, 2016 and December 31, 2015, 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 and nine-month periods ended September 30, 2016, the Company purchased $56.5 million and $150.9 million of FHLB stock at par, respectively, and redeemed $153.3 million and $443.7 million of FHLB stock at par, respectively. There was no gain or loss associated with these redemptions. During the three-month and nine-month periods ended September 30, 2016, the Company did not purchase any FRB stock. Other investments also include $39.6 million and $26.4 million of low-income housing tax credit ("LIHTC") investments as of September 30, 2016 and December 31, 2015, respectively.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. 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 and unamortized premiums or discounts. The Company maintains an 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 $53.5 billion at September 30, 2016 and $60.7 billion at December 31, 2015.

Loans that the Company intends to sell are classified as loans held-for-sale ("LHFS"). The LHFS portfolio balance at September 30, 2016 was $3.0 billion, compared to $3.2 billion at December 31, 2015. 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. During the third quarter of 2015, the Company determined that it no longer intended to hold certain personal lending assets at SC for investment. The Company adjusted the ACL associated with SC's personal loan portfolio to value the portfolio at the lower of cost or market, and the adjusted credit loss allowance was released through the provision for credit losses; reflected as a charge-off against the credit loss allowance. Future loan originations and purchases under SC’s personal lending platform will also be classified as held for sale. As of September 30, 2016, the value of the personal unsecured held-for-sale portfolio was $920.3 million.

On February 1, 2016, SC completed the sale of assets from the personal unsecured held-for-sale portfolio to a third party for an immaterial gain to the unpaid principal balance. The balance of the loans associated with this sale was $869.3 million.

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 September 30, 2016 and December 31, 2015, accrued interest receivable on the Company's loans was $536.0 million and $569.8 million, respectively.

Interest is accrued when earned in accordance with the terms of the retail installment contract. The accrual of interest is discontinued and reversed once a retail installment contract becomes 60 days past due, and is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. A Chrysler Capital retail installment contract is considered current if the borrower has made all prior payments in full and at least 90% of the payment currently due, and a non-Chrysler Capital retail installment contract is considered current if the borrower has made all prior payments in full and at least 50% of the payment currently due. Payments generally are applied to fees first, then interest, then principal, regardless of a contract's accrual status.

Retail installment contracts acquired individually are charged off against the allowance in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. A net charge off represents the difference between the estimated net sales proceeds and the Company's recorded investment in the related contract.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Loan and Lease Portfolio Composition

The following presents the composition of the gross loans and leases held-for-investment by portfolio and by rate type:



	September 30, 2016				December 31, 2015
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial loans held-for-investment:
Commercial real estate loans	$	10,165,990	11.7	%	$	9,846,236	11.3	%
Commercial and industrial loans	19,601,335		22.6	%	20,908,107		24.0	%
Multifamily loans	9,021,275		10.4	%	9,438,463		10.8	%
Other commercial⁽²⁾	6,799,457		7.8	%	6,257,072		7.2	%
Total commercial loans held-for-investment	45,588,057		52.5	%	46,449,878		53.3	%
Consumer loans secured by real estate:
Residential mortgages	7,588,663		8.7	%	7,566,301		8.7	%
Home equity loans and lines of credit	6,041,629		7.0	%	6,151,232		7.1	%
Total consumer loans secured by real estate	13,630,292		15.7	%	13,717,533		15.8	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	21,602,717		24.9	%	18,539,588		21.3	%
RICs and auto loans - purchased	4,005,079		4.6	%	6,108,210		7.0	%
Personal unsecured loans	1,219,942		1.4	%	1,177,998		1.4	%
Other consumer⁽³⁾	848,252		0.9	%	1,032,579		1.2	%
Total consumer loans	41,306,282		47.5	%	40,575,908		46.7	%
Total loans held-for-investment⁽¹⁾	$	86,894,339	100.0	%	$	87,025,786	100.0	%
Total loans held-for-investment:
Fixed rate	$	53,357,078	61.4	%	$	52,283,715	60.1	%
Variable rate	33,537,261		38.6	%	34,742,071		39.9	%
Total loans held-for-investment⁽¹⁾	$	86,894,339	100.0	%	$	87,025,786	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 increase in the loan balances of $640.5 million and $8.4 million as of September 30, 2016 and December 31, 2015, respectively.

(2)Other commercial includes$3.7 billion and $3.6 billion at September 30, 2016 and December 31, 2015, respectively, of loans not defined as commercial or consumer for regulatory purposes, but which are defined as "Other." The remainder of the balance primarily includes commercial equipment vehicle financing ("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. The Company utilizes an alternate categorization compared to the financial statement categorization of loans, 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.

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 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”, which is the commercial real estate portfolio of the specialized lending group. "Commercial and industrial" includes non-real estate-related commercial and industrial loans. "Multifamily" represents loans for multifamily residential housing units. “Other commercial” includes loans to global customer relationships in Latin America which are not defined as commercial or consumer for regulatory purposes. The remainder of the portfolio primarily represents the commercial equipment vehicle financing ("CEVF") business.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following table reconciles the Company's recorded investment classified by its major portfolio classifications to its commercial loan classifications utilized in its determination of the ALLL and other credit quality disclosures at September 30, 2016 and December 31, 2015, respectively:



Commercial Portfolio Segment⁽²⁾
Major Loan Classifications⁽¹⁾	September 30, 2016		December 31, 2015
	(in thousands)
Commercial loans held for investment:
Commercial real estate:
Corporate Banking	$	3,751,682	$	3,680,517
Middle Market Real Estate	5,033,700		4,615,250
Santander Real Estate Capital	1,380,608		1,550,469
Total commercial real estate	10,165,990		9,846,236
Commercial and industrial ⁽³⁾	19,601,335		20,908,107
Multifamily	9,021,275		9,438,463
Other commercial	6,799,457		6,257,072
Total commercial LHFI	$	45,588,057	$	46,449,878


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


(2)	These represent the Company's loan classes used to determine its ALLL.


(3)	Commercial and industrial loans excluded $224.5 million of LHFS at September 30, 2016 and excluded $86.4 million of LHFS at December 31, 2015.

The Company's portfolio classes 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” include all organic home equity contracts and purchased home equity portfolios. "RIC and auto loans" includes the Company's direct automobile loan portfolios, but excludes recreational vehicle ("RV") and marine retail installment contracts ("RICs"). "Personal unsecured loans" includes personal revolving loans and credit cards. “Other consumer” includes an acquired portfolio of marine RICs and RV contracts as well as indirect auto loans.

In accordance with the Company's accounting policy when establishing the collective ACL for originated loans, the Company's estimate of losses on recorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off, while it considers the entire discount for loan portfolios purchased at a discount as available to absorb the credit losses when determining the ACL specific to these portfolios. For loans purchased at a discount, provision expense is recorded only when incurred losses on the portfolio exceed the unaccreted purchase discount. This accounting policy is not applicable for the purchased loan portfolios acquired with evidence of credit deterioration, on which we elected to apply the FVO.



Consumer Portfolio Segment⁽²⁾
Major Loan Classifications⁽¹⁾	September 30, 2016		December 31, 2015
	(in thousands)
Consumer loans secured by real estate:
Residential mortgages⁽³⁾	$	7,588,663	$	7,566,301
Home equity loans and lines of credit	6,041,629		6,151,232
Total consumer loans secured by real estate	13,630,292		13,717,533
Consumer loans not secured by real estate:
RICs and auto loans - originated ⁽⁴⁾	21,602,717		18,539,588
RICs and auto loans - purchased ⁽⁴⁾	4,005,079		6,108,210
Personal unsecured loans⁽⁵⁾	1,219,942		1,177,998
Other consumer	848,252		1,032,579
Total consumer loans held-for-investment	$	41,306,282	$	40,575,908


(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 ALLL.


(3)	Residential mortgages exclude $392.9 million and $243.5 million of LHFS at September 30, 2016 and December 31, 2015, respectively.


(4)	RIC and auto loans exclude $1.5 billion and $905.7 million of LHFS at September 30, 2016 and December 31, 2015, respectively.


(5)	Personal unsecured loans exclude $920.3 million and $2.0 billion of LHFS at September 30, 2016 and December 31, 2015, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The RIC and auto loan portfolio is comprised of: (1) RICs originated by SC prior to the first quarter 2014 change in control and consolidation of SC (the “Change in Control"), (2) RICs originated by SC after the Change in Control, and (3) auto loans originated by SBNA. The composition of the portfolio segment is as follows:



	September 30, 2016			December 31, 2015
RICs - Purchased:
UPB ⁽¹⁾	$	4,366,769		$	6,709,748
UPB - FVO ⁽²⁾	46,049			140,995
Total UPB	4,412,818			6,850,743
Purchase Marks ⁽³⁾	(407,739		)	(742,533		)
Total RICs - Purchased	4,005,079			6,108,210

RICs - Originated:
UPB ⁽¹⁾	22,104,087			19,069,801
Net discount	(517,961		)	(548,057		)
Total RICs - Originated	21,586,126			18,521,744
SBNA auto loans	16,591			17,844
Total RICs - originated post change in control	$	21,602,717		$	18,539,588
Total RICs and auto loans	$	25,607,796		$	24,647,798

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

(2) The Company elected to account for these loans, which were acquired with evidence of credit deterioration, under the FVO.

(3) Includes purchase marks of $10.6 million and $33.1 million related to purchased loan portfolios on which we elected to apply the FVO at September 30, 2016 and December 31, 2015, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

ACL Rollforward by Portfolio Segment

The activity in the ACL by portfolio segment for the three-month and nine-month periods ended September 30, 2016 and 2015 was as follows:



	Three-Month Period Ended September 30, 2016
	Commercial			Consumer			Unallocated		Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	528,858		$	3,189,784		$	47,245	$	3,765,887
Provision for/ (Recovery of) loan losses	21,454			687,697			—		709,151
Charge-offs	(41,660		)	(1,249,370		)	—		(1,291,030		)
Recoveries	21,359			608,915			—		630,274
Charge-offs, net of recoveries	(20,301		)	(640,455		)	—		(660,756		)
Allowance for loan and lease losses, end of period	$	530,011		$	3,237,026		$	47,245	$	3,814,282

Reserve for unfunded lending commitments, beginning of period	$	156,155		$	743		$	—	$	156,898
Provision for unfunded lending commitments	(21,244		)	5			—		(21,239		)
Loss on unfunded lending commitments	(1,094		)	—			—		(1,094		)
Reserve for unfunded lending commitments, end of period	133,817			748			—		134,565
Total allowance for credit losses, end of period	$	663,828		$	3,237,774		$	47,245	$	3,948,847

	Nine-Month Period Ended September 30, 2016
	Commercial			Consumer			Unallocated		Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	456,812		$	2,742,088		$	47,245	$	3,246,145
Provision for loan and lease losses	122,832			2,090,516			—		2,213,348
Charge-offs	(118,273		)	(3,424,199		)	—		(3,542,472		)
Recoveries	68,640			1,828,621			—		1,897,261
Charge-offs, net of recoveries	(49,633		)	(1,595,578		)	—		(1,645,211		)
Allowance for loan and lease losses, end of period	$	530,011		$	3,237,026		$	47,245	$	3,814,282
Reserve for unfunded lending commitments, beginning of period	$	148,207		$	814		$	—	$	149,021
Provision for unfunded lending commitments	(13,128		)	(66		)	—		(13,194		)
Loss on unfunded lending commitments	(1,262		)	—			—		(1,262		)
Reserve for unfunded lending commitments, end of period	133,817			748			—		134,565
Total allowance for credit losses, end of period	$	663,828		$	3,237,774		$	47,245	$	3,948,847
Ending balance, individually evaluated for impairment⁽¹⁾	$	146,458		$	1,376,942		$	—	$	1,523,400
Ending balance, collectively evaluated for impairment	383,553			1,860,084			47,245		2,290,882

Financing receivables:
Ending balance	$	45,812,581		$	44,091,345		$	—	$	89,903,926
Ending balance, evaluated under the fair value option or lower of cost or fair value	224,524			3,027,806			—		3,252,330
Ending balance, individually evaluated for impairment⁽¹⁾	693,317			5,465,762			—		6,159,079
Ending balance, collectively evaluated for impairment	44,894,740			35,597,777			—		80,492,517

(1) Consists of loans in TDR status

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three-Month Period Ended September 30, 2015
	Commercial			Consumer			Unallocated			Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	416,986		$	2,423,712		$	73,509		$	2,914,207
Provision for / (Recovery of) loan losses	31,108			949,212			(26,258		)	954,062
Charge-offs	(48,248		)	(1,495,927		)	—			(1,544,175		)
Recoveries	27,890			498,218			—			526,108
Charge-offs, net of recoveries	(20,358		)	(997,709		)	—			(1,018,067		)
Allowance for loan and lease losses, end of period	$	427,736		$	2,375,215		$	47,251		$	2,850,202

Reserve for unfunded lending commitments, beginning of period	$	138,016		$	1,129		$	—		$	139,145
Provision for unfunded lending commitments	(9		)	17			—			8
Loss on unfunded lending commitments	—			—			—			—
Reserve for unfunded lending commitments, end of period	138,007			1,146			—			139,153
Total allowance for credit losses, end of period	$	565,743		$	2,376,361		$	47,251		$	2,989,355

	Nine-Month Period Ended September 30, 2015
	Commercial			Consumer			Unallocated			Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	413,885		$	1,329,063		$	34,941		$	1,777,889
Provision for loan and lease losses	73,821			2,913,441			12,310			2,999,572
Other⁽¹⁾	—			(27,117		)	—			(27,117		)
Charge-offs	(102,809		)	(3,345,343		)	—			(3,448,152		)
Recoveries	42,839			1,505,171			—			1,548,010
Charge-offs, net of recoveries	(59,970		)	(1,840,172		)	—			(1,900,142		)
Allowance for loan and lease losses, end of period	$	427,736		$	2,375,215		$	47,251		$	2,850,202

Reserve for unfunded lending commitments, beginning of period	$	133,002		$	1,001		$	—		$	134,003
Provision for unfunded lending commitments	5,005			146			—			5,151
Loss on unfunded lending commitments	—			(1		)	—			(1		)
Reserve for unfunded lending commitments, end of period	138,007			1,146			—			139,153
Total allowance for credit losses, end of period	$	565,743		$	2,376,361		$	47,251		$	2,989,355
Ending balance, individually evaluated for impairment⁽²⁾	$	63,842		$	761,620		$	—		$	825,462
Ending balance, collectively evaluated for impairment	363,894			1,613,595			47,251			2,024,740

Financing receivables:
Ending balance	$	45,750,989		$	43,616,178		$	—		$	89,367,167
Ending balance, evaluated under the fair value option or lower of cost or fair value⁽¹⁾	—			3,371,151			—			3,371,151
Ending balance, individually evaluated for impairment⁽²⁾	469,130			4,047,157			—			4,516,287
Ending balance, collectively evaluated for impairment	45,281,859			36,197,870			—			81,479,729


(1)	The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1.0 billion of RICs as held-for-sale during the first quarter of 2015.


(2)	Consists of loans in TDR status.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following table presents the activity in the Allowance for loan losses for the Retail Installment Contracts acquired ("Purchased") in the Change in Control and those originated by SC subsequent to the Change in Control.



	Three-Month Period Ended									Nine-Month Period Ended
	September 30, 2016									September 30, 2016
	Purchased			Originated			Total			Purchased			Originated			Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	615,623		$	2,342,440		$	2,958,063		$	590,807		$	1,891,989		$	2,482,796
Provision for / (Release of) loan and lease losses	29,406			630,962			660,368			150,658			1,877,527			2,028,185
Charge-offs	(207,662		)	(996,395		)	(1,204,057		)	(666,623		)	(2,611,263		)	(3,277,886		)
Recoveries	155,673			442,543			598,216			518,198			1,261,297			1,779,495
Charge-offs, net of recoveries	(51,989		)	(553,852		)	(605,841		)	(148,425		)	(1,349,966		)	(1,498,391		)
Allowance for loan and lease losses, end of period	$	593,040		$	2,419,550		$	3,012,590		$	593,040		$	2,419,550		$	3,012,590



	Three-Month Period Ended									Nine-Month Period Ended
	September 30, 2015									September 30, 2015
	Purchased			Originated			Total			Purchased			Originated			Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	542,709		$	1,219,134		$	1,761,843		$	963		$	709,024		$	709,987
Provision for / (Release of) loan and lease losses	129,109			686,563			815,672			958,738			1,520,920			2,479,658
Other⁽¹⁾	—			—			—			(27,117		)	—			(27,117		)
Charge-offs	(328,624		)	(612,318		)	(940,942		)	(1,216,036		)	(1,268,524		)	(2,484,560		)
Recoveries	218,962			251,748			470,710			845,608			583,707			1,429,315
Charge-offs, net of recoveries	(109,662		)	(360,570		)	(470,232		)	(370,428		)	(684,817		)	(1,055,245		)
Allowance for loan and lease losses, end of period	$	562,156		$	1,545,127		$	2,107,283		$	562,156		$	1,545,127		$	2,107,283

(1) The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1.0 billion of RICs as held-for-sale during the first quarter of 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. 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 and other non-performing assets is summarized as follows:



	September 30, 2016		December 31, 2015
	(in thousands)
Non-accrual loans:
Commercial:
Commercial real estate:
Corporate banking	$	121,041	$	101,803
Middle market commercial real estate	58,880		59,112
Santander real estate capital	3,143		3,454
Commercial and industrial	225,050		95,538
Multifamily	7,084		9,162
Other commercial	9,276		2,982
Total commercial loans	424,474		272,051
Consumer:
Residential mortgages	278,265		304,935
Home equity loans and lines of credit	119,114		127,171
RICs and auto loans - originated	913,186		701,785
RICs - purchased	291,178		417,276
Personal unsecured loans	4,800		5,623
Other consumer	13,410		23,125
Total consumer loans	1,619,953		1,579,915
Total non-accrual loans	2,044,427		1,851,966

Other real estate owned ("OREO")	115,308		117,746
Repossessed vehicles	193,596		172,375
Foreclosed and other repossessed assets	1,780		374
Total OREO and other repossessed assets	310,684		290,495
Total non-performing assets	$	2,355,111	$	2,142,461

Age Analysis of Past Due Loans

For reporting of past due loans, a payment of 90% or more of the amount due will be considered to meet the contractual requirements. For the majority of RICs, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. The Company aggregates partial payments in determining whether a full payment has been missed in computing past due status.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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:
		September 30, 2016
		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		$	14,414	$	41,775	$	56,189	$	3,695,493	$	3,751,682	$	—
Middle market commercial real estate		4,672		59,157		63,829		4,969,870		5,033,699		—
Santander real estate capital		125		—		125		1,380,484		1,380,609		—
Commercial and industrial		50,724		38,412		89,136		19,737,271		19,826,407		—
Multifamily		2,474		1,980		4,454		9,016,821		9,021,275		—
Other commercial		36,897		1,104		38,001		6,760,908		6,798,909		—
Consumer:
Residential mortgages		214,060		230,596		444,656		7,536,939		7,981,595		—
Home equity loans and lines of credit		28,520		74,746		103,266		5,938,363		6,041,629		—
RICs and auto loans - originated		2,740,157		262,461		3,002,618		20,071,907		23,074,525		—
RICs and auto loans - purchased		844,228		73,314		917,542		3,087,537		4,005,079		—
Personal unsecured loans		96,117		100,059		196,176		1,944,089		2,140,265		91,219
Other consumer		25,808		21,923		47,731		800,521		848,252		—
Total		$	4,058,196	$	905,527	$	4,963,723	$	84,940,203	$	89,903,926	$	91,219


(1)	Financing receivables include LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	As of
		December 31, 2015
		30-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivable⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking		$	18,402	$	41,167	$	59,569	$	3,620,948	$	3,680,517	$	—
Middle market commercial real estate		9,778		42,622		52,400		4,562,850		4,615,250		192
Santander real estate capital		—		654		654		1,549,815		1,550,469		—
Commercial and industrial		36,834		49,315		86,149		20,908,357		20,994,506		—
Multifamily		2,951		4,537		7,488		9,430,975		9,438,463		—
Other commercial		50,649		2,083		52,732		6,204,340		6,257,072		—
Consumer:
Residential mortgages		205,140		240,623		445,763		7,364,082		7,809,845		—
Home equity loans and lines of credit		28,166		79,715		107,881		6,043,351		6,151,232		—
RICs and auto loans - originated		2,149,480		212,569		2,362,049		17,083,248		19,445,297		—
RICs and auto loans - purchased		1,242,545		109,258		1,351,803		4,756,407		6,108,210		—
Personal unsecured loans		88,938		88,445		177,383		2,955,029		3,132,412		79,760
Other consumer		41,667		32,573		74,240		958,340		1,032,580		—
Total		$	3,874,550	$	903,561	$	4,778,111	$	85,437,742	$	90,215,853	$	79,952


(1)	Financing receivables include LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. 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:



	September 30, 2016
	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	$	95,621	$	110,825	$	—	$	96,384
Middle market commercial real estate	47,564		74,630		—		62,945
Santander real estate capital	2,663		2,663		—		2,739
Commercial and industrial	67,953		73,427		—		41,123
Multifamily	10,494		11,261		—		9,981
Other commercial	1,355		1,355		—		797
Consumer:
Residential mortgages	180,763		226,874		—		159,288
Home equity loans and lines of credit	51,169		51,169		—		41,125
RICs and auto loans - originated	2		2		—		4
RICs and auto loans - purchased	40,639		52,211		—		92,850
Personal unsecured loans⁽²⁾	23,144		23,144		—		18,005
Other consumer	19,571		23,893		—		10,891
With an allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	87,996		91,391		22,771		78,454
Middle market commercial real estate	71,554		82,343		17,343		54,800
Santander real estate capital	8,652		8,652		890		4,653
Commercial and industrial	220,846		225,717		104,178		161,208
Multifamily	2,256		2,256		831		3,955
Other commercial	6,475		6,475		445		4,846
Consumer:
Residential mortgages	271,390		307,548		39,876		306,946
Home equity loans and lines of credit	50,712		65,032		5,256		65,990
RICs and auto loans - originated	2,789,937		2,848,928		842,411		6,481,276
RICs and auto loans - purchased	2,023,615		2,287,010		486,370		4,796,995
Personal unsecured loans	1,571		1,855		271		9,158
Other consumer	13,512		18,189		2,758		17,479
Total:
Commercial	$	623,429	$	690,995	$	146,458	$	521,885
Consumer	5,466,025		5,905,855		1,376,942		12,000,007
Total	$	6,089,454	$	6,596,850	$	1,523,400	$	12,521,892


(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.


(2)	Includes LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The Company recognized interest income, not including the impact of purchase accounting adjustments, of $510.2 million for the nine-month period ended September 30, 2016 on approximately $4.9 billion of TDRs that were returned to performing status as of September 30, 2016.



	December 31, 2015
	Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Specific Reserves
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	$	97,975	$	108,760	$	—
Middle market commercial real estate	78,325		123,495		—
Santander real estate capital	2,815		2,815		—
Commercial and industrial	12,190		17,513		—
Multifamily	9,467		10,488		—
Other commercial	239		239		—
Consumer:
Residential mortgages	145,676		190,240		—
Home equity loans and lines of credit	31,080		31,080		—
RICs and auto loans - originated	15		15		—
RICs and auto loans - purchased	75,698		96,768		—
Personal unsecured loans	12,865		12,865		—
Other consumer	12,495		16,002		—
With an allowance recorded:
Commercial:
Corporate banking	62,894		66,460		12,314
Middle market commercial real estate	38,046		43,745		5,624
Santander real estate capital	654		782		98
Commercial and industrial	117,419		146,394		35,607
Multifamily	5,653		5,658		443
Other commercial	3,216		4,465		750
Consumer:
Residential mortgages	323,060		360,450		40,818
Home equity loans and lines of credit	71,847		86,355		3,757
RICs and auto loans - originated	1,325,975		1,359,585		408,208
RICs and auto loans - purchased	2,454,108		2,773,536		454,926
Personal unsecured loans	1,839		2,226		430
Other consumer	18,663		23,790		3,225
Total:
Commercial	$	428,893	$	530,814	$	54,836
Consumer	4,473,321		4,952,912		911,364
Total	$	4,902,214	$	5,483,726	$	966,200


(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 $451.1 million for the year ended December 31, 2015 on approximately $4.0 billion of TDRs that were returned to performing status as of December 31, 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. 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 Company 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
September 30, 2016	Corporate banking		Middle market commercial real estate		Santander real estate capital		Commercial and industrial		Multifamily		Remaining commercial		Total⁽¹⁾
	(in thousands)
Regulatory Rating:
Pass	$	3,327,659	$	4,647,062	$	1,278,943	$	18,500,649	$	8,853,272	$	6,771,544	$	43,379,129
Special Mention	161,853		170,711		34,250		658,121		118,172		9,986		1,153,093
Substandard	244,084		172,277		67,415		634,495		49,831		17,379		1,185,481
Doubtful	18,086		43,650		—		33,142		—		—		94,878
Total commercial loans	$	3,751,682	$	5,033,700	$	1,380,608	$	19,826,407	$	9,021,275	$	6,798,909	$	45,812,581


(1)	Financing receivables include LHFS.



	Commercial Real Estate
December 31, 2015	Corporate banking		Middle market commercial real estate		Santander real estate capital		Commercial and industrial		Multifamily		Remaining commercial		Total⁽¹⁾
	(in thousands)
Regulatory Rating:
Pass	$	2,940,461	$	4,335,501	$	1,363,031	$	19,730,170	$	9,114,466	$	6,211,672	$	43,695,301
Special Mention	188,324		33,256		144,597		516,776		249,165		28,686		1,160,804
Substandard	345,668		163,939		42,187		475,405		74,410		15,601		1,117,210
Doubtful	206,064		82,554		654		272,984		422		284		562,962
Total commercial loans	$	3,680,517	$	4,615,250	$	1,550,469	$	20,995,335	$	9,438,463	$	6,256,243	$	46,536,277


(1)	Financing receivables include LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Consumer Lending Asset Quality Indicators-Credit Score

In early 2015, the Company increased its origination volume of RICs to borrowers with limited credit bureau attributes, such as less than 36 months of history or less than four trade lines. For these borrowers, many of whom do not have a FICO^® score, other factors, such as the LexisNexis risk view score, LTV ratio, and payment-to-income ratio, are utilized to assign an internal credit score. Origination volume of these RICs was $562 million and $1 billion for the three-month periods ended September 30, 2016 and September 30, 2015, respectively. The Company recorded a qualitative adjustment of $149 million as of December 31, 2015 to account for the higher concentration of loans with limited bureau information. However, this qualitative adjustment was reduced to zero as of September 30, 2016 as origination metrics have improved and the additional charge-offs expected on this portfolio are included in the estimated credit loss allowance.

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



	September 30, 2016				December 31, 2015
Credit Score Range⁽²⁾	RICs and auto loans⁽³⁾		Percent		RICs and auto loans⁽³⁾		Percent
	(dollars in thousands)
No FICO^®(1)	$	4,765,756	17.6	%	$	4,913,606	19.2	%
<600	14,103,716		52.1	%	13,374,065		52.3	%
600-639	4,561,645		16.8	%	4,260,982		16.7	%
>=640	3,648,487		13.5	%	3,004,854		11.8	%
Total	$	27,079,604	100.0	%	$	25,553,507	100.0	%

(1) Consists primarily of loans for which credit scores are not considered in the ALLL model.

(2) Credit scores updated quarterly.

(3) RICs and auto loans include $1.5 billion and $905.7 million of LHFS at September 30, 2016 and December 31, 2015 that do not have an allowance.

Consumer Lending Asset Quality Indicators-FICO^® and LTV Ratio

For both residential and home equity loans, loss severity assumptions are incorporated in the loan and lease loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various current LTV bands within these portfolios. LTVs 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 LTV. The Company's ALLL incorporates the refreshed LTV information to update the distribution of defaulted loans by LTV as well as the associated loss given default for each LTV band. Reappraisals on a recurring basis at the individual property level are not considered cost-effective or necessary; 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Residential mortgage and home equity financing receivables by LTV and FICO^® range are summarized as follows:



	Residential Mortgages⁽¹⁾⁽³⁾
September 30, 2016	N/A⁽²⁾		LTV<=70%		70.01-80%		80.01-90%		90.01-100%		100.01-110%		LTV>110%		Grand Total
FICO^® Score	(dollars in thousands)
N/A⁽²⁾	$	645,667	$	11,938	$	1	$	—	$	—	$	—	$	—	$	657,606
<600	133		236,658		69,626		48,061		32,607		6,628		7,545		401,258
600-639	180		153,675		49,253		41,185		41,355		3,885		4,889		294,422
640-679	75		290,677		109,200		90,926		105,138		8,120		7,083		611,219
680-719	58		478,925		189,611		147,764		148,056		7,950		16,626		988,990
720-759	2		745,492		363,243		162,293		182,247		8,716		16,333		1,478,326
>=760	558		2,265,660		834,339		234,885		176,250		15,621		22,461		3,549,774
Grand Total	$	646,673	$	4,183,025	$	1,615,273	$	725,114	$	685,653	$	50,920	$	74,937	$	7,981,595

(1) Includes LHFS.

(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO^® score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO^® score is unavailable.

(3) Allowance model considers LTV for financing receivables in first lien position for the Company and combined LTV ("CLTV") for financing receivables in second lien position for the Company.



	Home Equity Loans and Lines of Credit⁽²⁾
September 30, 2016	N/A⁽¹⁾		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO^® Score	(dollars in thousands)
N/A⁽¹⁾	$	180,298	$	3,051	$	3,489	$	—	$	—	$	186,838
<600	10,806		149,590		65,428		18,319		16,776		260,919
600-639	7,983		140,754		73,304		15,709		11,229		248,979
640-679	10,764		267,263		163,098		30,994		19,549		491,668
680-719	10,866		453,323		306,077		49,614		26,546		846,426
720-759	10,244		643,091		410,704		51,110		34,304		1,149,453
>=760	24,746		1,679,896		985,063		107,135		60,506		2,857,346
Grand Total	$	255,707	$	3,336,968	$	2,007,163	$	272,881	$	168,910	$	6,041,629

(1) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO^® score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO^® score is unavailable.

(2) Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.



	Residential Mortgages⁽¹⁾⁽³⁾
December 31, 2015	N/A ⁽²⁾		LTV<=70%		70.01-80%		80.01-90%		90.01-100%		100.01-110%		LTV>110%		Grand Total
FICO^® Score	(dollars in thousands)
N/A⁽²⁾	$	468,624	$	12,251	$	2,770	$	—	$	—	$	—	$	—	$	483,645
<600	128		236,107		87,871		53,621		37,437		9,407		9,814		434,385
600-639	1		164,571		56,149		48,965		46,247		5,531		8,494		329,958
640-679	230		271,557		110,301		94,738		107,858		10,003		12,671		607,358
680-719	19		488,461		219,492		157,938		170,519		10,441		25,241		1,072,111
720-759	339		713,358		393,638		174,507		199,703		12,517		24,803		1,518,865
>=760	84		2,094,970		784,463		248,123		186,966		23,703		25,214		3,363,523
Grand Total	$	469,425	$	3,981,275	$	1,654,684	$	777,892	$	748,730	$	71,602	$	106,237	$	7,809,845

(1) Includes LHFS.

(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO® score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO® score is unavailable.

(3) Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Home Equity Loans and Lines of Credit⁽¹⁾
December 31, 2015	N/A⁽¹⁾		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO^® Score	(dollars in thousands)
N/A⁽¹⁾	$	192,379	$	390	$	305	$	—	$	—	$	193,074
<600	11,110		155,306		79,389		22,373		22,261		290,439
600-639	8,871		140,277		83,548		20,766		12,525		265,987
640-679	12,534		254,481		174,223		32,925		26,565		500,728
680-719	14,273		431,818		317,260		56,589		31,722		851,662
720-759	12,673		614,748		425,744		63,840		39,981		1,156,986
>=760	34,579		1,644,168		1,007,561		135,571		70,477		2,892,356
Grand Total	$	286,419	$	3,241,188	$	2,088,030	$	332,064	$	203,531	$	6,151,232

(2) Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.

TDR Loans

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



	September 30, 2016		December 31, 2015
	(in thousands)
Performing	$	4,902,908	$	3,984,382
Non-performing	852,895		704,600
Total	$	5,755,803	$	4,688,982

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationships with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions, interest rate reductions, etc. 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. Commercial 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). TDRs are 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

For the Company’s other consumer portfolios, including RICs and auto loans, the terms of the modifications generally include one or a combination of: a reduction of the stated interest rate of the loan to a rate of interest lower than the current market rate for new debt with similar risk, an extension of the maturity date or principal forgiveness.

Consumer TDRs excluding RICs 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 implemented. After modification, RICs are classified as current and continue to accrue interest as long as they remain less than 60 days past due. The TDR classification will remain on the loan until it is paid in full or liquidated.

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

TDR Impact to Allowance for Loan and Lease Losses

The ALLL 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 status, 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 original effective interest rate or fair value of collateral, less costs to sell. The amount of the required ALLL 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 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 4. 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 and nine-month periods ended September 30, 2016 and September 30, 2015, respectively:



	Three-Month Period Ended September 30, 2016
	Number of Contracts	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Term Extension			Principal Forbearance			Other⁽⁴⁾			Post-Modification Outstanding Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	21	$	53,849	$	10		$	(1,342	)	$	(2,927	)	$	49,590
Middle market commercial real estate	1	500		—			—			14,607			15,107
Santander real estate capital	—	—		—			—			—			—
Commercial and industrial	249	6,475		—			—			(113		)	6,362
Consumer:
Residential mortgages⁽³⁾	68	10,917		—			—			(408		)	10,509
Home equity loans and lines of credit	39	2,637		(132		)	—			59			2,564
RICs and auto loans - originated	43,632	798,710		(122		)	—			(119		)	798,469
RICs - purchased	10,227	108,855		(657		)	—			(22		)	108,176
Personal unsecured loans	756	2,014		—			—			(90		)	1,924
Other consumer	255	5,636		(2		)	—			29			5,663
Total	55,248	$	989,593	$	(903	)	$	(1,342	)	$	11,016		$	998,364

	Nine-Month Period Ended September 30, 2016
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Principal Forbearance			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	81	$	213,688	$	(22	)	$	(27,198	)	$	(3,438	)	$	183,030
Middle market commercial real estate	5	11,326		—			—			44,483			55,809
Santander real estate capital	1	8,729		—			—			(18		)	8,711
Commercial and industrial	815	26,601		—			—			(79		)	26,522
Consumer:
Residential mortgages⁽³⁾	237	36,354		(1		)	—			(3		)	36,350
Home equity loans and lines of credit	141	9,680		—			—			(226		)	9,454
RICs and auto loans - originated	109,896	2,023,661		(369		)	—			(227		)	2,023,065
RICs - purchased	35,072	407,562		(1,799		)	—			(63		)	405,700
Personal unsecured loans	18,264	27,639		—			—			(270		)	27,369
Other consumer	285	6,726		(2		)	—			(150		)	6,574
Total	164,797	$	2,771,966	$	(2,193	)	$	(27,198	)	$	40,009		$	2,782,584

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

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

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

(4) Other modifications may include modifications such as interest rate reductions, fee waivers, or capitalization of fees.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three-Month Period Ended September 30, 2015
	Number of Contracts	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Term Extension			Principal Forbearance			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	26	$	3,923	$	—		$	(393	)	$	—		$	3,530
Commercial and industrial	210	6,818		32			2,679			(2,713		)	6,816
Consumer:
Residential mortgages⁽³⁾	70	10,830		52			(289		)	269			10,862
Home equity loans and lines of credit	31	2,580		3,155			—			408			6,143
RICs and auto loans - originated	23,726	447,622		(234		)	—			(75		)	447,313
RICs - purchased	33,436	446,122		(871		)	—			(62		)	445,189
Personal unsecured loans	4,295	7,734		—			(14		)	(24		)	7,696
Other consumer	3	310		(1		)	—			19			328
Total	61,797	$	925,939	$	2,133		$	1,983		$	(2,178	)	$	927,877


	Nine-Month Period Ended September 30, 2015
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Principal Forbearance			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	46	$	20,462	$	(1,027	)	$	(914	)	$	2,581		$	21,102
Middle market commercial real estate	1	14,439		—			—			—			14,439
Commercial and industrial	437	24,432		(2		)	351			(2,713		)	22,068
Consumer:
Residential mortgages⁽³⁾	331	57,600		1			(156		)	860			58,305
Home equity loans and lines of credit	92	7,274		—			—			1,002			8,276
RICs and auto loans - originated	50,252	957,309		(234		)	—			(203		)	956,872
RICs - purchased	152,943	2,120,303		(4,017		)	—			(804		)	2,115,482
Personal unsecured loans	13,904	23,947		—			(175		)	(89		)	23,683
Other consumer	20	1,441		(1		)	—			44			1,484
Total	218,026	$	3,227,207	$	(5,280	)	$	(894	)	$	678		$	3,221,711

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


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


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


(4)	Other modifications may include modifications such as interest rate reductions, fee waivers, or capitalization of fees.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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 RICs, 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 and nine-month periods ended September 30, 2016 and September 30, 2015, respectively.



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2016			2015			2016			2015
	Number of Contracts	Recorded Investment⁽¹⁾		Number of Contracts	Recorded Investment⁽¹⁾		Number of Contracts	Recorded Investment⁽¹⁾		Number of Contracts	Recorded Investment⁽¹⁾
	(dollars in thousands)						(dollars in thousands)
Commercial
Commercial and industrial	76	$	2,838	10	$	357	194	$	14,223	32	$	1,043
Consumer:
Residential mortgages	5	579		9	2,061		22	3,171		36	6,970
Home equity loans and lines of credit	19	2,991		3	728		54	8,457		14	1,665
RICs and auto loans	12,112	208,762		15,416	241,952		35,299	588,127		37,252	568,756
Unsecured loans	719	1,676		873	1,023		3,594	5,048		3,427	3,712
Other consumer	263	766		—	—		263	766		2	244
Total	13,194	$	217,612	16,311	$	246,121	39,426	$	619,792	40,763	$	582,390


(1)	The recorded investment represents the period-end balance at September 30, 2016 and 2015. Does not include Chapter 7 bankruptcy TDRs.

NOTE 5. 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 the Company with Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC, to be a preferred lender (the "Chrysler Agreement"). Under the Chrysler Agreement, the Company had the first right to review and approve all prime consumer vehicle lease applications originated under the Chrysler Capital program ("Chrysler Capital"), the trade name used in providing services under the Chrysler Agreement . SC provides servicing on all leases originated under this agreement.

Leased vehicles, net consisted of the following as of September 30, 2016 and December 31, 2015:



	September 30, 2016			December 31, 2015
	(in thousands)
Leased vehicles	$	13,551,661		$	11,297,752
Origination fees and other costs	26,893			29,800
Manufacturer subvention payments, net of accretion	(1,195,232		)	(1,048,713		)
Leased vehicles, gross	12,383,322			10,278,839
Less: accumulated depreciation	(2,623,203		)	(1,901,004		)
Leased vehicles, net	$	9,760,119		$	8,377,835

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. LEASED VEHICLES, NET (continued)

For the three-month and nine-month periods ended September 30, 2016, the Company did not execute any bulk sales of leases originated under the Chrysler Capital program. During the three-month and nine-month periods ended September 30, 2015, the Company executed a bulk sale of leases originated under the Chrysler Capital program with depreciated net capitalized costs of zero and $1.3 billion, respectively, and a net book value of zero and $1.2 billion, respectively, to a third party. The bulk sales agreement included certain provisions under which SC agreed to share in residual losses for lease terminations with losses over a specific percentage threshold. SC retained servicing on the leases sold. Due to the accelerated depreciation permitted for tax purposes, this sale generated large taxable gains that SC deferred through a qualified like-kind exchange program. An immaterial amount of taxable gain that did not qualify for deferral was recognized upon expiration of the reinvestment period.

The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of September 30, 2016 (in thousands):




Remainder of 2016	$	459,158
2017	1,505,042
2018	795,298
2019	163,872
2020	2,860
Total	$	2,926,230

Lease income for the three-month and nine-month periods ended September 30, 2016 was $483.9 million and $1.4 billion, respectively, compared to $364.6 million and $1.0 billion, respectively, for the three-month and nine-month periods ended September 30, 2015.

Lease expense for three-month and nine-month periods ended September 30, 2016 was $338.1 million and $953.1 million, respectively, compared to $261.7 million and $755.9 million, respectively, for the three-month and nine-month periods ended September 30, 2015.

NOTE 6. VARIABLE INTEREST ENTITIES

VIEs

The Company transfers RICs and leases into newly-formed securitization trusts ("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, generally, through holding residual interests in the Trusts. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and, when the Company holds the residual interest, 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. When the Company does not retain any debt or equity interests in its securitizations or subsequently sells such interests, it records these transactions as sales of the associated RIC.

The collateral, borrowings under credit facilities and securitization notes payable of the Company's consolidated VIEs remain on the Company's Condensed Consolidated Balance Sheets. The Company recognizes finance charges and fee income on the RICs and leased vehicles and interest expense on the debt, and records a provision for loan and lease 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 owned by them and not available to other creditors.

Revolving credit facilities generally also utilize Trusts that are considered VIEs.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6. VARIABLE INTEREST ENTITIES (continued)

The Company also uses a titling trust to originate and hold its leased vehicles and the associated leases in order to facilitate the pledging of leases to financing facilities or the sale of leases to other parties without incurring the costs and administrative burden of retitling the lease vehicles. This titling trust is considered a VIE.

On-balance sheet VIEs

The assets of consolidated VIEs that are included in the Company's Condensed Consolidated Financial Statements, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, that can be used to settle obligations of the consolidated VIE and the liabilities of these consolidated entities for which creditors (or beneficial interest holders) do not have recourse to our general credit were as follows:



	September 30, 2016		December 31, 2015
	(in thousands)
Assets
Restricted cash	$	1,992,731	$	1,842,877
Loans⁽¹⁾	23,481,814		23,494,541
Leased vehicles, net	8,467,129		6,497,310
Various other assets	589,006		630,017
Total Assets	$	34,530,680	$	32,464,745
Liabilities
Notes payable	$	30,903,083	$	30,628,837
Various other liabilities	92,128		85,844
Total Liabilities	$	30,995,211	$	30,714,681

(1) Includes $1.6 billion and $1.5 billion of RICs held for sale at September 30, 2016 and December 31, 2015, respectively.

Certain amounts shown above are greater than the amounts shown in the corresponding line items in the accompanying Condensed Consolidated Balance Sheets due to intercompany eliminations between the VIEs and other entities consolidated by the Company. The amounts shown above are also impacted by purchase accounting marks from the Change in Control. For example, for most of its securitizations, the Company retains one or more of the lowest tranches of bonds. Rather than showing investment in bonds as an asset and the associated debt as a liability, these amounts are eliminated in consolidation as required by GAAP.

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 miscellaneous income. As of September 30, 2016 and December 31, 2015, the Company was servicing $28.1 billion and $27.3 billion, respectively, of RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.

Below is a summary of the cash flows received from the on-balance sheet Trusts for the periods indicated:



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,
	2016		2015		2016		2015
	(in thousands)
Assets securitized	$	2,043,114	$	4,761,341	$	12,026,706	$	14,828,478

Net proceeds from new securitizations ⁽¹⁾	$	1,688,822	$	3,840,369	$	9,509,135	$	11,816,224
Net proceeds from sale of retained bonds	—		—		128,798		—
Cash received for servicing fees ⁽²⁾	200,634		182,960		595,070		518,563
Net distributions from Trusts ⁽²⁾	776,306		486,377		2,167,512		1,558,772
Total cash received from Trusts	$	2,665,762	$	4,509,706	$	12,400,515	$	13,893,559

(1) Includes additional advances on existing securitizations.

(2) These amounts are not reflected in the accompanying Condensed Consolidated Statements of Cash Flows because the cash flows are between the VIEs and other entities included in the consolidation.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6. VARIABLE INTEREST ENTITIES (continued)

Off-balance sheet VIEs

The Company has completed sales to VIEs that met sale accounting treatment in accordance with applicable guidance. Due to the nature, purpose, and activity of these 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, and may reacquire assets from the Trusts through the exercise of an optional clean-up call, as permitted through the respective servicing agreements. The Company also recognizes a gain or loss in the amount of the difference between the cash proceeds and carrying value of the assets sold.

During the three-month and nine-month periods ended September 30, 2016, the Company executed no off-balance sheet securitizations with VIEs in which it has continuing involvement. As of September 30, 2016 and December 31, 2015, the Company was servicing $2.3 billion and $3.9 billion, respectively, of gross RICs in off-balance sheet 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 sheet Trusts for the periods indicated is as follows:



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,
	2016		2015		2016		2015
	(in thousands)
Assets securitized	$	—	$	—	$	—	$	768,561

Net proceeds from new securitizations	$	—	$	—	$	—	$	785,983
Cash received for servicing fees	10,027		5,955		38,885		17,578
Total cash received from Trusts	$	10,027	$	5,955	$	38,885	$	803,561

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presents activity in the Company's goodwill by its reportable segments for the nine-month period ended September 30, 2016:



	Consumer and Business Banking ⁽¹⁾		Auto Finance & Business Banking			Commercial Real Estate⁽²⁾		Commercial Banking⁽²⁾			Global Corporate Banking		SC		Santander BanCorp ⁽³⁾		Total
	(in thousands)
Goodwill at December 31, 2015	$	1,550,320	$	445,923		$	—	$	1,297,055		$	131,130	$	1,019,960	$	10,537	$	4,454,925
Disposals during the period	—		—			—		—			—		—		—		—
Additions during the period	—		—			—		—			—		—		—		—
Re-allocations during the period	329,983		(445,923		)	870,411		(754,471		)	—		—		—		—
Impairment during the period	—		—			—		—			—		—		—		—
Goodwill at September 30, 2016	$	1,880,303	$	—		$	870,411	$	542,584		$	131,130	$	1,019,960	$	10,537	$	4,454,925

(1) Consumer and Business Banking were formerly designated as the Retail Banking segment and was renamed during the first quarter of 2016.

(2) Commercial Real Estate and Commercial Banking were formerly disclosed as the combined Real Estate and Commercial Banking segment.

(3) As a result of the IHC reorganization, effective July 1, 2016, the Company retrospectively recorded $10.5 million of goodwill related to Santander BanCorp at December 31, 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. GOODWILL AND OTHER INTANGIBLES (continued)

As more fully described in Note 17 to the Condensed Consolidated Financial Statements, during the first quarter of 2016, certain management and line of business changes became effective 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 provide enhanced customer service to its clients. Accordingly, the following changes were made within the Company's reportable segments and reporting units to provide greater focus on each of its core businesses:

•

The small business banking, commercial business banking, and auto leasing lines of business formerly included in the Auto Finance and Business Banking reportable segment were combined with the Consumer and Business Banking reportable segment. The combined impact of these organizational changes resulted in the re-allocation of $330.0 million of goodwill from Auto Finance & Business Banking to Consumer and Business Banking.


•	The Real Estate and Commercial Banking reportable segment was split into the Commercial Real Estate reportable segment and the Commercial Banking reportable segment, resulting in the re-allocation of $870.4 million of goodwill from Commercial Banking to Commercial Real Estate.


•	The CEVF and dealer floor plan lines of business, formerly included in the Auto Finance & Business Banking reportable segment were moved to the Commercial Banking business unit, resulting in the re-allocation of $115.9 million of goodwill from Auto Finance & Business Banking to Commercial Banking.

The Company conducted its annual goodwill impairment test as of October 1, 2015 using generally accepted valuation methods. After conducting an analysis of the fair value of each reporting unit as of October 1, 2015, the Company determined that no impairment of goodwill was identified as a result of the annual impairment analysis. During the fourth quarter of 2015, due to a decline in SC's share price, the Company concluded that the fair value of our SC reporting unit was more likely than not less than its carrying value including goodwill. As a result, the Company performed an interim goodwill impairment analysis as of December 31, 2015, the results of which required the Company to record an impairment of $4.5 billion. During the first nine months of 2016, the Company continued to evaluate SC's share price. The Company is in the process of performing its goodwill impairment test as of October 1, 2016.

Other Intangible Assets

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



	September 30, 2016					December 31, 2015
	Net Carrying Amount		Accumulated Amortization			Net Carrying Amount		Accumulated Amortization
	(in thousands)
Intangibles subject to amortization:
Dealer networks	$	475,429	$	(104,571	)	$	504,839	$	(75,161	)
Chrysler relationship	98,750		(40,000		)	110,000		(28,750		)
Core deposit intangibles	—		(295,842		)	763		(295,079		)
Trade name ⁽¹⁾	17,400		(600		)	—		—
Other intangibles	22,840		(95,171		)	33,674		(84,335		)
Total intangibles subject to amortization	614,419		(536,185		)	649,276		(483,325		)
Intangibles not subject to amortization:
Trade name ⁽¹⁾	$	—	$	—		$	18,000	$	—
Total Intangibles	$	614,419	$	(536,185	)	$	667,276	$	(483,325	)

(1)As of December 31, 2015, the Trade Name intangible asset was identified as an indefinite-lived intangible not subject to amortization. Effective April 1, 2016, management has determined this asset to be a definite-lived intangible with a remaining useful life of 15 years.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7. GOODWILL AND OTHER INTANGIBLES (continued)

As a result of the IHC reorganization, effective July 1, 2016, Santander transferred to the Company intangible assets subject to amortization with a net carrying amount of $19.2 million and $28.2 million and accumulated amortization of $68.9 million and $59.9 million at September 30, 2016 and December 31, 2015, respectively.

Amortization expense on intangible assets for the three-month and nine-month periods ended September 30, 2016 were $17.2 million and $52.9 million, respectively, compared to $19.2 million and $59.1 million for the three-month and nine-month periods ended September 30, 2015, respectively.

During 2016, the Company's core deposit intangibles and purchased credit card relationship intangibles associated with its 2006 acquisitions, which were amortized straight-line over a period of ten years, became fully-amortized.

The estimated aggregate amortization expense related to intangibles, excluding any impairment charges, 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)
2016	$	70,034	$	52,860	$	17,174
2017	61,491		—		61,491
2018	60,644		—		60,644
2019	58,975		—		58,975
2020	58,642		—		58,642
Thereafter	357,493		—		357,493

NOTE 8. OTHER ASSETS

The following is a detail of items that comprise other assets at September 30, 2016 and December 31, 2015:



	September 30, 2016		December 31, 2015
	(in thousands)
Income tax receivables	$	452,266	$	634,262
Derivative assets at fair value	494,803		383,034
Other repossessed assets	195,376		172,749
MSRs	129,922		151,490
Prepaid expenses	172,030		182,069
OREO	115,308		117,746
Miscellaneous assets and receivables	702,586		493,477
Total other assets	$	2,262,291	$	2,134,827

Derivative assets at fair value represent the net amount of derivatives presented in the condensed consolidated financial statements, including the impact of amounts offsetting recognized assets. Refer to the offsetting of financial assets table in Note 11 to these Condensed Consolidated Financial Statements for the detail of these amounts.

The change in income tax receivable is related to the receipt of an IRS refund in the second quarter of 2016.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8. OTHER ASSETS (continued)

MSRs

Residential real estate

The Company maintains an MSR asset for sold residential real estate loans serviced for others. At September 30, 2016 and December 31, 2015, the balance of these loans serviced for others was $15.5 billion, and $15.9 billion, respectively. The Company accounts for residential MSRs using the FVO. Changes in fair value are recorded through the Mortgage banking income, net line of the Condensed Consolidated Statements of Operations. The fair value of the MSRs at September 30, 2016 and December 31, 2015 were $126.1 million and $147.2 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 and forward contracts to purchase MBS. See further discussion on these derivative activities in Note 11 to these Condensed Consolidated Financial Statements.

For the three-month and nine-month periods ended September 30, 2016, the Company recorded net changes in the fair value of MSRs due to valuation totaling $7.7 million and $(18.1) million, respectively, compared to $(13.5) million and $0.7 million for the corresponding periods in 2015.

The following table presents a summary of activity for the Company's residential MSRs that are included in the Condensed Consolidated Balance Sheets.



	Three-Month Period Ended						Nine-Month Period Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
	(in thousands)
Fair value at beginning of period⁽¹⁾	$	117,792		$	157,147		$	147,233		$	145,047
Mortgage servicing assets recognized	6,057			5,795			14,450			17,124
Principal reductions	(5,446		)	(5,934		)	(17,456		)	(19,385		)
Change in fair value due to valuation assumptions	7,711			(13,473		)	(18,113		)	749
Fair value at end of period⁽¹⁾	$	126,114		$	143,535		$	126,114		$	143,535

(1) The Company has total MSRs of $129.9 million and $151.5 million as of September 30, 2016 and December 31, 2015, respectively. The Company has elected to account for its MSR balance using the fair value option while the remainder of the MSRs are accounting for using the lower of cost or fair value.

Fee income and gain/loss on sale of mortgage loans

Included in Mortgage banking income, net on the Condensed Consolidated Statements of Operations was mortgage servicing fee income of $10.8 million and $32.4 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $11.1 million and $33.6 million for the corresponding periods in 2015. The Company had gains on sales of mortgage loans included in Mortgage banking income, net on the Condensed Consolidated Statements of Operations of $8.0 million and $18.1 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to gains of $5.9 million and $30.4 million for the corresponding periods ended September 30, 2015.

Other repossessed assets and OREO

Other repossessed assets primarily consist of SC's vehicle inventory, which is obtained through repossession. Other real estate owned ("OREO") consists primarily of the Bank's foreclosed properties.

Miscellaneous assets and receivables

Miscellaneous assets and receivables includes subvention receivables in connection with the Chrysler Agreement, investment and capital market receivables, and unapplied payments. This increased due to an increase in capitalized lease equipment.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9. DEPOSITS AND OTHER CUSTOMER ACCOUNTS

Deposits and other customer accounts are summarized as follows:



	September 30, 2016				December 31, 2015
	Balance		Percent of total deposits		Balance		Percent of total deposits
	(in thousands)
Interest-bearing demand deposits	$	10,207,447	15.1	%	$	11,665,596	17.8	%
Non-interest-bearing demand deposits	15,592,290		23.0	%	12,915,025		19.7	%
Savings	6,005,579		8.9	%	6,025,358		9.1	%
Customer repurchase accounts	919,158		1.4	%	896,736		1.4	%
Money market	25,353,203		37.4	%	24,437,346		37.3	%
Certificates of deposit	9,626,448		14.2	%	9,643,369		14.7	%
Total Deposits ⁽¹⁾	$	67,704,125	100	%	$	65,583,430	100	%

(1) Includes foreign deposits of $646.5 million and $565.0 million at September 30, 2016 and December 31, 2015, respectively.

Deposits collateralized by investment securities, loans, and other financial instruments totaled $6.1 billion and $3.2 billion at September 30, 2016 and December 31, 2015, respectively.

Demand deposit overdrafts that have been reclassified as loan balances were $52.1 million and $25.2 million at September 30, 2016 and December 31, 2015, respectively.

NOTE 10. BORROWINGS

Total borrowings and other debt obligations at September 30, 2016 were $44.6 billion, compared to $49.8 billion at December 31, 2015. The Company's debt agreements impose certain limitations on dividends other payments and transactions. The Company is currently in compliance with these limitations.

Periodically, as part of the Company's wholesale funding management, it opportunistically repurchases outstanding borrowings in the open market and subsequently retires the obligations. The Company did not repurchase any outstanding borrowings during the nine-month period ended September 30, 2016 or September 30, 2015.

On February 22, 2016, the Company issued a $1.5 billion of senior unsecured floating rate notes to Santander. The note had a floating rate equal to the three-month London Interbank Offered Rate ("LIBOR") plus 218 basis points with a maturity of August 22, 2017. The proceeds of the notes were used for general corporate purposes. During the second quarter of 2016, the Company repaid this note at par with no prepayment penalty.

On May 23, 2016, the Company issued $1.0 billion in aggregate principal amount of its 2.70% senior notes due May 2019 and $600 million in aggregate principal amount of its senior floating rate notes. These notes have a floating rate equal to the three-month LIBOR plus 145 basis points with a maturity of November 2017.

During the first quarter of 2016, the Bank terminated $1.3 billion of FHLB advances. As a consequence, the Company incurred costs of $32.9 million through a loss on debt extinguishment.

During the second quarter of 2016, the Bank terminated $1.5 billion of FHLB advances. As a consequence, the Company incurred costs of $45.6 million through a loss on debt extinguishment.

During the third quarter of 2016, the Bank terminated $750.0 million of FHLB advances. As a consequence, the Company incurred costs of $10.2 million through a loss on debt extinguishment.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. BORROWINGS (continued)

During October 2016, the Bank terminated $300.0 million of FHLB advances. As a consequence, the Company incurred costs of $25.6 million through a loss on debt extinguishment.

Parent Company & other IHC Entity Borrowings and Debt Obligations

The following table presents information regarding the Parent Company & Other IHC borrowings and other debt obligations at the dates indicated:



	September 30, 2016				December 31, 2015
	Balance		Effective Rate		Balance		Effective Rate
	(dollars in thousands)
4.625% senior notes, due April 2016	$	—	—	%	$	475,723	4.85	%
Senior notes, due November 2017⁽¹⁾	598,570		2.49	%	—		—	%
3.45% senior notes, due August 2018	498,401		3.62	%	497,800		3.62	%
2.70% senior notes, due May 2019	996,539		2.84	%	—		—	%
2.65% senior notes, due April 2020	994,288		2.82	%	993,151		2.82	%
4.50% senior notes, due July 2025	1,094,835		4.56	%	1,094,483		4.56	%
Junior subordinated debentures - Capital Trust VI, due June 2036	69,792		7.91	%	69,775		7.91	%
Common securities - Capital Trust VI	10,000		7.91	%	10,000		7.91	%
Junior subordinated debentures - Capital Trust IX, due July 2036	149,426		2.49	%	149,404		2.18	%
Common securities - Capital Trust IX	4,640		2.49	%	4,640		2.18	%
Overnight funds purchase, due January 2017	825		0.03	%	1,445		0.15	%
2.00% subordinated debt, maturing through 2042	40,621		2.00	%	40,549		2.00	%
Overnight borrowings	227,019		0.08	%	687,526		0.05	%
Short-term borrowings, maturing in less than one year	5,230		0.70	%	12,959		0.54	%
Total Parent Company & other IHC entity borrowings and other debt obligations	$	4,690,186	3.21	%	$	4,037,455	3.22	%

(1) These notes bear interest at a rate equal to three-month LIBOR plus 145 basis points per annum.

Bank Borrowings and Debt Obligations

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



	September 30, 2016				December 31, 2015
	Balance		Effective Rate		Balance		Effective Rate
	(dollars in thousands)
2.00% senior notes, due January 2018	$	747,698	2.24	%	$	746,381	2.24	%
Senior notes, due January 2018⁽¹⁾	249,629		1.71	%	249,415		1.31	%
8.750% subordinated debentures, due May 2018	498,699		8.92	%	498,175		8.92	%
Subordinated term loan, due February 2019	122,109		6.78	%	130,899		6.15	%
FHLB advances, maturing through July 2019	6,600,000		1.05	%	13,885,000		1.40	%
REIT preferred, due May 2020	156,074		13.42	%	154,930		13.66	%
Subordinated term loan, due August 2022	29,747		8.35	%	30,344		7.89	%
Total Bank borrowings and other debt obligations	$	8,403,956	1.98	%	$	15,695,144	1.85	%

(1) These notes will bear interest at a rate equal to three-month LIBOR plus 93 basis points per annum.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. BORROWINGS (continued)

Revolving Credit Facilities

The following tables present information regarding SC's credit facilities as of September 30, 2016 and December 31, 2015:



	September 30, 2016
	Balance		Effective Rate		Assets Pledged		Restricted Cash Pledged
	(dollars in thousands)
Warehouse line, maturing on various dates⁽¹⁾	$	800,385	1.84	%	$	1,087,050	$	36,383
Warehouse line, due November 2016⁽²⁾	175,000		2.08	%	—		—
Warehouse line, due November 2016⁽²⁾	250,000		2.08	%	—		2,503
Warehouse line, due June 2017	219,372		2.83	%	417,953		38,791
Warehouse line, due July 2017⁽³⁾	963,120		1.96	%	1,097,091		47,186
Warehouse line, due July 2017⁽⁴⁾	2,695,143		1.96	%	4,097,792		70,008
Warehouse line, due December 2017⁽⁵⁾	1,044,377		1.84	%	1,448,568		27,601
Warehouse line, due January 2018	191,400		2.06	%	265,416		5,505
Warehouse line, due January 2018	293,084		2.13	%	414,103		—
Warehouse line, due March 2018	669,399		1.42	%	939,409		28,150
Repurchase facility, due December 2016⁽⁶⁾	762,440		2.65	%	—		32,344
Repurchase facility, due April 2017⁽⁶⁾	235,509		1.84	%	—		—
Line of credit with related party, due December 2016⁽⁷⁾	1,000,000		2.83	%	—		—
Line of credit with related party, due December 2016⁽⁷⁾	500,000		2.83	%	—		—
Line of credit with related party, due December 2018⁽⁷⁾	550,000		2.89	%	—		—
Total SC revolving credit facilities	$	10,349,229	2.16	%	$	9,767,382	$	288,471

(1) As of September 30, 2016, half of the outstanding balance on this facility matures in March 2017 and half matures in March 2018.

(2) These lines are collateralized by residuals retained by SC.

(3) This line is held exclusively for financing of Chrysler Capital loans.

(4) This line is held exclusively for financing of Chrysler Capital leases.

(5) On November 4, 2016, the maturity date of this facility was extended to October 2018.

(6) These repurchase facilities are collateralized by securitization notes payable retained by SC. No portion of these facilities are unsecured. These facilities have rolling maturities of up to one year.

(7) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of September 30, 2016, $1.8 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, 2015
	Balance		Effective Rate		Assets Pledged		Restricted Cash Pledged
	(dollars in thousands)
Warehouse line, maturing on various dates⁽¹⁾	$	808,135	1.29	%	$	1,137,257	$	24,942
Warehouse line, due June 2016	378,301		1.48	%	535,737		—
Warehouse line, due November 2016⁽²⁾	175,000		1.90	%	—		—
Warehouse line, due November 2016⁽²⁾	250,000		1.90	%	—		2,501
Warehouse line, due July 2017⁽³⁾	682,720		1.35	%	809,185		20,852
Warehouse line, due July 2017⁽⁴⁾	2,247,443		1.41	%	3,412,321		48,589
Warehouse line, due September 2017	565,399		1.20	%	824,327		15,759
Warehouse line, due December 2017⁽⁵⁾	944,877		1.56	%	1,345,051		32,038
Repurchase facility, due December 2016⁽⁶⁾	850,904		2.07	%	—		34,166
Line of credit with related party, due December 2016⁽⁷⁾	1,000,000		2.61	%	—		—
Line of credit with related party, due December 2016⁽⁷⁾	500,000		2.65	%	—		—
Line of credit with related party, due December 2018⁽⁷⁾	800,000		2.84	%	—		—
Total SC revolving credit facilities	$	9,202,779	1.81	%	$	8,063,878	$	178,847

(1) As of December 31, 2015, half of the outstanding balance on this facility matured in March 2016 and half matured in March 2017. On March 29, 2016, the facility was amended to, among other changes, extend the maturity for half of the balance to March 2017 and half to March 2018.

(2) These lines are collateralized by residuals retained by SC.

(3) This line is held exclusively for financing of Chrysler Capital loans.

(4) This line is held exclusively for financing of Chrysler Capital leases.

(5) In December 2015, the commitment on this warehouse line was amended to extend the commitment termination date to December 2017.

(6) This repurchase facility is collateralized by securitization notes payable retained by SC. 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 SC. As of December 31, 2015, $1.4 billion of the aggregate outstanding balances on these credit facilities was unsecured.

Secured Structured Financings

The following tables present information regarding SC's secured structured financings as of September 30, 2016 and December 31, 2015:



	September 30, 2016
	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral		Restricted Cash
	(dollars in thousands)
SC public securitizations, maturing on various dates⁽¹⁾	$	12,374,456	$	29,866,272	0.89% - 2.46%	$	16,332,832	$	1,381,481
SC privately issued amortizing notes, maturing on various dates⁽¹⁾	8,786,543		13,535,991		0.88% - 2.86%	12,464,959		463,104
Total SC secured structured financings	$	21,160,999	$	43,402,263	0.88% - 2.86%	$	28,797,791	$	1,844,585

(1) SC 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 RICs, and the related securitization debt issued by SPEs, remain on the Condensed Consolidated Balance Sheets. The maturity of this debt is based on the timing of repayments from the securitized assets.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. BORROWINGS (continued)



	December 31, 2015
	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral		Restricted Cash
	(dollars in thousands)
SC public securitizations, maturing on various dates⁽¹⁾	$	12,679,987	$	24,923,292	0.89% - 2.29%	$	16,256,067	$	1,242,857
SC privately issued amortizing notes, maturing on various dates⁽¹⁾	8,213,217		11,729,171		0.88% - 2.81%	11,495,352		457,840
Total SC secured structured financings	$	20,893,204	$	36,652,463	0.88% - 2.81%	$	27,751,419	$	1,700,697

Most of SC'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 are collateralized by RICs or vehicle leases.

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 the Overnight Indexed Swap ("OIS") rate 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.

The Company’s capital markets and mortgage banking activities are 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)

Credit Risk Contingent Features

The Company has entered into certain derivative contracts that require the posting of collateral to counterparties when those 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 September 30, 2016, derivatives in this category had a fair value of $13.7 million. The credit ratings of the Company and Bank are currently considered investment grade. The Company estimates as of September 30, 2016 that a further 1- or 2- notch downgrade by either Standard & Poor's ("S&P") or Moody's would require the Company to post up to an additional $0.5 million or $0.5 million of collateral, respectively, to comply with existing derivative agreements.

As of September 30, 2016 and December 31, 2015, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e. those containing collateral posting or termination provisions based on the Company's ratings) that were in a net liability position totaled $85.7 million and $132.5 million, respectively. The Company had $85.7 million and $134.2 million in cash and securities collateral posted to cover those positions as of September 30, 2016 and December 31, 2015, respectively.

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 and nine-month periods ended September 30, 2016 and 2015. The remaining fair value hedges were terminated during the third quarter of 2016.

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 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 and nine-month periods ended September 30, 2016 and 2015. As of September 30, 2016, the Company expects an immaterial amount of gross losses recorded in accumulated other comprehensive loss 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 September 30, 2016 and December 31, 2015 included:



	Notional Amount		Asset		Liability		Weighted Average Receive Rate		Weighted Average Pay Rate		Weighted Average Life (Years)
	(dollars in thousands)
September 30, 2016
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	$	10,119,917	$	3,363	$	54,695	0.62	%	1.03	%	2.90

December 31, 2015
Fair Value hedges:
Cross-currency swaps	$	16,390	$	3,695	$	92	4.76	%	4.75	%	0.11
Interest rate swaps	318,000		47		2,006		1.07	%	2.31	%	3.50
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	11,030,431		7,295		23,047		0.32	%	1.13	%	3.00
Total	$	11,364,821	$	11,037	$	25,145	0.35	%	1.17	%	3.01

See Note 13 for detail of the amounts included in accumulated other comprehensive income related to derivatives activity. Cross-currency swaps designated as hedges matured during the first quarter of 2016.

During the second quarter of 2016, the Company terminated cash flow hedges with a notional value of $1.5 billion. Losses of $20.6 million deferred in accumulated other comprehensive income will be reclassified to interest expense in the periods during which the hedged cash flows occur. Also, fair value hedges with a notional value of $356 million were terminated in tandem with the sale of the hedged investments.

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, as well as derivatives to hedge interest rate risk on SC secured structured financings and the borrowings under its revolving credit facilities. SC uses both interest rate swaps and interest rate caps to satisfy these requirements and to hedge the variability of cash flows on securities issued by Trusts and borrowings under its warehouse facilities. 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 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 Company originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, the Federal National Mortgage Association ("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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11. DERIVATIVES (continued)

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.

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.

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 the Company's market risk associated with certain investments and customer deposit products.

Derivatives Not Designated in Hedge Relationships – Notional and Fair Values

Other derivative activities at September 30, 2016 and December 31, 2015 included:



	Notional				Asset derivatives Fair value				Liability derivatives Fair value
	September 30, 2016		December 31, 2015		September 30, 2016		December 31, 2015		September 30, 2016		December 31, 2015
	(in thousands)
Mortgage banking derivatives:
Forward commitments to sell loans	$	754,368	$	396,984	$	47	$	550	$	3,846	$	—
Interest rate lock commitments	438,556		187,930		9,185		2,540		—		—
Mortgage servicing	400,000		435,000		18,976		679		775		3,502
Total mortgage banking risk management	1,592,924		1,019,914		28,208		3,769		4,621		3,502

Customer related derivatives:
Swaps receive fixed	10,030,283		9,110,944		352,979		209,379		945		6,023
Swaps pay fixed	10,312,805		9,279,446		3,683		16,196		294,089		177,114
Other	2,111,237		3,063,466		34,751		53,418		34,074		52,632
Total customer related derivatives	22,454,325		21,453,856		391,413		278,993		329,108		235,769

Other derivative activities:
Foreign exchange contracts	3,662,011		6,599,760		46,618		53,994		39,925		45,418
Interest rate swap agreements	1,290,484		2,443,991		4		1,176		6,813		6,668
Interest rate cap agreements	9,852,003		10,042,293		11,762		33,080		7		—
Options for interest rate cap agreements	9,824,251		10,013,912		—		—		11,794		32,977
Total return settlement	658,471		1,404,726		—		—		29,864		53,432
Other	1,091,431		899,394		18,625		11,146		20,764		14,553
Total	$	50,425,900	$	53,877,846	$	496,630	$	382,158	$	442,896	$	392,319

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 and nine-month periods ended September 30, 2016 and 2015:



		Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
Derivative Activity⁽¹⁾	Line Item	2016			2015			2016			2015
		(in thousands)
Fair value hedges:
Cross-currency swaps	Miscellaneous income	$	—		$	(39	)	$	174		$	110
Interest rate swaps	Miscellaneous income	190			(3,985		)	1,959			(5,437		)
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Net interest income	(254		)	(1,775		)	(4,379		)	(9,957		)
Other derivative activities:
Forward commitments to sell loans	Mortgage banking income	4,128			(10,663		)	(4,348		)	(1,729		)
Interest rate lock commitments	Mortgage banking income	(793		)	3,595			6,645			2,417
Mortgage servicing	Mortgage banking income	(2,803		)	11,736			21,024			1,302
Customer related derivatives	Miscellaneous income	24,108			(1,376		)	18,985			(1,049		)
Foreign exchange	Miscellaneous income	967			2,142			4,694			4,618
Interest rate swaps, caps, and options	Miscellaneous income	4,329			(3,825		)	(1,790		)	1,501
Interest rate swaps, caps, and options	Net interest income	12,391			21,093			42,563			58,453
Total return settlement	Other administrative expenses	343			3,836			(2,337		)	(10,197		)
Other	Miscellaneous income	(765		)	(1,649		)	974			(2,107		)

(1) Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.

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.

The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master netting ISDA agreements for all trades executed after April 1, 2013. Collateral that is received or pledged for these transactions is disclosed within the “Gross amounts not offset in the Condensed Consolidated Balance Sheet” section of the tables below. Prior to April 1, 2013, the Company had elected to net all caps, floors, and interest rate swaps when it had an ISDA agreement with the counterparty. The collateral received or pledged in connection with these transactions is disclosed within the “Gross amounts offset in the Condensed Consolidated Balance Sheet" section of the tables below.

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 September 30, 2016 and December 31, 2015, 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)
September 30, 2016
Cash flow hedges	$	3,363	$	—	$	3,363	$	—	$	—	$	3,363
Other derivative activities⁽¹⁾	487,445		5,190		482,255		—		8,505		473,750
Total derivatives subject to a master netting arrangement or similar arrangement	490,808		5,190		485,618		—		8,505		477,113
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	9,185		—		9,185		—		—		9,185
Total Derivative Assets	$	499,993	$	5,190	$	494,803	$	—	$	8,505	$	486,298

Total Financial Assets	$	499,993	$	5,190	$	494,803	$	—	$	8,505	$	486,298

December 31, 2015
Fair value hedges	$	3,742	$	—	$	3,742	$	—	$	—	$	3,742
Cash flow hedges	7,295		—		7,295		—		—		7,295
Other derivative activities⁽¹⁾	379,626		10,161		369,465		8,008		21,784		339,673
Total derivatives subject to a master netting arrangement or similar arrangement	390,663		10,161		380,502		8,008		21,784		350,710
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	2,532		—		2,532		—		—		2,532
Total Derivative Assets	$	393,195	$	10,161	$	383,034	$	8,008	$	21,784	$	353,242

Total Financial Assets	$	393,195	$	10,161	$	383,034	$	8,008	$	21,784	$	353,242


(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)
September 30, 2016
Cash flow hedges	$	54,695	$	—	$	54,695	$	—	$	44,227	$	10,468
Other derivative activities⁽¹⁾	413,032		73,550		339,482		7,691		286,581		45,210
Total derivatives subject to a master netting arrangement or similar arrangement	467,727		73,550		394,177		7,691		330,808		55,678
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	29,864		—		29,864		—		—		29,864
Total Derivative Liabilities	$	497,591	$	73,550	$	424,041	$	7,691	$	330,808	$	85,542

Total Financial Liabilities	$	497,591	$	73,550	$	424,041	$	7,691	$	330,808	$	85,542

December 31, 2015
Fair value hedges	$	2,098	$	—	$	2,098	$	87	$	10,602	$	(8,591	)
Cash flow hedges	23,047		—		23,047		—		38,607		(15,560		)
Other derivative activities⁽¹⁾	338,887		77,734		261,153		4,265		209,087		47,801
Total derivatives subject to a master netting arrangement or similar arrangement	364,032		77,734		286,298		4,352		258,296		23,650
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	53,432		—		53,432		—		—		53,432
Total Derivative Liabilities	$	417,464	$	77,734	$	339,730	$	4,352	$	258,296	$	77,082

Total Financial Liabilities	$	417,464	$	77,734	$	339,730	$	4,352	$	258,296	$	77,082


(1)	Includes customer-related and other derivatives.


(2)	Includes mortgage banking derivatives.

NOTE 12. INCOME TAXES

Income tax provisions of $108.3 million and $340.0 million were recorded for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $217.8 million and $416.4 million for the corresponding periods in 2015. This resulted in effective tax rates of 32.4% and 35.8% for the three-month and nine-month periods ended September 30, 2016, respectively, compared to 60.7% and 41.0% for the corresponding periods in 2015.

The Company recognized discrete income tax benefits of $6.7 million and $4.6 million, respectively, for the three-month and nine-month periods ended September 30, 2016 and discrete income tax provisions of $90.0 million and $57.8 million, respectively, for the three-month and nine-month periods ended September 30, 2015, which resulted in the higher effective tax rates for the three-month and nine-month periods ended September 30, 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12. INCOME TAXES (continued)

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 its tax balances quarterly and, as new information becomes available, the balances are adjusted as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions.

The 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 Company is entitled to a refund of the amounts paid. The Company has recorded a receivable in the Other assets line of the Condensed Consolidated Balance Sheets for the amount of these payments, less a tax reserve of $230.1 million, as of September 30, 2016.

On November 13, 2015, the Federal District Court issued a written opinion in favor of the Company on all contested issues, and in a judgment issued on January 13, 2016, ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. On March 11, 2016, the IRS filed a notice of appeal. The appeal was heard in the First Circuit on November 9, 2016.

In 2013, two different federal courts decided cases involving similar financing structures entered into by the Bank of New York Mellon Corp. ("BNY Mellon") and BB&T Corp. ("BB&T") in favor of the IRS. BNY Mellon and BB&T each appealed. On May 14, 2015, the Court of Appeals for the Federal Circuit decided BB&T's appeal by affirming the trial court's decision to disallow BB&T's foreign tax credits and to allow penalties, but reversed the trial court and allowed BB&T's entitlement to interest deductions. On September 9, 2015, the Court of Appeals for the Second Circuit upheld the trial court's decision in BNY Mellon's case, allowing BNY Mellon to claim interest deductions, but disallowing BNY Mellon's claimed foreign tax credits. On September 29, 2015, BB&T filed a petition requesting the U.S. Supreme Court to hear its appeal of the Federal Circuit Court’s decision. BNY Mellon filed a petition requesting the U.S. Supreme Court hear its appeal of the Second Circuit’s decision on November 3, 2015. On March 7, 2016, the U.S. Supreme Court denied BB&T's and BNY Mellon's petitions.

The Company has not changed its reserve position as of September 30, 2016, and remains confident in the legal merits of its position and believes its reserve amount adequately provides for potential exposure to the IRS related to these items. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $230.1 million to an increase of $201.9 million.

With few exceptions, the Company is no longer subject to federal, state and non-U.S. 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 and nine-month periods ended September 30, 2016, and 2015, respectively.



	Total Other Comprehensive (Loss)/Income									Total Accumulated Other Comprehensive Loss
	Three-Month Period Ended September 30, 2016									June 30, 2016						September 30, 2016
	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	$	69,464		$	(15,775	)	$	53,689
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments ⁽¹⁾	254			(115		)	139
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	69,718			(15,890		)	53,828			$	(63,881	)	$	53,828		$	(10,053	)

Change in unrealized (losses)/gains on investment securities available-for-sale	(105,270		)	38,852			(66,418		)
Net unrealized (losses)/gains on investment securities available-for-sale	(105,270		)	38,852			(66,418		)	83,262			(66,418		)	16,844

Pension and post-retirement actuarial losses⁽²⁾	(4,085		)	(364		)	(4,449		)	(56,877		)	(4,449		)	(61,326		)

As of September 30, 2016	$	(39,637	)	$	22,598		$	(17,039	)	$	(37,496	)	$	(17,039	)	$	(54,535	)

(1) Net gains/(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 in Note 11 to the Condensed Consolidated Financial Statements.

(2) 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 (Loss)/Income
	For the Nine-Month Period Ended September 30, 2016									December 31, 2015						September 30, 2016
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
	(in thousands)
Change in accumulated (losses)/gains on cash flow hedge derivative financial instruments	$	(11,538	)	$	15,117		$	3,579
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments ⁽¹⁾	4,379			(1,430		)	2,949
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments	(7,159		)	13,687			6,528			$	(16,581	)	$	6,528		$	(10,053	)

Change in unrealized gains/(losses) on investment securities available-for-sale	246,508			(99,376		)	147,132
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	(57,770		)	23,398			(34,372		)
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities ⁽³⁾	44			(18		)	26
Reclassification adjustment for net (gains)/losses included in net income	(57,726		)	23,380			(34,346		)
Net unrealized gains/(losses) on investment securities available-for-sale	188,782			(75,996		)	112,786			(95,942		)	112,786			16,844

Pension and post-retirement actuarial losses⁽⁴⁾	(2,227		)	(1,092		)	(3,319		)	(58,007		)	(3,319		)	(61,326		)

As of September 30, 2016	$	179,396		$	(63,401	)	$	115,995		$	(170,530	)	$	115,995		$	(54,535	)

(1) Net gains 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 in Note 11 to the Condensed Consolidated Financial Statements.

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

(3) Unrealized losses previously recognized in accumulated other comprehensive income on securities for which OTTI was recognized during the period. See further discussion in Note 3 to the Condensed Consolidated Financial Statements.

(4) 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 (Loss)/Income
	Three-Month Period Ended September 30, 2015									June 30, 2015						September 30, 2015
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
	(in thousands)
Change in accumulated (losses)/gains on cash flow hedge derivative financial instruments	$	(45,805	)	$	16,975		$	(28,830	)
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments ⁽¹⁾	1,774			(657		)	1,117
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments	(44,031		)	16,318			(27,713		)	$	(22,161	)	$	(27,713	)	$	(49,874	)

Change in unrealized gains/(losses) on investment securities available-for-sale	135,553			(52,711		)	82,842
Reclassification adjustment for net losses/(gains) included in net income/(expense) on non-OTTI securities ⁽²⁾	1,993			(777		)	1,216
Net unrealized gains/(losses) on investment securities available-for-sale	137,546			(53,488		)	84,058			(74,275		)	84,058			9,783

Pension and post-retirement actuarial gains/(losses)⁽³⁾	1,019			(398		)	621			(61,116		)	621			(60,495		)

As of September 30, 2015	$	94,534		$	(37,568	)	$	56,966		$	(157,552	)	$	56,966		$	(100,586	)

(2) Net gains reclassified into Net gains 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 (Loss)/Income
	For the Nine-Month Period Ended September 30, 2015									December 31, 2014						September 30, 2015
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
	(in thousands)
Change in accumulated (losses)/gains on cash flow hedge derivative financial instruments	$	(67,051	)	$	25,226		$	(41,825	)
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments⁽¹⁾	9,957			(3,746		)	6,211
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments	(57,094		)	21,480			(35,614		)	$	(14,260	)	$	(35,614	)	$	(49,874	)

Change in unrealized gains/(losses) on investment securities available-for-sale	119,696			(47,692		)	72,004
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	(18,363		)	7,325			(11,038		)
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities ⁽³⁾	1,092			(435		)	657
Reclassification adjustment for net (gains)/losses included in net income	(17,271		)	6,890			(10,381		)
Net unrealized gains/(losses) on investment securities available-for-sale	102,425			(40,802		)	61,623			(51,840		)	61,623			9,783

Pension and post-retirement actuarial gains/(losses)⁽⁴⁾	3,054			(1,382		)	1,672			(62,167		)	1,672			(60,495		)

As of September 30, 2015	$	48,385		$	(20,704	)	$	27,681		$	(128,267	)	$	27,681		$	(100,586	)

(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.

(4) Included in the computation of net periodic pension costs,

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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



Other Commitments	September 30, 2016		December 31, 2015
	(in thousands)
Commitments to extend credit	$	29,051,150	$	32,114,672
Unsecured revolving lines of credit	31,890		33,586
Letters of credit	2,111,716		2,154,696
Recourse exposure on sold loans	72,081		70,394
Commitments to sell loans	87,142		56,982
Total commitments	$	31,353,979	$	34,430,330

Commitments to Extend Credit

Commitments to extend credit generally have fixed expiration dates, are variable rate, and contain provisions 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.

Included within the reported balances for Commitments to extend credit at September 30, 2016 are $6.0 million of commitments that can be canceled by the Company without notice.

During the three-month and nine-month periods ended September 30, 2016, SBNA transferred and settled $338.0 million and $6.3 billion, respectively, of unfunded commitments to extend credit to an unconsolidated related party for a gain on sale of $0.4 million and a loss on sale of $1.7 million, respectively. Subsequent to September 30, 2016 but prior to the issuance of these financial statements, SBNA transferred and settled an additional $190.0 million of unfunded commitments to extend credit to an unconsolidated related party for a gain on sale of $0.1 million.

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 to extend credit expiring per period as of the dates indicated:



	September 30, 2016		December 31, 2015
	(in thousands)
1 year or less	$	5,453,034	$	7,176,748
Over 1 year to 3 years	4,376,927		5,260,636
Over 3 years to 5 years	4,086,094		12,136,625
Over 5 years ⁽¹⁾	15,135,095		7,540,663
Total	$	29,051,150	$	32,114,672

(1) Includes certain commitments to extend credit that do not have a contractual maturity date, but are expected to be outstanding greater than 5 years.

Unsecured Revolving Lines of Credit

Such commitments, included in the Commitments to extend credit table above, 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 at September 30, 2016 is 13.3 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 requested draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and other customer business assets. The maximum undiscounted exposure related to these commitments at September 30, 2016 was $2.1 billion. The fees related to letters of credit are deferred and amortized over the life of the respective commitments and were immaterial to the Company’s financial statements at September 30, 2016. 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 September 30, 2016 and December 31, 2015, the liability related to these letters of credit was $11.1 million and $30.0 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 September 30, 2016 and December 31, 2015 were lines of credit outstanding of $123.5 million and $119.0 million, respectively.

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



	September 30, 2016		December 31, 2015
	(in thousands)
1 year or less	$	1,338,876	$	1,445,048
Over 1 year to 3 years	211,368		380,656
Over 3 years to 5 years	83,208		304,112
Over 5 years	478,264		24,880
Total	$	2,111,716	$	2,154,696

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 multifamily 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 $386.3 million as of September 30, 2016 and $552.1 million as of December 31, 2015. As a result of its agreement with FNMA, the Company retained a 100% first loss position on each multifamily loan sold to FNMA until the earlier to occur of (i) the aggregate approved losses on multifamily loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole of $34.4 million as of September 30, 2016 and $34.4 million as of December 31, 2015, or (ii) the time when such loans sold to FNMA under this program are fully paid off. Any losses sustained as a result of impediments in standard representations and warranties would be in addition to the maximum loss exposure.

The Company has established a liability which represents the fair value of the retained credit exposure 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 September 30, 2016 and December 31, 2015, the Company had $4.4 million and $6.8 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 the 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 the FNMA is required for all transactions related to the liquidation of properties underlying the mortgages.

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.

SC Commitments

SC is obligated to make purchase price holdback payments to a third-party originator of auto loans it has purchased, when losses are lower than originally expected. SC also is obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased loans were greater than originally expected. As of September 30, 2016, all purchase price holdback payments, and all total return settlement payments due in 2016, have been made. These obligations are accounted for as derivatives (Note 11).

Under terms of agreements with LendingClub, SC was previously committed to purchase a portion of "near-prime" (as that term is defined in the agreements) originations through July 2017. On October 9, 2015, SC sent a notice of termination to LendingClub, and, accordingly, ceased originations on this platform on January 7, 2016.

SC is 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, SC has not recorded an allowance for unfunded commitments. As of September 30, 2016 and December 31, 2015, SC was obligated to purchase $15.2 million and $12.5 million, respectively, in receivables that had been originated by the retailer but not yet purchased by SC. SC also is required to make a profit-sharing payment to the retailer each month if performance exceeds a specified return threshold. The retailer also has the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement, and, provided that repurchase right is exercised, has the right to retain up to 20% of new accounts subsequently originated.

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 OEM other than FCA, SC 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 SC to originate any loans, but for each loan originated SC pays the OEM a referral fee, comprised of a volume bonus fee and a loss betterment bonus fee. The loss betterment bonus fee is 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 RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet trusts or other third parties. As of September 30, 2016, there were no loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s retail installment contract sales agreements will not have a material adverse effect on SC’s consolidated financial position, results of operations, or cash flows.

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

Under terms of the Chrysler Agreement, SC must make revenue-sharing payments to FCA and also must make gain-sharing payments when residual gains on leased vehicles exceed a specified threshold. SC had accrued $14.0 million and $12.1 million at September 30, 2016 and December 31, 2015, respectively, related to these obligations.

SC has a flow agreement with Bank of America whereby SC is committed to sell up to a specified amount of eligible loans to Bank of America each month through May 2018. Prior to October 1, 2015, the amount of this monthly commitment was $300.0 million. On October 1, 2015, SC and Bank of America amended the flow agreement to increase the maximum commitment to sell to $350.0 million of eligible loans each month, and to change the required written notice period from either party in the event of termination of the agreement from 120 days to 90 days. On July 27, 2016, SC and Bank of America further amended the flow agreement to reduce the maximum commitment to sell eligible loans each month to the original contractual amount of $300.0 million from $350.0 million. On October 27, 2016, Bank of America notified SC that it is terminating the flow agreement effective January 31, 2017. SC 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. SC had accrued $8.7 million and $6.3 million at September 30, 2016 and December 31, 2015, respectively, related to this obligation.

SC has sold loans to CBP under terms of a flow agreement and predecessor sale agreements. On June 25, 2015, SC and CBP amended the flow agreement to reduce, effective from and after August 1, 2015, CBP's committed purchases of Chrysler Capital prime loans from a maximum of $600.0 million and a minimum of $250.0 million per quarter to a maximum of $200.0 million and a minimum of $50.0 million per quarter, as may be adjusted according to the agreement. SC 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. SC had accrued $3.3 million and $3.4 million at September 30, 2016 and December 31, 2015, respectively, related to the loss-sharing obligation.

As of September 30, 2016, SC is party to a forward flow asset sale agreement with a third party under terms of which SC is committed to sell charged-off loan receivables in bankruptcy status on a quarterly basis until sales total at least $350.0 million. Any sale after the total sales have reached $275.0 million is subject to a market price check. As of September 30, 2016 and December 31, 2015, the remaining aggregate commitment was $166.2 million and $200.7 million, respectively.

In connection with the bulk sales of Chrysler Capital leases to a third party, SC is obligated to make quarterly payments to the purchaser sharing residual losses for lease terminations with losses over a specific percentage threshold. The estimated guarantee liability, net, was $0.0 million and $2.9 million, net, as of September 30, 2016 and December 31, 2015, respectively.

Pursuant to the terms of a Separation Agreement among SC`s former CEO Thomas G. Dundon, SC, DDFS LLC, the Company and Santander, upon satisfaction of applicable conditions, including receipt of required regulatory approvals, SC will accrue and pay Mr. Dundon a cash payment of up to $115.1 million.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 that include items such as indemnifications provided in the ordinary course of business and intercompany guarantees.

Litigation and Regulatory Matters

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, inspections, information-gathering requests, inquiries and investigations, including by the Board of Governors of the Federal Reserve System ( “Federal Reserve”), the Office of the Comptroller of the Currency (“OCC”), the Consumer Financial Protection Bureau (“CFPB”), the Federal Deposit Insurance Corporation (“FDIC”), the Department of Justice (“DOJ”), the SEC, state attorneys general, and other governmental, enforcement and regulatory authorities.

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.

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, enforcement, 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, during which quarter 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 of the Company's legal matters, the Company is able to estimate a range of reasonably possible losses. For other matters for which some loss is probable or reasonably possible, such an estimate is not possible. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves at September 30, 2016 are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows of the Company. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Company.

The regulatory 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 to these Condensed Consolidated Financial Statements for disclosure regarding the lawsuit filed by the Company against the IRS/United States.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 Financing Agency, the FNMA or the 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 June 16, 2015, the Bank entered into a consent order with the OCC (the “Order”) amending a prior consent order issued by the OTS in 2011 as well as the 2013 amendment to the Order (the “2015 Amendment”). The 2015 Amendment outlined nine actionable items that remained outstanding from the Order, and imposed certain supervisory restrictions on the Bank's mortgage origination and servicing business. These restrictions required the Bank to obtain prior supervisory non objection from the OCC before engaging in certain new or broader mortgage origination and servicing activities or appointing new senior mortgage servicing officers. The Bank has addressed the nine actionable items. On February 8, 2016, the OCC terminated the Order in its entirety and assessed a civil monetary penalty (“CMP”) of $3.4 million, which has been paid by the Bank.

Santander Identity Theft Protection Product ("SIP") Matter

In 2014, the Bank commenced discussions with the OCC to address concerns that some customers may have paid for but did not receive certain benefits of SIP, an identity theft protection product, from the Bank's third-party vendor. In response to those concerns, as of September 30, 2016, the Bank had made $37.3 million in total remediation payments to customers. Notwithstanding those payments, on March 26, 2015, the Bank entered into a Consent Cease and Desist Order ("SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP. Pursuant to the SIP Consent Order, the Bank paid a civil monetary penalty of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of SIP. As indicated above, as of the end of 2014, all customers had been mailed a refund representing the amount paid for product enrollment.

Subsequently, the Bank commenced a further review in order to remediate checking account customers who may have been charged an overdraft fee and credit card customers who may have been charged an over limit fee and/or finance charge related to SIP product fees. The approximate amount of the expected additional remediation was $5.2 million. On June 26, 2015, the Bank sent its formal response to the SIP Consent Order and on October 15, 2015, the OCC responded objecting to the Bank's response and proposed reimbursement and action plans. On December 14, 2015, the Bank re-submitted a revised response and enhanced reimbursement and action plans and on December 21, 2015 received a notice of non-objection from the OCC. Since that time, the actions and remediation set forth in the action plans are underway as is ongoing reporting to the OCC.

Overdraft Coverage Consent Order

On April 1, 2014, the Bank received a civil investigative demand ("CID") from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for ATM and/or onetime debit card transactions through a third party vendor. On July 14, 2016, the Bank entered into a Consent Order with the CFPB regarding the Bank’s overdraft coverage practices for ATM and onetime debit card transactions. Pursuant to the terms of the consent order, the Bank paid a civil monetary penalty of $10.0 million and agreed to validate the overdraft coverage elections made by customers who opted in to overdraft coverage for ATM and onetime debit card transactions as a result of telemarketing by the third party vendor. The Bank is also required to make certain changes to its third party vendor oversight policy and its customer complaint policy. The Bank is working to meet the Consent Order requirements. However, it is possible that additional regulatory action could be taken and/or litigation filed as a result of these issues.

SC Matters

Periodically, SC is party to, or otherwise involved in, various lawsuits and other legal proceedings that arise in the ordinary course of business.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

On August 26, 2014, a purported securities class action lawsuit was filed in the United States District Court, Southern District of New York, captioned Steck v. Santander Consumer USA Holdings Inc. et al., No. 1:14-cv-06942 (the "Deka Lawsuit"). On October 6, 2014, another purported securities class action lawsuit was filed in the District Court of Dallas County, State of Texas, captioned Kumar v. Santander Consumer USA Holdings, et al., No. DC-14-11783, which was subsequently removed to the United States District Court, Northern District of Texas and re-captioned Kumar v. Santander Consumer USA Holdings, et al., No. 3:14-CV-3746 (the "Kumar Lawsuit").

Both the Deka Lawsuit and the Kumar Lawsuit were brought against SC, certain of its current and former directors and executive officers and certain institutions that served as underwriters in SC's IPO on behalf of a class consisting of those who purchased or otherwise acquired SC's securities between January 23, 2014 and June 12, 2014. In February 2015, the Kumar Lawsuit was voluntarily dismissed with prejudice. In June 2015, the venue of the Deka Lawsuit was transferred to the United States District Court, Northern District of Texas. In September 2015, the court granted a motion to appoint lead plaintiffs and lead counsel, and the Deka Lawsuit is now captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The amended class action complaint in the Deka Lawsuit alleges that that SC's registration statement and prospectus and certain subsequent public disclosures contained misleading statements concerning SC’s ability to pay dividends and the adequacy of SC’s compliance systems and oversight. The amended complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act and under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks damages and other relief. On December 18, 2015, SC and the individual defendants moved to dismiss the amended class action complaint and on June 13, 2016, the motion to dismiss was denied.

On October 15, 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614 (the Feldman Lawsuit). The Feldman Lawsuit names as defendants current and former members of SC’s Board, and names SC as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing SC’s subprime auto lending practices, resulting in harm to SC. The complaint seeks unspecified damages and equitable relief. On December 29, 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.

On March 18, 2016, a purported securities class action lawsuit was filed in the United States District Court, Northern District of Texas, captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783 (the Parmelee Lawsuit). On April 4, 2016, another purported securities class action lawsuit was filed in the United States District Court, Northern District of Texas, captioned Benson v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-919 (the Benson Lawsuit). Both the Parmelee Lawsuit and the Benson Lawsuit were filed against SC and certain of its current and former directors and executive officers on behalf of a class consisting of all those who purchased or otherwise acquired SC's securities between February 3, 2015 and March 15, 2016. The complaints in the Parmelee Lawsuit and Benson Lawsuit allege that SC made false or misleading statements, as well as failed to disclose material adverse facts in prior annual and quarterly reports filed under the Exchange Act and certain other public disclosures, in connection with SC's change in its methodology for estimating its ACL and correction of such allowance for prior periods in SC’s Annual Report on Form 10-K/A for the year ended December 31, 2015. The complaints assert claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seek damages and other relief. On May 25, 2016, the Benson Lawsuit was consolidated into the Parmelee Lawsuit, with the consolidated case captioned as Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783.

On September 27, 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. # 12775 (the Jackie888 Lawsuit). The Jackie888 Lawsuit names as defendants current and former members of SC’s Board, and names SC as a nominal defendant. The complaint alleges, among other things, that the defendants breached their fiduciary duties in connection with SC’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Further, SC is party to, or is periodically otherwise involved in reviews, investigations, and proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the Federal Reserve, the CFPB, the DOJ, the SEC, the FTC and various state regulatory agencies. Currently, such proceedings include a civil subpoena from the DOJ, under the Financial Institutions Reform, Recovery, and Enforcement Act, requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since 2007, and from the SEC requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since January 2013. SC also has received civil subpoenas from various state attorneys general requesting similar documents and communications. SC is complying with the requests for information and document preservation and continues to discuss these matters with the relevant government authorities.

On November 4, 2015, SC entered into an AOD with the Office of Massachusetts AG. The Massachusetts Attorney General alleged that SC violated the maximum permissible interest rates allowed under Massachusetts law due to the inclusion of GAP charges in the calculation of finance charges. Among other things, the AOD requires SC, with respect to any loan that exceeded the maximum rates, to issue refunds of all finance charges paid to date and to waive all future finance charges. The AOD also requires SC to undertake certain remedial measures, including ensuring that interest rates on its loans do not exceed maximum rates (when GAP charges are included) in the future, and provides that SC pay one hundred fifty thousand dollars to the Massachusetts Attorney General to reimburse its costs of implementing the AOD.

On February 25, 2015, SC entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, that resolves the DOJ's claims against SC 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 ("SCRA"). The consent order requires SC to pay a civil fine in the amount of fifty-five thousand dollars, as well as at least $9.4 million to affected servicemembers consisting of ten thousand dollars per servicemember plus compensation for any lost equity (with interest) for each repossession by SC and five thousand dollars per servicemember for each instance where SC sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder, and requires SC to undertake certain additional remedial measures.

On July 31, 2015, the CFPB notified SC that it had referred to the DOJ certain alleged violations by SC of the ECOA regarding statistical disparities in markups charged by automobile dealers to protected groups on loans originated by those dealers and purchased by SC and the treatment of certain types of income in SC's underwriting process. On September 25, 2015, the DOJ notified SC that it has initiated, based on the referral from the CFPB, an investigation under the ECOA of SC's pricing of automobile loans.

IHC Matters

Periodically, Santander Securities LLC (“SSLLC”) is party to pending and threatened legal actions and proceedings, including Financial Industry Regulatory Authority (“FINRA”) arbitration actions and class action claims.

Puerto Rico FINRA Arbitrations

As of September 30, 2016, SSLLC has received 171 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds. Most of these cases are based upon concerns regarding the local Puerto Rico securities market. The statement of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There are 123 claims that remain pending.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Puerto Rico Closed-End Funds Shareholder Derivative and Class Action

On September 12, 2016 customers of certain Puerto Rico closed-end funds (“CEFs”) filed a shareholder derivative and class action in the Court of First Instance of the Commonwealth of Puerto Rico, Superior Court of San Juan, captioned Dionisio Trigo González et al. v. Banco Santander, S.A. et al., Civil No. 2016-0857. Customers filed this action against Banco Santander, S.A., Santander BanCorp, Banco Santander Puerto Rico, Santander Securities LLC, Santander Asset Management, LLC, and several directors and senior management of those entities. The complaint alleges misconduct including that the entities and individuals created, controlled, managed, and advised certain CEFs within the First Puerto Rico Family of Funds (the “Funds”) from March 1, 2012 through the present to the detriment of the Funds and their shareholders. Brought on behalf of the Funds and Puerto-Rico based investors, the complaint contains numerous allegations and seeks unspecified damages but alleges damages to be at least tens of millions of dollars.

SHUSA 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 the Company.

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 Condensed Consolidated Financial Statements of the Company's Annual Report on Form 10-K/A for the year ended December 31, 2015. During the three-month and nine-month periods ended September 30, 2016, SBNA transferred and settled $0.3 billion and $6.3 billion, respectively, of unfunded commitments to extend credit to an unconsolidated related party for a gain on sale of $0.4 million and a loss on sale of $1.7 million. Subsequent to September 30, 2016 but prior to the issuance of these financial statements, SBNA transferred and settled an additional $190.0 million of unfunded commitments to extend credit to an unconsolidated related party for a gain on sale of $0.1 million; see Note 14. 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.

On July 2, 2015, the Company announced that it had entered into an agreement with former SC Chief Executive Officer Thomas G. Dundon (” Dundon”), Dundon DFS LLC ("DDFS"), and Santander related to Mr. Dundon's departure from SC (the “Separation Agreement”). Pursuant to the Separation Agreement, the Company was deemed to have delivered an irrevocable notice to exercise its option to acquire all of the 34,598,506 shares of SC Common Stock owned by DDFS and consummate the transactions contemplated by the call option notice, subject to the receipt of all required regulatory approvals (the "Call Transaction"). At that date, the SC Common Stock held by DDFS (the "DDFS Shares") represented approximately 9.7% of SC Common Stock. The Separation Agreement did not affect Santander’s option to assume the Company’s obligation under the Call Transaction as provided in the Shareholders Agreement that was entered into by the same parties on January 28, 2014. Under the Separation Agreement, because the Call Transaction was not consummated prior to October 15, 2015 (the “Call End Date”), DDFS is free to transfer any or all of the DDFS shares, subject to the terms and conditions of the Amended and Restated Loan Agreement dated as of July 16, 2014 between DDFS and Santander. Because the Call Transaction was not completed before the Call End Date, interest began accruing on the price that will be paid per share in the Call Transaction at the overnight LIBOR rate on the third business day preceding the consummation of the Call Transaction plus 100 basis points with respect to the shares of SC Common Stock that will ultimately be sold in the Call Transaction. The Amended and Restated Loan Agreement provides for a $300.0 million revolving loan which, as of September 30, 2016 and December 31, 2015, had an unpaid principal balance of approximately $290.0 million. Pursuant to the Loan Agreement, 29,598,506 shares of the SC’s Common Stock owned by DDFS are pledged as collateral under a related pledge agreement.

On August 31, 2016, Santander exercised its option to become the direct obligor of the Company’s Call Obligation in accordance with the Shareholders Agreement dated as of January 28, 2014 among Dundon, DDFS, SC and Santander. It is expected that Santander will subsequently contribute the DDFS Shares to the Company, which will be accounted for by the Company as an equity contribution. To date, the Call Transaction has not been consummated and remains subject to the completion of all conditions and required regulatory approvals.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE

General

As of September 30, 2016, $17.9 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. $190.1 million of these financial instruments was measured using quoted market prices for identical instruments or Level 1 inputs. Approximately $16.0 billion of these financial instruments were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $1.7 billion of these financial instruments were measured using model-based techniques, or Level 3 inputs, and represented approximately 9.4% of total assets measured at fair value and approximately 1.2% 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, discounted cash flow ("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.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

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 the Company's 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 or 3 during the three-month and nine-month periods ended September 30, 2016 and September 30, 2015 for any assets or liabilities valued at fair value on a recurring basis.

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 September 30, 2016 and December 31, 2015.



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30, 2016
	(in thousands)
Financial assets:
U.S. Treasury securities	$	185,264	$	544,000	$	—	$	729,264
Corporate debt	—		36		—		36
Asset-backed securities	—		373,229		1,322,179		1,695,408
State and municipal securities	—		31		—		31
Mortgage backed securities	—		14,202,282		—		14,202,282
Total investment securities available-for-sale⁽¹⁾	185,264		15,119,578		1,322,179		16,627,021
Trading securities	4,790		1,169		—		5,959
Retail installment contracts held-for-investment	—		—		217,543		217,543
Loans held-for-sale⁽²⁾	—		384,972		—		384,972
Mortgage servicing rights	—		—		126,114		126,114
Derivatives:
Cash flow	—		3,363		—		3,363
Mortgage banking interest rate lock commitments	—		—		9,185		9,185
Mortgage banking forward sell commitments	—		—		47		47
Customer related	—		391,413		—		391,413
Foreign exchange	—		46,618		—		46,618
Mortgage servicing	—		18,976		—		18,976
Interest rate swap agreements	—		4		—		4
Interest rate cap agreements	—		11,762		—		11,762
Other	—		18,625		—		18,625
Total financial assets	$	190,054	$	15,996,480	$	1,675,068	$	17,861,602
Financial liabilities:
Derivatives:
Cash flow	$	—	$	54,695	$	—	$	54,695
Mortgage banking forward sell commitments	—		3,846		—		3,846
Customer related	—		329,108		—		329,108
Total return swap	—		—		639		639
Foreign exchange	—		39,925		—		39,925
Mortgage servicing	—		775		—		775
Interest rate swaps	—		6,813		—		6,813
Interest rate cap agreements	—		7		—		7
Option for interest rate cap	—		11,794		—		11,794
Total return settlement	—		—		29,864		29,864
Other	—		19,974		151		20,125
Total financial liabilities	$	—	$	466,937	$	30,654	$	497,591

(1) Investment securities available-for-sale disclosed on the Condensed Consolidated Balance Sheet at September 30, 2016 includes $10.8 million of equity securities that are not presented within this table in accordance with the adoption of ASU 2015-07. Refer to Note 1 to the Condensed Consolidated Financial Statements for additional details related to this ASU implementation.

(2) LHFS disclosed on the Condensed Consolidated Balance Sheet also includes LHFS that are held at the lower of cost or fair value and are not presented within this table.

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, 2015
	(in thousands)
Financial assets:
U.S. Treasury securities	$	185,362	$	3,826,233	$	—	$	4,011,595
Corporate debt	—		1,475,613		—		1,475,613
Asset-backed securities	—		409,270		1,360,240		1,769,510
State and municipal securities	—		767,880		—		767,880
Mortgage backed securities	—		13,706,087		—		13,706,087
Total investment securities available-for-sale⁽¹⁾	185,362		20,185,083		1,360,240		21,730,685
Trading securities	—		230		18		248
Retail installment contracts held-for-investment	—		—		328,655		328,655
Loans held-for-sale⁽²⁾	—		236,760		—		236,760
Mortgage servicing rights	—		—		147,233		147,233
Derivatives:
Fair value	—		3,742		—		3,742
Cash flow	—		7,295		—		7,295
Mortgage banking interest rate lock commitments	—		—		2,540		2,540
Mortgage banking forward sell commitments	—		542		8		550
Customer related	—		278,993		—		278,993
Foreign exchange	—		53,994		—		53,994
Mortgage servicing	—		679		—		679
Interest rate swap agreements	—		1,176		—		1,176
Interest rate cap agreements	—		33,080		—		33,080
Other	—		11,136		10		11,146
Total financial assets	$	185,362	$	20,812,710	$	1,838,704	$	22,836,776
Financial liabilities:
Derivatives:
Fair value	$	—	$	2,098	$	—	$	2,098
Cash flow	—		23,047		—		23,047
Customer related	—		235,769		—		235,769
Total return swap	—		—		282		282
Foreign exchange	—		45,418		—		45,418
Mortgage servicing	—		3,502		—		3,502
Interest rate swaps	—		6,668		—		6,668
Option for interest rate cap	—		32,977		—		32,977
Total return settlement	—		—		53,432		53,432
Other	—		14,149		122		14,271
Total financial liabilities	$	—	$	363,628	$	53,836	$	417,464

(1) Investment securities available-for-sale disclosed on the Condensed Consolidated Balance Sheet at December 31, 2015 includes $10.5 million of equity securities that are not presented within this table in accordance with the adoption of ASU 2015-07. Refer to Note 1 to the Condensed Consolidated Financial Statements for additional details related to this ASU implementation.

(2) LHFS disclosed on the Condensed Consolidated Balance Sheet also includes LHFS that are held at the lower of cost or fair value and are not presented within this table.

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 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:



	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)
September 30, 2016
Impaired loans held-for-investment	$	—	$	286,543	$	222,877	$	509,420
Foreclosed assets	—		25,250		80,464		105,714
Vehicle inventory	—		248,178		—		248,178
Loans held for sale	—		—		964,550		964,550
Mortgage servicing rights	—		—		10,231		10,231

December 31, 2015
Impaired loans held-for-investment	$	—	$	122,792	$	214,659	$	337,451
Foreclosed assets	—		27,574		78,085		105,659
Vehicle inventory	—		204,120		—		204,120
Loans held for sale	—		—		2,040,813		2,040,813
Goodwill	—		—		1,019,960		1,019,960
Indefinite lived intangibles	—		—		18,000		18,000
Mortgage servicing rights	—		—		10,478		10,478

Valuation Processes and Techniques

Impaired LHFI 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 ALLL. 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 inputs. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and are considered Level 2 inputs. Loans for which the value of the underlying collateral is determined using a combination of real estate appraisals, field examinations and internal calculations are classified as Level 3. The inputs in the internal calculations may 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 $390.6 million and $305.6 million at September 30, 2016 and December 31, 2015, respectively.

Foreclosed assets represent the recorded investment in assets taken in foreclosure of defaulted loans, and are primarily comprised of commercial and residential real properties 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 market 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 values of used cars.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

The Company's LHFS portfolios that are measured at fair value on a nonrecurring basis consist of personal and commercial LHFS. The estimated fair value for the personal and commercial LHFS is calculated based on a combination of estimated market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect voluntary prepayments, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations.

The estimated fair value of goodwill and intangible assets are valued using unobservable inputs and are classified as Level 3. Fair value is calculated using a DCF model. On a quarterly basis, the Company assesses whether or not impairment indicators are present. For information on the Company's goodwill impairment test and the results of the most recent goodwill impairment test, see Note 1 and Note 7 for a description of the Company's goodwill valuation methodology.

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 September 30,						Nine-Month Period Ended September 30,
		2016			2015			2016			2015
		(in thousands)
Impaired loans held-for-investment	Provision for credit losses	$	(14,033	)	$	(9,428	)	$	(127,144	)	$	(22,306	)
Foreclosed assets	Miscellaneous income⁽¹⁾	(1,604		)	(1,667		)	(6,346		)	(5,245		)
Loans held for sale	Miscellaneous income⁽¹⁾	(107,526		)	—			(266,506		)	—
Mortgage servicing rights	Mortgage banking income, net	301			370			962			1,149
		$	(122,862	)	$	(10,725	)	$	(399,034	)	$	(26,402	)

(1) These amounts reduce Miscellaneous income.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the changes in Level 3 balances for the three-month and nine-month periods ended September 30, 2016 and 2015, respectively, for those assets and liabilities measured at fair value on a recurring basis.



Three-Month Period Ended September 30, 2016
	Investments Available-for-Sale			Retail Installment Contracts Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, June 30, 2016	$	1,526,691		$	250,703		$	117,792		$	(44,378	)	$	1,850,808
Gains in other comprehensive income	3,879			—			—			—			3,879
Gains/(losses) in earnings	—			31,814			7,711			(478		)	39,047
Additions/Issuances	9,479			—			6,058			—			15,537
Settlements⁽¹⁾	(217,870		)	(64,974		)	(5,447		)	23,434			(264,857		)
Balance, September 30, 2016	$	1,322,179		$	217,543		$	126,114		$	(21,422	)	$	1,644,414
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2016	$	—		$	31,814		$	7,711		$	315		$	39,840

Nine-Month Period Ended September 30, 2016
	Investments Available-for-Sale			Retail Installment Contracts Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, December 31, 2015	$	1,360,240		$	328,655		$	147,233		$	(51,278	)	$	1,784,850
Gains in other comprehensive income	6,088			—			—			—			6,088
Gains/(losses) in earnings	—			85,169			(18,113		)	3,657			70,713
Additions/Issuances	509,006			—			14,450			—			523,456
Settlements⁽¹⁾	(553,155		)	(196,281		)	(17,456		)	26,199			(740,693		)
Balance, September 30, 2016	$	1,322,179		$	217,543		$	126,114		$	(21,422	)	$	1,644,414
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2016	$	—		$	85,169		$	(18,113	)	$	(2,988	)	$	64,068


(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)



Three-Month Period Ended September 30, 2015
	Investments Available-for-Sale			Retail Installment Contracts Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, June 30, 2015	$	1,539,483		$	494,651		$	157,147		$	(57,582	)	$	2,133,699
Losses in other comprehensive income	(5,307		)	—			—			—			(5,307		)
Gains/(losses) in earnings	—			39,296			(13,472		)	7,387			33,211
Additions/Issuances	311,540			—			5,795			—			317,335
Settlements⁽¹⁾	(222,989		)	(159,789		)	(5,935		)	2,007			(386,706		)
Balance, September 30, 2015	$	1,622,727		$	374,158		$	143,535		$	(48,188	)	$	2,092,232
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2015	$	—		$	39,296		$	(13,472	)	$	3,792		$	29,616

Nine-Month Period Ended September 30, 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		$	(46,168	)	$	2,212,433
Losses in other comprehensive income	(8,961		)	—			—			—			(8,961		)
Gains/(losses) in earnings	—			219,837			749			(8,083		)	212,503
Additions/Issuances	910,135			—			17,124			—			927,259
Settlements⁽¹⁾	(546,090		)	(691,590		)	(19,385		)	6,063			(1,251,002		)
Balance, September 30, 2015	$	1,622,727		$	374,158		$	143,535		$	(48,188	)	$	2,092,232
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2015	$	—		$	219,837		$	749		$	(10,500	)	$	210,086


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

The gains in earnings reported in the table above related to the RICs held for investment for which the Company elected the FVO are driven by three primary factors: 1) the recognition of interest income 2) recoveries of previously charged-off RICs and 3) actual performance of the portfolio since the Change in Control. Recoveries from RICs that were charged-off at the Change in Control date are a direct increase to the gain recognized within the portfolio. In accordance with ASC 805, Business Combinations, the Company did not ascribe a fair value to the portfolio of sub-prime charged-off RICs at the Change in Control date. Recoveries of previously charged off loans are usually recorded as a reduction to charge-offs in the period in which the recovery is made, however, in instances where the FVO is elected, it will flow through the fair value mark. At the Change in Control date, the unpaid principal balance of the previously charged-off RIC portfolio was approximately $3.0 billion.

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. Its primary pricing service has consistently proved to be a high quality third-party pricing provider. For those investments not valued by 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 MBS, 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 these securities that incorporate relevant observable 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.

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. 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, which are comprised primarily of shares of registered mutual funds, are priced using net asset value per share practical expedient, which is validated with a sufficient level of observable activity. In accordance with the implementation of ASU 2015-07, these equity securities are not presented within the fair value hierarchy. Refer to Note 1 to the Condensed Consolidated Financial Statements for additional details related to this ASU implementation.

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

RICs held-for-investment

For certain RICs held-for-investment, the Company has elected the FVO. The fair values of RICs are estimated using the DCF model. In estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rates 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 debt issuance and recent historical equity yields, recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, RICs held-for-investment for which the Company has elected FVO are classified as Level 3.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

LHFS

The Company's LHFS portfolios that are measured at fair value on a recurring basis consists primarily of residential mortgage LHFS. The fair values of LHFS are estimated using published forward agency prices to agency buyers such as FNMA and 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 as well as the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation, and are not 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. Gains and losses on residential mortgage LHFS are recognized in the Condensed Consolidated Statements of Operations through Miscellaneous income. See further discussion below in the section captioned "FVO for Financial Assets and Financial Liabilities."

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. Gains and losses on MSRs are recognized on the Condensed Consolidated Statements of Operations through Mortgage banking income, net. See further discussion on MSRs in Note 8.

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 $5.3 million and $10.1 million, respectively, at September 30, 2016.


•	A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $4.1 million and $7.8 million, respectively, at September 30, 2016.

Significant increases (decreases) in any of those inputs in isolation would result in significantly (lower) higher 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

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 the Company 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 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 and total return settlement derivative contracts.

The DCF model is utilized to determine the fair value of the mortgage banking derivatives-interest rate lock commitments and the total return settlement derivative contracts. 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. The significant unobservable inputs for total return settlement derivative contracts used in the fair value measurement of the Company's liabilities are discount percentages, which are based on comparable financial instruments. 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 September 30, 2016		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	(in thousands)
Financial Assets:
Asset-backed securities
Financing bonds	$	1,271,808	Discounted Cash Flow	Discount Rate ⁽¹⁾	0.99% - 2.10% (1.30%)
Sale-leaseback securities	$	50,371	Consensus Pricing ⁽²⁾	Offered quotes ⁽³⁾	128.27	%
Retail installment contracts held-for-investment	$	217,543	Discounted Cash Flow	Prepayment rate (CPR) ⁽⁴⁾	9.50	%
				Discount Rate ⁽⁵⁾	9.50% - 14.50% (10.08%)
				Recovery Rate ⁽⁶⁾	25.00% - 43.00% (27.72%)
Mortgage servicing rights	$	126,114	Discounted Cash Flow	Prepayment rate (CPR) ⁽⁷⁾	0.19% - 39.20% (11.74%)
				Discount Rate ⁽⁸⁾	9.90	%
Mortgage banking interest rate lock commitments	$	9,185	Discounted Cash Flow	Pull through percentage ⁽⁹⁾	76.66	%
				MSR value ⁽¹⁰⁾	0.73% - 1.03% (0.94%)
Financial Liabilities:
Total return settlement	$	29,864	Discounted Cash Flow	Discount Rate ⁽⁴⁾	8.00	%

(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-leaseback securities, the Company owns one security.

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

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

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

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

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

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

(10) 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:



	September 30, 2016
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	11,829,746	$	11,829,746	$	11,829,746	$	—	$	—
Available-for-sale investment securities⁽¹⁾	16,627,021		16,627,021		185,264		15,119,578		1,322,179
Trading securities	5,959		5,959		4,790		1,169		—
Loans held-for-investment, net	83,080,057		83,781,725		—		286,543		83,495,182
Loans held-for-sale	3,009,587		3,030,537		—		384,972		2,645,565
Restricted cash	3,256,902		3,256,902		3,256,902		—		—
Mortgage servicing rights	129,922		136,345		—		—		136,345
Derivatives	499,993		499,993		—		490,761		9,232

Financial liabilities:
Deposits	67,704,125		67,631,194		58,077,677		9,553,517		—
Borrowings and other debt obligations	44,604,370		45,036,801		825		34,686,747		10,349,229
Derivatives	497,591		497,591		—		466,937		30,654



	December 31, 2015
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	9,447,003	$	9,447,003	$	9,447,003	$	—	$	—
Available-for-sale investment securities⁽¹⁾	21,730,685		21,730,685		185,362		20,185,083		1,360,240
Trading securities	248		248		—		230		18
Loans held-for-investment, net	83,779,641		83,419,422		—		122,792		83,296,630
Loans held-for-sale	3,190,067		3,202,397		—		236,760		2,965,637
Restricted cash	2,630,508		2,630,508		2,630,508		—		—
Mortgage servicing rights	151,490		157,711		—		—		157,711
Derivatives	393,195		393,195		—		390,637		2,558

Financial liabilities:
Deposits	65,583,430		65,585,250		55,940,061		9,645,189		—
Borrowings and other debt obligations	49,828,582		50,037,708		1,445		40,833,484		9,202,779
Derivatives	417,464		417,464		—		363,628		53,836

(1) Investment securities available-for-sale disclosed on the Condensed Consolidated Balance Sheet at September 30, 2016 and December 31, 2015 includes $10.8 million and $10.5 million, respectively, of equity securities that are not presented within these tables in accordance with the adoption of ASU 2015-07. Refer to Note 1 to the Condensed Consolidated Financial Statements for additional details related to this ASU implementation.

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 September 30, 2016 and December 31, 2015, the Company had $3.3 billion and $2.6 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.

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 the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis" above.

LHFS

The Company's LHFS portfolios that are accounted for at the lower of cost or market primarily consists of RICs held-for-sale. The estimated fair value of the RICs held-for-sale is based on prices obtained in recent market transactions or expected to be obtained in the subsequent sales for similar assets.

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 certificates of deposit ("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, they 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 fair value for these financial instruments.

FVO for Financial Assets and Financial Liabilities

LHFS

The Company's LHFS portfolios that are measured using the FVO consist of residential mortgage LHFS. The adoption of the FVO on residential mortgage loans classified as held-for-sale 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.

RICs held for investment

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs held for investment in connection with the Change in Control. These loans consisted of all of SC’s RICs accounted by SC under ASC 310-30, as well as all of SC’s RICs 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 that date.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16. FAIR VALUE (continued)

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value as of September 30, 2016.



	Fair Value		Aggregate Unpaid Principal Balance		Difference
	(in thousands)
September 30, 2016
Loans held-for-sale⁽¹⁾	$	384,972	$	375,271	$	9,701
Nonaccrual loans	—		—		—
Retail installment contracts held-for-investment	$	217,543	$	279,577	$	(62,034	)
Nonaccrual loans	17,222		26,918		(9,696		)

(1) LHFS disclosed on the Condensed Consolidated Balance Sheet also includes LHFS that are held at the lower of cost or fair value that are not presented within this table.

Interest income on the Company’s LHFS and RICs 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 RIC 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 regard 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 $126.1 million at September 30, 2016. Changes in fair value totaling a loss of $18.1 million was recorded in Mortgage banking income, net in the Condensed Consolidated Statements of Operations during the nine-month period ended September 30, 2016.

NOTE 17. BUSINESS SEGMENT INFORMATION

Business Segment Products and Services

On July 1, 2016, Santander consolidated its U.S. subsidiary activities under IHC, which resulted in a change to how the Company's. Chief Operating Decision Maker ("CODM"), as described by ASC 280, Segment Reporting, manages the Company. The Company’s reportable segments are focused principally around the customers the Company serves. During the first quarter of 2016, certain management and business line changes became effective 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 provide enhanced customer service to its clients. Accordingly, the following changes were made within the Company's reportable segments to provide greater focus on each of its core businesses:


•	The small business banking, commercial business banking, and auto leasing lines of business formerly included in the Auto Finance and Business Banking reportable segment, were combined with the Consumer and Business Banking reportable segment.


•	The Real Estate and Commercial reportable segment was split into the Commercial Real Estate reportable segment and the Commercial Banking reportable segment.


•	The CEVF and dealer floor plan lines of business, formerly included in the Auto Finance & Business Banking reportable segment, were moved to the Commercial Banking business unit.


•	The internal FTP guidelines and methodologies were revised to align with Santander corporate criteria for internal management reporting. These FTP changes impact all reporting segments, excluding SC.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)

The Company has identified the following reportable segments:

•

The Consumer and Business Banking segment (formerly known as the Retail Banking segment) primarily comprises the Bank's branch locations, residential mortgage business and business banking customers. The branch locations offer a wide range of products and services to both consumers and business banking customers, which 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, and home equity loans and lines of credit, and business loans such as commercial lines of credit and business credit cards. In addition, investment services provide annuities, mutual funds, managed monies, and insurance products and acts as an investment brokerage agent to the customers of the Consumer and Business Banking segment.

•

The Commercial Banking segment currently provides commercial lines, loans, and deposits to medium and large business banking customers as well as financing and deposits for government entities, commercial loans to dealers and financing for commercial vehicles and municipal equipment. 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 Commercial Real Estate segment offers commercial real estate loans and multifamily loans to customers.

•

The Global Corporate Banking ("GCB") segment was formerly designated as the Global Corporate Banking & Market & Large Corporate Banking segment, and was renamed during the third quarter of 2015. This segment was formerly designated as the Global Corporate Banking & Market & Large Corporate Banking segment and was renamed during the third quarter of 2015. This 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. GCB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.

•

SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC’s primary business is the indirect origination of RICs, 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 FCA that became effective May 1, 2013, SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SC also originates vehicle loans through a Web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile, recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it provides personal loans, private label credit cards and other consumer finance products. During 2015, SC announced its intention to exit the personal lending business.

SC has entered into a number of intercompany agreements with the Bank as described above as part of the Other segment. All intercompany revenue and fees between the Bank and SC are eliminated in the consolidated results of the Company.

The Other category includes certain immaterial subsidiaries such as BSI, Banco Santander Puerto Rico, SIS, and SSLLC, interest expense on the Company's borrowings and other debt obligations and certain unallocated corporate income and indirect expenses.

The Company’s segment results, excluding SC and the IHC entities, 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 ("FTP") 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)

Other income and expenses are managed directly by each reportable segment, 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.

The CODM, as described by ASC 280, Segment Reporting, manages SC on a historical basis by reviewing the results of SC on a pre-Change in Control basis. The Results of Segments table discloses SC's operating information on the same basis that it is reviewed by SHUSA's CODM to reconcile to SC's GAAP results, purchase price adjustments and accounting for SC as an equity method investment.

All prior period results have been recast to conform to the new composition of the reportable segments.

Certain segments previously deemed quantitatively significant no longer met the threshold and have been combined with the Other category as of September 30, 2016. Prior period results have been recast to conform to the new composition of the reportable segment.

Results of Segments

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




For the Three-Month Period Ended	SHUSA Reportable Segments
September 30, 2016	Consumer & Business Banking			Commercial Banking			Commercial Real Estate		Global Corporate Banking			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	295,374		$	91,290		$	74,992	$	60,435		$	(43,132	)	$	1,095,060	$	42,566		$	4,545		$	1,621,130
Total non-interest income	166,718			14,505			3,214		24,901			134,034			389,375		9,071			(13,824		)	727,994
Provision/(release) for credit losses	13,182			(20,160		)	2,945		(2,487		)	11,114			610,398		72,920						687,912
Total expenses	455,480			48,124			18,033		24,785			209,023			570,017		13,956			(12,172		)	1,327,246
Income/(loss) before income taxes	(6,570		)	77,831			57,228		63,038			(129,235		)	304,020		(35,239		)	2,893			333,966
Intersegment (expense)/revenue⁽¹⁾	552			1,174			613		(2,121		)	(218		)	—		—			—			—
Total assets	20,661,280			12,178,009			15,005,335		10,551,939			42,062,688			38,771,636		—			—			139,230,887


(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 includes the results of the IHC entities, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


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


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)



For the Nine-Month Period Ended	SHUSA Reportable Segments
September 30, 2016	Consumer & Business Banking			Commercial Banking		Commercial Real Estate		Global Corporate Banking			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income/(loss)	$	783,349		$	257,523	$	212,035	$	182,024		$	1,714		$	3,388,276	$	146,419		$	10,477		$	4,981,817
Total non-interest income	523,421			41,150		8,400		59,758			402,030			1,109,894		38,340			(38,897		)	2,144,096
Provision for credit losses	32,965			32,693		23,905		28,889			38,490			1,782,489		260,723			—			2,200,154
Total expenses	1,355,726			143,371		54,827		80,054			690,826			1,645,156		42,585			(37,497		)	3,975,048
Income/(loss) before income taxes	(81,921		)	122,609		141,703		132,839			(325,572		)	1,070,525		(118,549		)	9,077			950,711
Intersegment revenue/(expense)⁽¹⁾	1,916			2,982		1,895		(6,840		)	47			—		—			—			—
Total assets	20,661,280			12,178,009		15,005,335		10,551,939			42,062,688			38,771,636		—			—			139,230,887


(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 includes the results of the IHC entities, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


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


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




For the Three- Month Period Ended	SHUSA Reportable Segments
September 30, 2015	Consumer & Business Banking			Commercial Banking			Commercial Real Estate		Global Corporate Banking			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	214,208		$	70,445		$	67,302	$	54,381		$	58,017		$	1,176,411	$	71,620		$	116		$	1,712,500
Total non-interest income	167,696			12,431			23,158		19,047			112,830			382,700		101,102			(9,991		)	808,973
Provision/(release) for credit losses	7,094			(6,329		)	9,898		(10,931		)	(1,452		)	723,921		231,869			—			954,070
Total expenses	442,843			44,993			17,427		26,410			213,714			462,214		15,034			(13,975		)	1,208,660
Income/(loss) before income taxes	(68,033		)	44,212			63,135		57,949			(41,415		)	372,976		(74,181		)	4,100			358,743
Intersegment revenue/(expense)⁽¹⁾	238			1,203			368		(2,241		)	432			—		—			—			—
Total assets	21,944,625			15,796,714			15,012,129		12,200,062			40,823,959			35,329,343		—			—			141,106,832


(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 includes the results of the IHC entities, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


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


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)




For the Nine-Month Period Ended	SHUSA Reportable Segments
September 30, 2015	Consumer & Business Banking			Commercial Banking		Commercial Real Estate		Global Corporate Banking			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	627,152		$	202,833	$	202,126	$	157,555		$	216,115		$	3,469,970	$	342,018		$	260		$	5,218,029
Total non-interest income	523,337			35,704		39,324		60,437			358,366			1,137,296		184,390			(38,304		)	2,300,550
Provision for/(release of) credit losses	33,779			1,370		22,694		(5,173		)	61,374			1,935,147		955,532			—			3,004,723
Total expenses	1,306,508			135,966		54,392		79,310			557,785			1,360,708		43,438			(40,849		)	3,497,258
Income/(loss) before income taxes	(189,798		)	101,201		164,364		143,855			(44,678		)	1,311,411		(472,562		)	2,805			1,016,598
Intersegment revenue/(expense)⁽¹⁾	891			2,961		1,467		(5,886		)	567			—		—			—			—
Total assets	21,944,625			15,796,714		15,012,129		12,200,062			40,823,959			35,329,343		—			—			141,106,832


(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 includes the results of the IHC entities, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


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


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

EXECUTIVE SUMMARY

Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent holding company of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association, and owns approximately 59% of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a specialized consumer finance company focused on vehicle finance and third-party servicing. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SC is headquartered in Dallas, Texas. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander").

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.

SC's primary business is the indirect origination of retail installment contracts ("RICs"), principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. SC also offers a full spectrum of auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand ("Chrysler Capital"), the trade name used in providing services under the ten-year private label financing agreement with the Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC signed by SC in 2013 (the "Chrysler Agreement"). These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. Under the terms of the Chrysler Agreement, certain standards were agreed to, including SC meeting specified escalating penetration rates for the first five years, and FCA treating SC in a manner consistent with comparable original equipment manufacturers ("OEMs") treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet its obligations under the agreement could result in the agreement being terminated. While SC has not achieved the targeted penetration rates to date, Chrysler Capital continues to be a focal point of its strategy, and SC continues to work with FCA to improve penetration rates and remains confident about the ongoing success of the Chrysler Agreement.

SC also originates vehicle loans through a Web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it provides personal unsecured loans, private-label credit cards and other consumer finance products.

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

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

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The Company's other subsidiaries include Santander BanCorp (together with its subsidiaries, "Santander BanCorp"), a financial holding company headquartered in Puerto Rico which offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico; Santander Securities, LLC ("SSLLC"), a broker-dealer located in Puerto Rico, Banco Santander International ("BSI"), a financial services company located in Miami, FL which offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; Santander Investment Securities Inc. ("SIS"), a registered broker-dealer located in New York, NY providing services in investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed income securities; as well as several other subsidiaries.

ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the second quarter of 2016, unemployment remained relatively flat while market results declined and the gross domestic product ("GDP") growth rate came in under expectations, marking overall mixed results for the U.S. economy.

The unemployment rate at September 30, 2016 increased slightly to 5.0% compared to 4.9% at June 30, 2016 and declined from 5.1% one year ago. According to the U.S Bureau of Labor Statistics, this job growth is primarily attributable to the professional and business services, retail trade, and health care sectors.

On October 28, 2016, the Bureau of Economic Analysis advance estimate indicated that real gross domestic product ("GDP") grew at an annualized rate of 2.9% for the third quarter of 2016, compared to 1.4% in the second quarter of 2016. The increase during the quarter is primarily attributable to an increase in personal consumption expenditures, exports, private inventory investment, federal government spending, and nonresidential fixed investment, but was offset by decreased residential fixed investment and state and local government spending.

Market results were mixed, but mostly positive in the third quarter of 2016. The total year-to-date returns for the following indices, based on closing prices, at September 30, 2016 were:



		September 30, 2016
Dow Jones Industrial Average		5.1%
S&P 500		6.1%
NASDAQ Composite		6.1%

At its November 2016 meeting, the Federal Open Market Committee decided to keep the federal funds rate target flat at 0.25% - 0.5%. The inflation rate remains just under the targeted rate of 2.0%.

The 10-year Treasury bond rate at September 30, 2016 was 1.61%, down from 2.27% at December 31, 2015 and 2.06% one year ago. Over the past year, the 10-year Treasury bond rate decreased 45 basis points. Within the industry, this metric is often considered to correspond to 15- and 30-year mortgage rates.

After a strong 2015, mortgage originations have begun to slightly decrease in 2016. At the time of filing this Form 10-Q, third quarter 2016 information was not available; however, for the second quarter of 2016, mortgage originations were up to 26% over the prior quarter and down 4% over the prior year. However, the most recent indicators from the Mortgage Bankers Association show that commercial real estate and multifamily originations for the first nine months of 2016increased 2% compared to the same period in 2015. Third quarter 2016 commercial and multifamily mortgage loan originations were 5% higher than the third quarter of 2015 and 7% higher than the second quarter of 2016. In addition, the ratio of nonperforming loans ("NPLs") to total loans has declined for the past four consecutive years for U.S. banks, including a decreasing trend in 2015 and through the third quarter of 2016, which confirms continuing improvement in credit quality and downward trends in general allowance reserves.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

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 September 30, 2016:

BANK

SHUSA

SANTANDER

SPAIN

Puerto Rico

Moody's

S&P

Moody's

S&P

Moody's

S&P

Moody's

S&P

Moody's

S&P

LT Senior Debt

Baa2

BBB+

Baa3

BBB+

A-

Baa2

BBB+

Baa2

BBB-

ST Deposits

P-1

A-2

n/a

A-2

P-2

A-2

P-2

A-2

P-1

A-3

Outlook

Stable

Negative

On October 18, 2016, Moody's downgraded the long term senior debt to Baa3 from Baa2, and outlook to Stable from Negative.

At the same time, the ratings for the Bank also were affirmed.

On April 1, 2016, S&P affirmed its long- and short-term foreign and local currency sovereign credit ratings on the Kingdom of Spain at BBB+/A-2 and the outlook as stable.

SHUSA funds its operations independently of the other entities owned by Santander, and believes its business is not necessarily closely related to the business or outlook of other entities owned by Santander. Future changes in the credit ratings of its parent, Santander, or the Kingdom of Spain could impact SHUSA's or its subsidiaries' credit ratings, and any other change in the condition of Santander could affect SHUSA.

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

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 ("BHC") Act, the Federal Reserve Act, the National Bank Act, the Federal Deposit Insurance Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA"), 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") (which prohibits creditors from discriminating against applicants on the basis of race, color, religion or other factors), 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 Servicemembers Civil Relief Act (which provides certain protections for individuals on active duty in the military), Section 5 of the Federal Trade Commission Act (which prohibits unfair or deceptive acts or practices in or affecting commerce), the Real Estate Settlement Procedures Act, (which contains certain requirements relating to the mortgage settlement process), the Expedited Funds Availability Act (which establishes the maximum permissible hold periods for checks and other deposits and the disclosure requirements for funds availability), the Credit Card Accountability, Responsibility and Disclosure Act (which establishes fair practices relating to the extension of credit under open-end consumer credit plans) 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, debit cards, automated teller machines ("ATMs") and other electronic banking services), as well as other federal and state laws.

As SC is a subsidiary of the Company, it is also subject to regulatory oversight from the FRB for BHC regulatory supervision purposes, as well as the Consumer Financial Protection Bureau (the "CFPB").

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

DFA

The DFA, enacted on July 21, 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the performance of and need for government intervention in the financial services sector during the financial crisis, The DFA includes a number of provisions designed to promote enhanced supervision and regulation of financial companies and financial markets. The DFA introduced substantial reforms that reshape the financial services industry, including significantly enhanced regulation. This enhanced regulation has involved and will continue to involve higher compliance costs and negatively affect the Company's revenue and earnings. More specifically, the DFA imposes enhanced prudential standards ("EPS") on BHCs with at least $50 billion in total consolidated assets (often referred to as “systemically important financial institutions”), including the Company, and requires the Board of Governors of the Federal Reserve System (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 and liquidity standards, including eliminating trust preferred securities as Tier 1 regulatory capital; enhanced risk management requirements; and credit exposure reporting and concentration limits. These changes have impacted and are expected to continue impacting 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 deemed 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, including the Bank, 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 CFPB, which has broad powers to set the requirements for the terms and conditions of consumer 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, including SC, take steps to monitor and impose controls over vehicle dealer "mark-up" policies under which dealers impose higher interest rates on certain consumers, with the mark-up shared between the dealer and the lender. In accordance with SC's policy, dealers were allowed to mark-up interest rates by a maximum of 2.00%, but in October 2014 SC reduced the maximum compensation (participation from 2.00% (industry practice) to 1.75%). SC believes this restriction removes the dealers' incentive to markup rates beyond 1.75%. SC plans to continue to evaluate this policy for effectiveness and may make further changes to strengthen oversight of dealers and mark-up rates.

On July 31, 2015, the CFPB notified SC that it had referred to the Department of Justice (the "DOJ") certain alleged violations by SC of the ECOA regarding (i) statistical disparities in mark-ups charged by automobile dealers to protected groups on loans originated by those dealers and purchased by SC and (ii) the treatment of certain types of income in SC's underwriting process. On September 25, 2015, the DOJ notified SC that it had initiated an investigation under the ECOA of SC's pricing of automobile loans based on the referral from the CFPB.

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 system 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, which likely would impact revenue and costs. SC is already subject to such state-level regulation.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The DFA and certain other legislation and regulations impose various restrictions on compensation of certain executive officers. The Company's 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.

Volcker Rule

The DFA added new section 13 to the BHC Act, which is commonly referred to as the “Volcker Rule.” The Volcker Rule prohibits a “banking entity” from engaging in “proprietary trading” or engaging in any of the following activities with respect to a hedge fund or a private equity fund (together, a “Covered Fund”): (i) acquiring or retaining any equity, partnership or other ownership interest in the fund; (ii) controlling the fund; or (iii) engaging in certain transactions with the fund if the banking entity or any affiliate is an investment adviser or sponsor to the fund. These prohibitions are subject to certain exemptions for permitted activities.

Because the term “banking entity” includes an insured depository institution, a depository institution holding company and any affiliate of any of the foregoing, the Volcker Rule has sweeping worldwide application and covers entities such as Santander, the Company, SC, the Bank and numerous other Santander subsidiaries in the United States and abroad.

The Company implemented certain policies and procedures, training programs, record keeping, internal controls and other compliance requirements that were necessary to comply with the Volcker Rule before July 21, 2015. As required by the Volcker Rule, the compliance infrastructure has been tailored to each banking entity based on the size of the entity and its level of trading activities. SHUSA's compliance program includes, among other things, processes for prior approval of new activities and investments that are permitted under the rule, testing and auditing for compliance and a process for attesting annually that the compliance program is reasonably designed to achieve compliance with the Volcker Rule. On March 31, 2016, the Company's Chief Executive Officer, on behalf of Santander, provided an attestation to the federal agencies responsible for administering the rule that the compliance program requirements applicable to Santander’s U.S. operations under the Volcker Rule were met by July 21, 2015.

Federal Deposit Insurance Corporation Improvement Act

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 with respect 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.

Basel III

New and evolving capital standards, both as a result of the DFA and the implementation in the U.S. of Basel III, have and will continue to have a significant effect on banks and BHCs, including the Company and the Bank. In July 2013, the Federal Reserve, the FDIC and the OCC released final U.S. Basel III regulatory capital rules implementing the global regulatory capital reforms of Basel III. The final rules established 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 applies 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 rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios that, when fully phased in, require banking organizations, including the Company and the Bank, to maintain a minimum common equity tier 1 ("CET1") capital 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 4.0%, calculated as the ratio of Tier 1 capital to average consolidated assets for the quarter.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

A capital conservation buffer of 2.5% above these minimum ratios is being 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. This capital conservation buffer is required for banking institutions and BHCs to avoid restrictions on their ability to make capital distributions, including paying dividends.

The U.S. Basel III regulatory capital rules include 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 the Company and the Bank began on January 1, 2015 and will be phased in over three years.

As of September 30, 2016, the Bank's and the Company's CET1 ratios under Basel III, on a fully phased-in basis under the standardized approach, were 15.26% and 13.41%, respectively. Under the transition provisions provided under Basel III, the Bank's and the Company's CET1 ratios under the standardized approach were 15.66% and 14.12%, respectively. The calculation of the CET1 ratio on 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 with advice from its counsel and compliance professionals. If the regulators were to 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. The Company believes that, as of September 30, 2016, it 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 Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A") for the Company's capital ratios under Basel III standards. The implementation of certain regulations and standards relating to regulatory capital could disproportionately affect the Company's regulatory capital position relative to that of its competitors, including those that may not be subject to the same regulatory requirements as the Company.

The Basel III liquidity framework requires banks and BHCs to measure their liquidity against specific liquidity tests. 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 ("HQLA") 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, the FDIC, and the 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 EPS and Comprehensive Capital Analysis and Review ("CCAR"). The agencies have mandated a phased implementation approach under which the most globally important covered companies (more than $700 billion in assets) and large regional financial institutions ($250 billion to $700 billion in assets) were required to report their LCR calculation beginning January 1, 2015. Smaller covered companies (more than $50 billion in assets) such as the Company were required to report their LCR calculation monthly beginning January 1, 2016. On November 13, 2015, the Federal Reserve published a revised final LCR rule. Under this revision, the Company is required to calculate the modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016 for the BHC. There is no requirement to submit the calculation to the Federal Reserve. The Company will be required to publicly disclose its US LCR results starting July 1, 2017. Based on management's interpretation of the final rule, effective on January 1, 2016, the Company'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. In May 2016, the Federal Reserve issued a proposed rule for NSFR applicable to U.S. financial institutions. The proposed rule will become a minimum standard by January 1, 2018. The Company is currently evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Stress Tests and Capital Adequacy

Pursuant to the DFA, the Company and the Bank are required to perform stress tests and submit the results to the Federal Reserve and the OCC on an annual basis. The Company is also required to submit a mid-year stress test to the Federal Reserve. In addition, together with the annual stress test submission, the Company is required to submit a proposed capital plan to the Federal Reserve. A notice of non-objection to the capital plan from the Federal Reserve is required before the Company can take capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. As a consolidated subsidiary of the Company, SC is included in the Company's stress tests and capital plans.

In June 2016, the Federal Reserve, as part of its CCAR process, objected on qualitative grounds to the capital plan submitted by the Company. However, the Company is permitted to continue the payment of dividends on the Company's outstanding class of preferred stock.

The Company is also subject to written agreements which address stress testing and capital adequacy.

On September 15, 2014, the Company entered into a written agreement with the FRB of Boston. Under the terms of this 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 July 2, 2015, the Company entered into a written agreement with the FRB of Boston. Under the terms of that written agreement, the Company is required to make enhancements with respect to, among other matters, board oversight of the consolidated organization, risk management, capital planning and liquidity risk management.

Total Loss-Absorbing Capacity

On October 30, 2015 the Federal Reserve released a notice of proposed rulemaking on total loss absorbing capacity ("TLAC"), long-term debt ("LTD"), and clean holding company requirements for systemically important U.S. BHCs and intermediate holding companies ("IHCs") of systemically important foreign banking organizations ("FBOs"). The Company, as the IHC for Santander in the U.S., will be subject to these requirements.

TLAC represents the amount of equity and debt a company must hold to facilitate its orderly liquidation. Under the Federal Reserve’s proposal, the Company would be required to hold loss absorbing equity and unsecured debt of 18.5% of risk-weighted assets ("RWAs") by January 1, 2019 and 20.5% of RWAs by January 1, 2022. These amounts represent the TLAC requirement (16% by January 1, 2019 and 18% by January 1, 2022) plus a TLAC buffer of 2.5%. The Federal Reserve's proposal also establishes a requirement for the LTD component of the TLAC. The LTD requirement for the Company would be 7% of RWAs by January 1, 2019.

The comment period on the FRB's TLAC proposal ended on February 19, 2016.

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) FBOs with a U.S. banking presence exceeding $50 billion in consolidated U.S. non-branch assets. The Final Rule implements, as new requirements for U.S. BHCs, 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 were subject to the liquidity requirements as of January 1, 2015.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Risk Retention Rule

On December 24, 2014 the Federal Reserve issued its final credit risk retention rule, which generally requires sponsors of asset-backed securities to retain not less than five percent of the credit risk of the assets collateralizing the asset-backed securities. Compliance with the rule with respect to asset-backed securities collateralized by residential mortgages is required beginning December 24, 2015. Compliance with the rule with regard to all other classes of asset-backed securities is required beginning December 24, 2016. SHUSA, primarily through SC, is an active participant in the structured finance markets and is expected to comply with the retention requirements effective December 24, 2016.

FBOs

On February 18, 2014, the Federal Reserve issued the final rule to strengthen regulatory oversight of FBOs (the “Final Rule”). Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, must consolidate U.S. subsidiary activities under an 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 and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the Final Rule. As a result of this rule, Santander transferred substantially all of its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries include Santander BanCorp, a Puerto Rico bank holding company, Banco Santander International, a private bank headquartered in Miami, Santander Investment Securities, Inc., a broker-dealer located in New York, and Santander Securities LLC, a Puerto Rico broker-dealer. 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. Other standards of the Final Rule will be phased in through January 1, 2018.

Federal Deposit Insurance Corporation Surcharge Assessment

In March 2016, the FDIC finalized the rule to implement Section 334 of the DFA to provide for a surcharge assessment at an annual rate of 4.5 basis points on banks with over $10 billion in assets to increase the FDIC insurance fund. The FDIC commenced the surcharge in the third quarter of 2016, and will continue for eight consecutive quarters. After the eight quarters, the FDIC may charge a shortfall assessment. The Company is currently evaluating the impact of the assessment on its financial position, results of operations and disclosures.

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 the Bank's corporate practices and impose certain restrictions on its 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, which were entered into by an unconsolidated related party, 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 report:

•

Santander UK held two frozen savings and two frozen current accounts for three customers resident in the U.K. who are currently designated by the U.S. under the Specially Designated Global Terrorist ("SDGT") sanctions program. The accounts held by each customer were blocked after the customer's designation and have remained blocked and dormant throughout the first nine months ended September 30, 2016. Revenue and profits generated by Santander UK on these accounts in the first nine months ended September 30, 2016 were negligible relative to the overall revenues profits of the company.


•	Santander UK held a savings account for a customer resident in the UK who is currently designated by the SDGT sanctions program. The savings account was closed on July 26, 2016. Revenue generated by Santander UK on this account in the nine months ended September 30, 2016 was negligible relative to the overall revenues of the company.

•

Santander UK holds two frozen current accounts for UK nationals who are designated by the US under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through the nine months ended September 30, 2016. The accounts are in arrears (£1,845 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. Revenues and profits generated by Santander UK on these accounts in the nine months ended September 30, 2016 were negligible relative to the overall revenues and profits of the company.


•	Santander UK holds three current accounts and a savings account for two customers resident in the UK, who are currently designated by the US under the specially designated nationals ("TCO") program. Revenues and profits generated by Santander UK on these accounts in the nine months ended September 30, 2016 were negligible relative to overall revenues and profits of Santander.

•

In addition, during the first nine months ended September 30, 2016, Santander UK has identified an Office of Foreign Assets Control ("OFAC") match on a power of attorney account. The power of attorney listed on the account is currently designated by the U.S. under the SDGT and Iranian Financial Sanction Regulation ("IFSR") sanctions program. The power of attorney was removed from the account on July 29, 2016. During the first nine months ended September 30, 2016, revenues and profits generated by Santander U.K. were negligible relative to the overall revenues and profits of Santander.

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 need prior approval from the Spanish government to pay any amounts due to Bank Sepah or Bank Mellat pursuant to Council Regulation (EU) No. 2015/1861.

In the aggregate, all of the transactions described above resulted in in gross revenues and net profits in the nine months ended September 30, 2016, which were negligible relative to the overall profits of Santander. 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 subject to prior approval (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.

The Company does not have any activities, transactions, or dealings which would require disclosure under Section 13(r) of the Exchange Act.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

RESULTS OF OPERATIONS

The following discussion reviews the Company's financial performance and position from a consolidated perspective. Key statement of operations line items and trends are discussed in this section. Key consolidated balance sheet trends are discussed in the "Financial Condition" section.

RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2016			2015			2016			2015
	(in thousands)
Net interest income	$	1,621,130		$	1,712,500		$	4,981,817		$	5,218,029
Provision for credit losses	(687,912		)	(954,070		)	(2,200,154		)	(3,004,723		)
Total non-interest income	727,994			808,973			2,144,096			2,300,550
General and administrative expenses	(1,281,275		)	(1,174,463		)	(3,775,490		)	(3,391,549		)
Other expenses	(45,971		)	(34,197		)	(199,558		)	(105,709		)
Income before income taxes	333,966			358,743			950,711			1,016,598
Income tax provision	(108,320		)	(217,753		)	(339,968		)	(416,387		)
Net income⁽¹⁾	$	225,646		$	140,990		$	610,743		$	600,211

(1)Includes non-controlling interest ("NCI")

The Company reported pre-tax income of $334.0 million and $950.7 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to pretax income of $358.7 million and $1.0 billion for the three-month and nine-month periods ended September 30, 2015. Factors contributing to these changes were as follows:


•	Net interest income decreased $91.4 million and $236.2 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. These decreases were primarily due to yield increases on the Company's borrowed funds.

•

The provision for credit losses decreased $266.2 million and $804.6 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. These decreases were primarily due due to the reclassification of SC's personal unsecured loan portfolio from held for investment to held for sale in the third quarter of 2015. We now recognize customer defaults and other lower of cost or market adjustments on the portfolio through miscellaneous income. In addition, the buildup of the ALLL on RICs which occurred during 2015 to maintain the Company's targeted coverage rate and build a specific reserve for the RIC TDR portfolio.

•

Total non-interest income decreased $81.0 million and $156.5 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. These decreases were primarily in miscellaneous income attributable to less sales of operating leases and fair value mark-downs of the fair value associated with personal unsecured LHFS during the current period when compared with the prior period, offset by an increase in lease income.


•	Total general and administrative expenses increased $106.8 million and $383.9 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. These increases were primarily due to increases in lease expenses and compensation and benefits.


•	Other expenses increased $11.8 million and $93.8 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. These increases were primarily due to losses on debt extinguishment associated with repositioning the balance sheet.


•	The income tax provision decreased $109.4 million and $76.4 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The decrease for the nine month period ended was due to discrete tax benefits recognized in the current periods compared to discrete tax provisions in the prior year comparative periods.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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



CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015
	2016 ⁽¹⁾							2015 ⁽¹⁾							Interest		Change due to
	Average Balance			Interest		Yield/ Rate⁽²⁾		Average Balance			Interest		Yield/ Rate⁽²⁾		Increase/ Decrease		Volume		Rate
	(dollars in thousands)
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	23,417,007		$	81,885	1.39	%	$	24,619,364		$	102,266	1.65	%	(20,381	)	(4,862	)	(15,519	)
LOANS⁽³⁾:
Commercial loans	37,164,361			332,340		3.56	%	36,057,819			321,133		3.53	%	11,207		9,165		2,042
Multi-family	9,110,535			82,610		3.61	%	9,207,838			89,198		3.84	%	(6,588	)	(967	)	(5,621	)
Total commercial loans	46,274,896			414,950		3.57	%	45,265,657			410,331		3.60	%	4,619		8,198		(3,579	)
Consumer loans:
Residential mortgages	7,888,262			62,882		3.17	%	8,096,136			66,186		3.24	%	(3,304	)	(1,772	)	(1,532	)
Home equity loans and lines of credit	6,055,344			54,888		3.61	%	6,147,646			54,660		3.53	%	228		(472	)	700
Total consumer loans secured by real estate	13,943,606			117,770		3.36	%	14,243,782			120,846		3.37	%	(3,076	)	(2,244	)	(832	)
Retail installment contracts and auto loans	26,922,199			1,198,698		17.71	%	25,401,300			1,192,288		18.62	%	6,410		34,721		(28,311	)
Personal unsecured	2,179,968			137,764		25.14	%	3,679,659			169,227		18.25	%	(31,463	)	(432,027	)	400,564
Other consumer⁽⁴⁾	879,136			19,895		9.00	%	1,115,311			25,556		9.09	%	(5,661	)	(5,414	)	(247	)
Total consumer	43,924,909			1,474,127		13.35	%	44,440,052			1,507,917		13.46	%	(33,790	)	(404,964	)	371,174
Total loans	90,199,805			1,889,077		8.33	%	89,705,709			1,918,248		8.48	%	(29,171	)	(396,766	)	367,595
Allowance for loan losses ⁽⁵⁾	(3,784,242		)	—		—	%	(3,019,846		)	—		—	%
NET LOANS	86,415,563			1,889,077		8.70	%	86,685,863			1,918,248		8.78	%	(29,171	)	(396,766	)	367,595
Intercompany investments	14,640			226		6.14	%	14,640			222		6.02	%	4		—		4
TOTAL EARNING ASSETS	109,847,210			1,971,188		7.14	%	111,319,867			2,020,736		7.20	%	(49,548	)	(401,628	)	352,080
Other assets⁽⁶⁾	29,935,299							32,694,987
TOTAL ASSETS	$	139,782,509						$	144,014,854
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest bearing demand deposits	$	10,977,842		$	6,384	0.23	%	$	13,044,131		$	15,384	0.47	%	(9,000	)	(2,147	)	(6,853	)
Savings	6,001,890			3,299		0.22	%	6,432,289			2,995		0.18	%	304		(174	)	478
Money market	25,199,241			31,383		0.50	%	23,518,380			32,888		0.55	%	(1,505	)	3,030		(4,535	)
Certificates of deposit	9,515,447			23,222		0.97	%	9,418,365			21,662		0.91	%	1,560		216		1,344
TOTAL INTEREST BEARING DEPOSITS	51,694,420			64,288		0.49	%	52,413,165			72,929		0.55	%	(8,641	)	925		(9,566	)
BORROWED FUNDS:
FHLB advances, federal funds, and repurchase agreements	7,633,696			24,783		1.29	%	11,705,271			45,024		1.53	%	(20,241	)	(13,950	)	(6,291	)
Other borrowings	38,314,163			260,761		2.71	%	36,786,976			190,061		2.05	%	70,700		8,098		62,602
TOTAL BORROWED FUNDS ⁽⁷⁾	45,947,859			285,544		2.47	%	48,492,247			235,085		1.92	%	50,459		(5,852	)	56,311
TOTAL INTEREST BEARING FUNDING LIABILITIES	97,642,279			349,832		1.43	%	100,905,412			308,014		1.21	%	41,818		(4,927	)	46,745
Noninterest bearing demand deposits	15,107,001							12,871,454
Other liabilities⁽⁸⁾	4,614,098							4,636,145
TOTAL LIABILITIES	117,363,378							118,413,011
STOCKHOLDER’S EQUITY	22,419,131							25,601,843
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	139,782,509						$	144,014,854
NET INTEREST SPREAD ⁽⁹⁾						5.71	%						5.99	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.87	%						6.10	%

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




CONDENSED CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015
	2016 ⁽¹⁾							2015 ⁽¹⁾							Interest		Change due to
	Average Balance			Interest		Yield/ Rate⁽²⁾		Average Balance			Interest		Yield/ Rate⁽²⁾		Increase Decrease		Volume		Rate
	(dollars in thousands)
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	25,581,579		$	302,964	1.58	%	$	21,575,824		$	296,134	1.84	%	6,830		26,567		(19,737	)
LOANS⁽³⁾:
Commercial loans	37,472,514			993,965		3.54	%	35,360,460			934,284		3.53	%	59,681		56,834		2,847
Multifamily	9,223,167			250,375		3.63	%	8,740,276			269,276		4.12	%	(18,901	)	16,206		(35,107	)
Total commercial loans	46,695,681			1,244,340		3.56	%	44,100,736			1,203,560		3.65	%	40,780		73,040		(32,260	)
Consumer loans:
Residential mortgages	7,816,089			187,430		3.20	%	8,251,465			202,632		3.28	%	(15,202	)	(10,395	)	(4,807	)
Home equity loans and lines of credit	6,095,190			165,639		3.63	%	6,168,383			163,722		3.55	%	1,917		(2,059	)	3,976
Total consumer loans secured by real estate	13,911,279			353,069		3.39	%	14,419,848			366,354		3.40	%	(13,285	)	(12,454	)	(831	)
Retail installment contracts and auto loans	26,597,271			3,657,493		18.37	%	24,408,203			3,656,615		20.03	%	878		11,653		(10,775	)
Personal unsecured	2,341,387			436,724		24.92	%	3,422,954			514,300		20.09	%	(77,576	)	(323,815	)	246,239
Other consumer⁽⁴⁾	940,577			63,547		9.02	%	1,192,732			81,071		9.09	%	(17,524	)	(16,968	)	(556	)
Total consumer	43,790,514			4,510,833		13.76	%	43,443,737			4,618,340		14.21	%	(107,507	)	(341,583	)	234,076
Total loans	90,486,195			5,755,173		8.50	%	87,544,473			5,821,900		8.89	%	(66,727	)	(268,543	)	201,816
Allowance for loan and lease losses ⁽⁵⁾	(3,609,242		)	—		—	%	(2,511,162		)			—	%
NET LOANS	86,876,953			5,755,173		8.85	%	85,033,311			5,821,900		9.15	%	(66,727	)	(268,543	)	201,816
Intercompany investments	14,640			677		6.18	%	14,640			664		6.06	%	13		—		13
TOTAL EARNING ASSETS	112,473,172			6,058,814		7.20	%	106,623,775			6,118,698		7.67	%	(59,884	)	(241,976	)	182,092
Other assets⁽⁶⁾	29,445,100							31,940,325
TOTAL ASSETS	$	141,918,272						$	138,564,100
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest bearing demand deposits	$	11,788,832		$	35,809	0.41	%	$	12,655,796		$	41,389	0.44	%	(5,580	)	(2,720	)	(2,860	)
Savings	6,012,640			9,425		0.21	%	6,715,672			10,946		0.22	%	(1,521	)	(1,107	)	(414	)
Money market	24,836,343			95,377		0.51	%	22,842,486			95,111		0.56	%	266		2,659		(2,393	)
Certificates of deposit	9,875,505			72,524		0.98	%	9,656,593			68,232		0.94	%	4,292		1,594		2,698
TOTAL INTEREST BEARING DEPOSITS	52,513,320			213,135		0.54	%	51,870,547			215,678		0.56	%	(2,543	)	426		(2,969	)
BORROWED FUNDS:
FHLB advances, federal funds, and repurchase agreements	10,517,500			108,061		1.37	%	9,174,121			133,342		1.94	%	(25,281	)	25,118		(50,399	)
Other borrowings	38,193,757			755,125		2.64	%	34,800,114			550,985		2.12	%	204,140		57,686		146,454
TOTAL BORROWED FUNDS ⁽⁷⁾	48,711,257			863,186		2.37	%	43,974,235			684,327		2.08	%	178,859		82,804		96,055
TOTAL INTEREST BEARING FUNDING LIABILITIES	101,224,577			1,076,321		1.42	%	95,844,782			900,005		1.26	%	176,316		83,230		93,086
Noninterest bearing demand deposits	13,899,407							12,589,595
Other liabilities⁽⁸⁾	4,640,750							4,734,953
TOTAL LIABILITIES	119,764,734							113,169,330
STOCKHOLDER’S EQUITY	22,153,538							25,394,770
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	141,918,272						$	138,564,100

NET INTEREST SPREAD ⁽⁹⁾						5.78	%						6.42	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.92	%						6.54	%


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


(2)	Yields calculated using taxable equivalent net interest income


(3)	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").


(4)	Other consumer primarily includes recreational vehicle ("RV") and marine loans.


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


(6)	Other assets primarily includes goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, bank owned life insurance ("BOLI"), accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and mortgage servicing rights ("MSRs"). Refer to Note 8 to the Condensed Consolidated Financial Statements for further discussion.


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

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


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


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


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

NET INTEREST INCOME



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
	2016		2015		2016		2015		Dollar			Percentage		Dollar			Percentage
	(in thousands)
INTEREST INCOME:
Interest-earning deposits	$	13,400	$	5,733	$	41,890	$	14,894	$	7,667		133.7	%	$	26,996		181.3	%
Investments available-for-sale	60,844		85,707		235,851		241,150		(24,863		)	(29.0	)%	(5,299		)	(2.2	)%
Other investments	7,641		10,826		25,224		40,090		(3,185		)	(29.4	)%	(14,866		)	(37.1	)%
Total interest income on investment securities and interest-earning deposits	81,885		102,266		302,965		296,134		(20,381		)	(19.9	)%	6,831			2.3	%
Interest on loans	1,889,077		1,918,248		5,755,173		5,821,900		(29,171		)	(1.5	)%	(66,727		)	(1.1	)%
Total Interest Income	1,970,962		2,020,514		6,058,138		6,118,034		(49,552		)	(2.5	)%	(59,896		)	(1.0	)%
INTEREST EXPENSE:
Deposits and customer accounts	64,288		72,929		213,135		215,678		(8,641		)	(11.8	)%	(2,543		)	(1.2	)%
Borrowings and other debt obligations	285,544		235,085		863,186		684,327		50,459			21.5	%	178,859			26.1	%
Total Interest Expense	349,832		308,014		1,076,321		900,005		41,818			13.6	%	176,316			19.6	%
NET INTEREST INCOME	$	1,621,130	$	1,712,500	$	4,981,817	$	5,218,029	$	(91,370	)	(5.3	)%	$	(236,212	)	(4.5	)%

Net interest income decreased $91.4 million and $236.2 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. These decreases were primarily due to the yield increases on the borrowed funds in the three-month and nine-month periods ended September 30, 2016 compared to the three-month and nine-month periods ended September 30, 2015.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits decreased $20.4 million for the three-month period ended, and increased $6.8 million for the nine-month period ended September 30, 2016, compared to the corresponding periods in 2015. The average balance of investment securities and interest-earning deposits for the three-month and nine-month periods ended September 30, 2016 were $23.4 billion and $25.6 billion with an average yield of 1.39% and 1.58%, respectively, compared to an average balance of $24.6 billion and $21.6 billion with an average yield of 1.65% and 1.84% for the corresponding periods in 2015. The decrease in the average balance of interest income on investment securities and interest-earning deposits for the three-month period ended September 30, 2016 was primarily attributable to a decrease of $25.8 million in interest income on investment available-for-sale securities, offset by $5.1 million increase in short term treasury funds compared to the corresponding period in 2015. The increase in the average balance of interest income on investment securities and interest-earning deposits for the nine-month period ended September 30, 2016 was primarily attributable to the increase in short term treasury fund of $20.8 million, offset by $14.9 million decrease in dividends on Federal Home Loan Bank ("FHLB") stock compared to the corresponding period in 2015.

Interest Income on Loans

Interest income on loans decreased $29.2 million and $66.7 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The average balance of total loans was $90.2 billion and $90.5 billion with an average yield of 8.33% and 8.50% for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $89.7 billion and $87.5 billion with an average yield of 8.48% and 8.89% for the corresponding periods in 2015. The increases in the average balance of total loans of $494.1 million and $2.9 billion were primarily due to the growth of the RIC and auto loan portfolio. The average balance of RICs and auto loans, which comprised a majority of the increases, were $26.9 billion with an average yield of 17.71% and $26.6 billion with an average yield of 18.37% for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $25.4 billion with an average yield of 18.62% and $24.4 billion with an average yield of 20.03% for the corresponding periods in 2015.

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

The decreases in interest income on loans were primarily due to the activity in originations of the unsecured loan portfolios. Interest income on the personal unsecured loans portfolio decreased $31.5 million and $77.6 million for the three-month and nine-month periods ended September 30, 2016, respectively.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts decreased $8.6 million and $2.5 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The average balance of total interest-bearing deposits were $51.7 billion and $52.5 billion with an average cost of 0.49% and 0.54% for the three-month and nine-month periods ended September 30, 2016, respectively, compared to an average balance of $52.4 billion and $51.9 billion with an average cost of 0.55% and 0.56% for the corresponding periods in 2015. The decreases in interest expense on deposits and customer-related accounts during the three-month and nine-month periods ended September 30, 2016 were primarily due to the decrease in the interest rate paid on deposits in both periods.

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $50.5 million and $178.9 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The increases in interest expense on borrowed funds were due to the increases in the interest rate paid for the three-month and nine-month periods ended September 30, 2016, respectively. These increases were primarily due to $2.7 billion of new debt issued by SHUSA, which includes $1.1 billion of debt that was issued during the third quarter of 2015, and net $1.6 billion of SC on balance sheet securitization activity from September 30, 2015 to September 30, 2016. The average balance of total borrowings was $45.9 billion and $48.7 billion with an average cost of 2.47% and 2.37% for the three-month and nine-month periods ended September 30, 2016, respectively, compared to an average balance of $48.5 billion and $44.0 billion with an average cost of 1.92% and 2.08% for the corresponding periods in 2015.

103

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based 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 and nine-month periods ended September 30, 2016 was $687.9 million and $2.2 billion, respectively, compared to $954.1 million and $3.0 billion for the corresponding period in 2015. The decreases for the nine-month period ended September 30, 2016 was primarily related to the buildup of the ALLL coverage ratio throughout 2015, mainly on the RIC and auto loan portfolio. The provision continues to reflect the growth of the RIC and auto loan portfolio.



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2016			2015			2016			2015
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	3,765,887		$	2,914,207		$	3,246,145		$	1,777,889
Charge-offs:
Commercial	(41,660		)	(48,248		)	(118,273		)	(102,809		)
Consumer	(1,249,370		)	(1,495,927		)	(3,424,199		)	(3,345,343		)
Total charge-offs	(1,291,030		)	(1,544,175		)	(3,542,472		)	(3,448,152		)
Recoveries:
Commercial	21,359			27,890			68,640			42,839
Consumer	608,915			498,218			1,828,621			1,505,171
Total recoveries	630,274			526,108			1,897,261			1,548,010
Charge-offs, net of recoveries	(660,756		)	(1,018,067		)	(1,645,211		)	(1,900,142		)
Provision for loan and lease losses ⁽¹⁾	709,151			954,062			2,213,348			2,999,572
Other⁽²⁾:
Consumer	—			—			—			(27,117		)
Allowance for loan and lease losses, end of period	$	3,814,282		$	2,850,202		$	3,814,282		$	2,850,202

Reserve for unfunded lending commitments, beginning of period	$	156,898		$	139,145		$	149,021		$	134,003
Provision for unfunded lending commitments ⁽¹⁾	(21,239		)	8			(13,194		)	5,151
Loss on unfunded lending commitments	(1,094		)	—			(1,262		)	(1		)
Reserve for unfunded lending commitments, end of period	134,565			139,153			134,565			139,153
Total allowance for credit losses ("ACL"), end of period	$	3,948,847		$	2,989,355		$	3,948,847		$	2,989,355


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


(2)	The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1.0 billion of RICs as held-for-sale during the first quarter of 2015.

The Company's net charge-offs decreased $357.3 million and decreased $254.9 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015.

Commercial charge-offs decreased $6.6 million and increased $15.5 million for the three-month and nine-month periods ended September 30, 2016, respectively. The three-month decrease was primarily due to a $22.4 million decrease in Commercial Auto loan charge-offs offset by an $17.8 million increase in Corporate Banking charge-offs. The nine-month increase was primarily to due to an $11.7 million increase in Commercial Auto loans and a $5.4 million increase in Corporate Banking charge-offs.

Commercial recoveries decreased $6.5 million and increased $25.8 million for the three-month and nine-month periods ended September 30, 2016, respectively. The three-month decrease was primarily due to a $13.4 million decrease in Commercial Auto loans offset by an $8.2 million increase in Commercial Real Estate recoveries. The nine-month increase was primarily due to a $13.3 million increase in Commercial Real Estate, an $8.9 million increase in Commercial Auto and a $6.2 million increase in Corporate Banking recoveries. Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, were less than 0.1% for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015.

104

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Consumer charge-offs decreased $246.6 million and increased $78.9 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The three-month decrease was primarily due to a $249.1 million decrease in Consumer Auto Loan charge-offs. The nine-month increase was primarily due to a $60.8 million increase in Consumer Auto loans, an $8.4 million increase in Home Equity loans and a $7.1 million increase in Home Mortgage charge-offs.

Consumer recoveries increased $110.7 million and $323.5 million for the three-month and nine-month periods ended September 30, 2016, respectively. The increases were primarily due to $114.4 million and $329 million increases in Consumer Auto loan recoveries, respectively.

Consumer net charge-offs as a percentage of average consumer loans were 1.5% and 3.6% for the three-month and nine-month periods ended September 30, 2016, respectively, compared to 2.2% and 4.2% for the corresponding periods in 2015.

NON-INTEREST INCOME



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					YTD Change
	2016			2015			2016			2015			Dollar			Percentage		Dollar			Percentage
	(dollars in thousands)
Consumer fees	$	120,956		$	114,021		$	381,943		$	305,460		$	6,935		6.1	%	$	76,483		25.0	%
Commercial fees	50,728			53,694			153,640			160,448			(2,966		)	(5.5	)%	(6,808		)	(4.2	)%
Mortgage banking income, net	22,537			32,061			50,005			87,177			(9,524		)	(29.7	)%	(37,172		)	(42.6	)%
Equity method investments gains/(losses), net	421			1,624			(4,719		)	(5,543		)	(1,203		)	(74.1	)%	824			(14.9	)%
Bank-owned life insurance	14,150			15,590			44,315			44,430			(1,440		)	(9.2	)%	(115		)	(0.3	)%
Lease income	483,929			364,634			1,365,519			1,017,711			119,295			32.7	%	347,808			34.2	%
Miscellaneous income	35,637			229,658			94,842			674,969			(194,021		)	(84.5	)%	(580,127		)	(85.9	)%
Net (losses)/gain recognized in earnings	(364		)	(2,309		)	58,551			15,898			1,945			(84.2	)%	42,653			268.3	%
Total non-interest income	$	727,994		$	808,973		$	2,144,096		$	2,300,550		$	(80,979	)	(10.0	)%	$	(156,454	)	(6.8	)%

Total non-interest income decreased $81.0 million and $156.5 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The decreases for the three-month and nine-month periods ended September 30, 2016 were primarily due to decreases in miscellaneous income attributable to the decrease in sale of operating leases and mark-down of the fair value associated with personal unsecured LHFS, partially offset by increases in lease income.

Consumer Fees

Consumer fees increased $6.9 million and $76.5 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The increase in consumer fees for the three-month period ended September 30, 2016 was primarily due to $16.3 million increase in insurance and investment activities, partially offset by $12.0 million decrease in loan servicing income. The increase in consumer fees for the nine-month period ended September 30, 2016 was primarily due to a $48.6 million increase in insurance and investment activities, and $15.7 million of increases in loan servicing income, which was largely attributable to the Company's growing RIC and auto loan serviced for others portfolio.

Commercial Fees

Commercial fees consists of deposit overdraft fees, deposit ATM fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $3.0 million and $6.8 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015.

105

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Mortgage Banking Revenue



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					YTD Change
	2016			2015			2016			2015			Dollar			Percentage		Dollar			Percentage
	(dollars in thousands)
Mortgage and multifamily servicing fees	$	10,772		$	11,127		$	32,387		$	33,640		$	(355	)	(3.2	)%	$	(1,253	)	(3.7	)%
Net gains on sales of residential mortgage loans and related securities	8,049			5,912			18,127			30,424			2,137			36.1	%	(12,297		)	(40.4	)%
Net gains on sales of multifamily mortgage loans	1,097			18,623			2,397			28,961			(17,526		)	(94.1	)%	(26,564		)	(91.7	)%
Net gains on hedging activities	655			15,806			33,624			12,787			(15,151		)	(95.9	)%	20,837			163.0	%
Net gains/(losses) from changes in MSR fair value	7,711			(13,473		)	(18,113		)	749			21,184			(157.2	)%	(18,862		)	(2,518.3	)%
MSR principal reductions	(5,747		)	(5,934		)	(18,417		)	(19,384		)	187			(3.2	)%	967			(5.0	)%
Total mortgage banking income, net	$	22,537		$	32,061		$	50,005		$	87,177		$	(9,524	)	(29.7	)%	$	(37,172	)	(42.6	)%

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 included gains or losses on the sale of mortgage loans, home equity loans, home equity lines of credit, and MBS. Gains or losses on mortgage banking derivative and hedging transactions are also included in Mortgage banking income.

Mortgage banking revenue decreased $9.5 million and $37.2 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The decrease for the three-month period was primarily attributable to lower gains on sales of multifamily mortgage loans driven by lower provision releases during the current period and lower gains on hedging activities. Multifamily loan repurchases in 2015 which led to provision releases and higher mortgage banking revenue in 2015 did not recur in 2016. This was offset by realized gains on changes in the MSR fair value compared to losses realized in the corresponding period in 2015. The decrease for the nine-month period was attributable to lower gains on sales of both residential and multifamily mortgage loans also driven by lower residential mortgage sale activity and lower provision releases on multifamily mortgage loans as well as year-to-date losses realized on changes in MSR fair value compared to gains for the corresponding period in 2015. These decreases were offset by higher gains on hedging activities in 2016 compared to the corresponding period in 2015.

Since 2014, mortgage interest rates have remained stable, resulting in relative stability in mortgage banking fees from rate changes.

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



	30-Year Fixed		15-Year Fixed
September 30, 2014	4.25	%	3.50	%
December 31, 2014	3.99	%	3.25	%
March 31, 2015	3.88	%	3.13	%
June 30, 2015	4.13	%	3.38	%
September 30, 2015	3.88	%	3.13	%
December 31, 2015	4.13	%	3.38	%
March 31, 2016	3.63	%	2.88	%
June 30, 2016	3.50	%	2.75	%
September 30, 2016	3.50	%	2.88	%

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

Mortgage and multifamily servicing fees decreased $0.4 million and $1.3 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. At September 30, 2016 and 2015, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $688.8 million and $897.0 million, respectively. The decrease in loans serviced for others is primarily due to the 2015 repurchase of loans sold to FNMA for which the Company retained servicing.

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

Net gains on sales of residential mortgage loans and related securities increased $2.1 million and decreased $12.3 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. For the three-month and nine-month periods ended September 30, 2016, the Company sold $639.8 million and $1.5 billion of mortgage loans for gains of $8.0 million and $18.1 million, respectively, compared to $655.8 million and $1.6 billion of loans sold for gains of $5.9 million and $30.4 million for the three-month and nine-month periods ended September 30, 2015.

The Company periodically sells qualifying mortgage loans to the FHLMC, Government National Mortgage Association and the 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 multifamily mortgage loans decreased $17.5 million and $26.6 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The decreases were primarily due to a $1.1 million and $2.4 million release in the FNMA recourse reserve for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $18.6 million and $29.0 million for the three-month and nine-month periods ended September 30, 2015.

The Company previously sold multifamily loans in the secondary market to FNMA while retaining servicing. In September 2009, the Bank elected to stop selling multifamily loans to FNMA and, since that time, has retained all production for the multifamily loan portfolio. Under the terms of the multifamily 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 multifamily loan sold to FNMA under the program until the earlier to occur of (i) the aggregate approved losses on the multifamily 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 September 30, 2016 and December 31, 2015, the Company serviced loans with a principal balance of $386.3 million and $552.1 million, respectively, for FNMA. These loans had a credit loss exposure of $34.4 million and $34.4 million as of September 30, 2016 and December 31, 2015, respectively. Losses, if any, resulting from representation and warranty defaults would be in addition to the Company's 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 multifamily 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 September 30, 2016 and December 31, 2015, the Company had a liability of $4.4 million and $6.8 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to FNMA under this program.

Net gains on hedging activities decreased $15.2 million and increased $20.8 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The variances for the three-month and nine-month periods ended September 30, 2016 were primarily due to the increase in the mortgage loan pipeline valuation and the Company's hedging strategy in the current mortgage rate environment.

MSR fair value increased $21.2 million from a net loss of $13.5 million for the three-month period ended September 30, 2015 to a net gain of $7.7 million for the three-month period ended September 30, 2016. MSR fair value decreased $18.9 million to a net loss of $18.1 million for the nine-month period ended September 30, 2016 compared to a net gain of $0.7 million for the corresponding period in 2015. The carrying value of the related MSRs at September 30, 2016 and December 31, 2015 were $126.1 million and $147.2 million, respectively. The MSR asset fair value changes for the three-month and nine-month periods ended September 30, 2016 were the result of decreases in interest rates.

The Company recognized $5.7 million and $18.4 million of principal reductions for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $5.9 million and $19.4 million for the corresponding periods in 2015. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing and generally follows along with interest rates.

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

Equity method investments gains/(losses), net

Equity method investments gains/(losses), net consists of income and losses on investments in unconsolidated entities and joint ventures in which the Company has an interest in the partnerships, but does not have a controlling interest. These include investments in community reinvestment projects and entities which own wind power generating projects. Equity method investments gains/(losses), net decreased $1.2 million and increased $0.8 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015.

BOLI

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI decreased $1.4 million and $0.1 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015.

Lease income

Lease income increased $119.3 million and $347.8 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The average leased vehicle portfolio balance as of September 30, 2016 and September 30, 2015 was $9.2 billion and $9.0 billion, respectively. These increases were the result of the growth of the Company's lease portfolio.

Net gains/(losses) recognized in earnings

The Company recognized $0.4 million of losses and $58.6 million of gains for the three-month and nine-month periods ended September 30, 2016 in net (losses)/gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the nine-month period ended September 30, 2016 was primarily comprised of the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, the corporate debt securities were sold off with a book value of $1.4 billion for a gain of $5.9 million, the sale of MBS, including FHLMC residential debt securities and CMOs, with a book value of $1.3 billion for a gain of $24.7 million, and the sale of state and municipal securities with a book value of $748.0 million for a gain of $19.9 million.

The Company recognized $2.3 million of losses and $17.0 million of gains for the three-month and nine-month periods ended September 30, 2015, respectively, in net (losses)/gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net loss realized for the three-month period ended September 30, 2015 was primarily comprised of the sale of corporate debt securities with a book value of $63.7 million for a gain of $0.4 million, and the sale of asset-backed securities ("ABS") with a book value of $419.6 million for a loss of $1.4 million. The net gain for the nine-month period ended September 30, 2015 was primarily comprised of the sale of state and municipal securities with a book value of $421.5 million for a gain of $12.1 million, the sale of corporate debt securities with a book value of $517.6 million for a gain of $7.0 million, and the sale of ABS with a book value of $683.9 million for a gain of $0.2 million, offset by OTTI of $1.1 million.

Miscellaneous Income

Miscellaneous income decreased $194.0 million and $580.1 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The decrease for the three-month period ended September 30, 2016 compared to the same period in 2015 were primarily due primarily due to current year lower of cost or market adjustments of $98.0 million on SC personal unsecured loan portfolio which were reclassified to held for sale at the end of third quarter of 2015. SC also had $36.0 million less on lease and other miscellaneous sales for three months ended September 30, 2016, compared to the same periods in 2015, primarily due to a lack of bulk loan and lease sales in 2016. In addition, total other income decreased $70.8 million, including$59.8 million decrease in miscellaneous income, mainly due to lower fair value adjustments on the Company's FVO loan portfolio.

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

The decrease for the nine-month period ended September 30, 2016 compared to the same period in 2015, is primarily due to a decrease in lower of cost or market adjustments of $267.0 million on SC personal unsecured portfolio. SC also reflects $149.0 million less on lease and other miscellaneous sales for nine months ended September 30, 2016, compared to the same period in 2015, primarily due to a lack of bulk loan and lease sales in the 2016. Total other income decreased $316.3 million , including $116.8 million decrease in miscellaneous income, mainly due to lower fair value adjustments on the Company's FVO loan portfolio. For further discussion please see Note 16 to the Condensed Consolidated Financial Statements.

GENERAL AND ADMINISTRATIVE EXPENSES



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
	2016		2015		2016		2015		Dollar			Percentage		Dollar			Percentage
	(dollars in thousands)
Compensation and benefits	$	426,162	$	402,635	$	1,282,094	$	1,169,459	$	23,527		5.8	%	$	112,635		9.6	%
Occupancy and equipment expenses	156,611		140,116		453,687		433,780		16,495			11.8	%	19,907			4.6	%
Technology expense	56,449		55,144		183,039		163,205		1,305			2.4	%	19,834			12.2	%
Outside services	57,742		89,658		207,472		211,826		(31,916		)	(35.6	)%	(4,354		)	(2.1	)%
Marketing expense	35,944		26,308		77,986		61,559		9,636			36.6	%	16,427			26.7	%
Loan expense	101,101		89,907		307,992		285,660		11,194			12.5	%	22,332			7.8	%
Lease expense	338,077		261,668		953,142		755,945		76,409			29.2	%	197,197			26.1	%
Other administrative expenses	109,189		109,027		310,078		310,115		162			0.1	%	(37		)	—	%
Total general and administrative expenses	$	1,281,275	$	1,174,463	$	3,775,490	$	3,391,549	$	106,812		9.1	%	$	383,941		11.3	%

Total general and administrative expenses increased $106.8 million and $383.9 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. Factors contributing to these increases were as follows:


•	Compensation and benefits expense increased $23.5 million and $112.6 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The primary driver of the increases was the Company's headcount, in particular within its consumer finance subsidiary.


•	Technology expense increased $1.3 million and $19.8 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The increases were primarily due to the Company's increased technology services relating to Produban, a Santander affiliate.

•

Outside services decreased $31.9 million and $4.4 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The decreases were primarily due to decreased consulting service fees related to regulatory initiatives, including preparation for meeting the requirements of the IHC which became effective on July 1, 2016. Consulting fees decreased $34.6 million and $15.1 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015.

•

Loan expense increased $11.2 million and $22.3 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The increase in the three-month period was primarily due to an increase of $15.7 million in loan collection expenses. This was offset by $2.8 million decrease in loan servicing expenses, primarily associated with the activity in the RIC and auto loan portfolio.


•	Lease expense increased $76.4 million and $197.2 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. These increases were primarily due to the continued growth of the Company's leased vehicle portfolio and depreciation associated with that portfolio.

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

OTHER EXPENSES



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
	2016		2015		2016		2015		Dollar			Percentage		Dollar			Percentage
	(dollars in thousands)
Amortization of intangibles	$	17,174	$	19,245	$	52,860	$	59,144	$	(2,071	)	(10.8	)%	$	(6,284	)	(10.6	)%
Deposit insurance premiums and other expenses	17,950		14,917		56,966		46,446		3,033			20.3	%	10,520			22.6	%
Loss on debt extinguishment	10,228		—		88,672		—		10,228			100%		88,672			100%
Impairment of capitalized software	—		—		19		—		—			0%		19			100%
Investment expense on affordable housing projects	619		35		1,041		119		584			1,668.6	%	922			774.8	%
Total other expenses	$	45,971	$	34,197	$	199,558	$	105,709	$	11,774		34.4	%	$	93,849		88.8	%

Total other expenses increased $11.8 million and $93.8 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The primary factors contributing to the increases were:

Amortization of intangibles decreased $2.1 million and $6.3 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The decreases for the three and nine month periods were primarily due to the Company's core deposit intangibles and purchased credit card relationships from its acquisitions in 2006 and before becoming fully amortized in the second quarter of 2016.

Deposit insurance premiums and other expenses increased $3.0 million and $10.5 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The increase for the nine month period was primarily driven by an increase in other expenses attributable a loss on the sale of unfunded commitments to an unconsolidated related party of $1.7 million and an increase in FDIC insurance premiums.

There were $10.2 million and $88.7 million of losses on debt extinguishment during the three-month and nine-month periods ended September 30, 2016, respectively, compared to no such losses for the three-month and nine-month periods ended September 30, 2015. These expenses were primarily related to early termination fees incurred by the Company in association with the 2016 termination of FHLB advances. During the three-month and nine-month periods ended September 30, 2016, the Bank terminated $750.0 million and $3.5 billion of FHLB advances.

INCOME TAX PROVISION

The Company recognized discrete income tax benefits of $6.7 million and $4.6 million for the three-month and nine-month periods ended September 30, 2016, respectively and discrete income tax provisions of $90.0 million and $57.8 million for the three-month and nine-month periods ended September 30, 2015, respectively, which resulted in higher effective tax rates for the three-month and nine-month periods ended September 30, 2016.

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.

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

LINE OF BUSINESS RESULTS

General

The Company's segments at September 30, 2016 consisted of Consumer and Business Banking, Commercial Banking, Commercial Real Estate, Global Corporate Banking ("GCB"), and SC. For additional information with respect to the Company's reporting segments, see Note 17 to the Condensed Consolidated Financial Statements.

Results Summary

Consumer and Business Banking

Net interest income increased $81.2 million and $156.2 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The average balances of the Consumer and Business Banking segment's gross loans were $16.9 billion and $16.9 billion for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $17.3 billion and $17.5 billion for the corresponding periods in 2015. The average balances of deposits were $40.7 billion and $40.6 billion for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $39.4 billion for both corresponding periods in 2015, primarily driven by growth in non-interest-bearing deposits. Total non-interest income decreased $1.0 million and had no change for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The provision for credit losses increased $6.1 million and decreased $0.8 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. Total expenses increased $12.6 million and $49.2 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015.

Total assets as of September 30, 2016 were $20.7 billion, compared to $21.9 billion as of September 30, 2015.

Commercial Banking

Net interest income increased $20.8 million and $54.7 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. Total average gross loans were $12.2 billion and $11.9 billion for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $10.4 billion and $10.2 billion for the corresponding periods in 2015. Total non-interest income increased $2.1 million and $5.4 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The provision for credit losses decreased $13.8 million and increased $31.3 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015 driven by reserves for the energy finance business line. Total expenses increased $3.1 million and $7.4 million for the three-month and nine-month periods ended 2016, respectively, compared to the corresponding periods in 2015.

Total assets were $12.2 billion as of September 30, 2016, compared to $15.8 billion as of September 30, 2015 while total average deposits were $7.7 billion and $8.2 billion for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $9.0 billion and $8.9 billion for the corresponding periods in 2015.

Commercial Real Estate

Net interest income increased $7.7 million and $9.9 million during the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The average balance of this segment's gross loans increased to $15.2 billion and $15.3 billion during the three-month and nine-month periods ended September 30, 2016, respectively, compared to $14.8 billion and $14.3 billion for the corresponding periods in 2015, primarily due to the Company repurchasing multi-family loans from FNMA in the second half of 2015. The average balance of deposits was $817.2 million and $788.2 million during the three-month and nine-month periods ended September 30, 2016, respectively, compared to $764.6 million and $791.5 million during the corresponding periods in 2015. Total non-interest income decreased $19.9 million and $30.9 million during the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The provision for credit losses was $2.9 million and $23.9 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $9.9 million and $22.7 million for the corresponding periods in 2015. Total expenses increased $0.6 million and $0.4 million during the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. Total assets were $15.0 billion for both September 30, 2016 and September 30, 2015.

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

Global Corporate Banking

Net interest income increased $6.1 million and $24.5 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The average balance of this segment's gross loans were $8.8 billion and $9.5 billion for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $9.9 billion and $9.4 billion for the corresponding periods in 2015. The average balance of deposits was $2.4 billion and $2.1 billion for the three-month and nine-month periods ended September 30, 2016, respectively, compared to $2.1 billion and $1.7 billion for the corresponding periods in 2015. Total non-interest income increased $5.9 million and decreased $0.7 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The provision for credit losses increased $8.4 million and $34.1 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. Total expenses decreased 1.6 million and increased $0.7 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015.

Total assets were $10.6 billion as of September 30, 2016, compared to $12.2 billion as of September 30, 2015.

Other

Net interest income decreased $101.1 million and $214.4 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. Total non-interest income increased $21.2 million and $43.7 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The provision for credit losses increased $12.6 million and decreased $22.9 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. Total expenses decreased $4.7 million and increased $133.0 million during the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015.

Total assets were $42.1 billion as of September 30, 2016, compared to $40.8 billion as of September 30, 2015.

Net interest income decreased $81.4 million and $81.7 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The fluctuations were primarily related to an increase in interest expense during both periods. Total non-interest income increased $6.7 million and decreased $27.4 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The overall decrease in 2016 is due to lower of cost or market adjustments required on a held for sale loan portfolio that did not occur in 2015. The provision for credit losses decreased $113.5 million and $152.7 million for the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015. Total expenses increased $107.8 million and $284.4 million during the three-month and nine-month periods ended September 30, 2016, respectively, compared to the corresponding periods in 2015, also attributable to growth in the loan and leased vehicle portfolios during the year.

Total assets were $38.8 billion as of September 30, 2016, compared to $35.3 billion as of September 30, 2015.

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

FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's loan and lease portfolio held for investment consisted of the following at the dates provided:



	September 30, 2016				December 31, 2015
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial loans:
Commercial real estate loans	$	10,165,990	11.7	%	$	9,846,236	11.3	%
Commercial and industrial loans and other commercial	19,601,335		22.6	%	20,908,107		24.0	%
Multifamily	9,021,275		10.4	%	9,438,463		10.8	%
Other Commercial	6,799,457		7.8	%	6,257,072		7.2	%
Total Commercial Loans	45,588,057		52.5	%	46,449,878		53.3	%
Consumer loans secured by real estate:
Residential mortgages	7,588,663		8.7	%	7,566,301		8.7	%
Home equity loans and lines of credit	6,041,629		7.0	%	6,151,232		7.1	%
Total consumer loans secured by real estate	13,630,292		15.7	%	13,717,533		15.8	%
Consumer loans not secured by real estate:
Retail installment contracts and auto loans - originated	21,602,717		24.9	%	18,539,588		21.3	%
Retail installment contracts and auto loans - purchased	4,005,079		4.6	%	6,108,210		7.0	%
Personal unsecured loans	1,219,942		1.4	%	1,177,998		1.4	%
Other consumer	848,252		0.9	%	1,032,579		1.2	%
Total Consumer Loans	41,306,282		47.5	%	40,575,908		46.7	%
Total loans held for investment	$	86,894,339	100.0	%	$	87,025,786	100.0	%
Total Loans with:
Fixed	$	53,357,078	61.4	%	$	52,283,715	60.1	%
Variable	33,537,261		38.6	%	34,742,071		39.9	%
Total loans held for investment	$	86,894,339	100.0	%	$	87,025,786	100.0	%

Commercial

Commercial loans decreased approximately $861.8 million, or 1.9%, from December 31, 2015 to September 30, 2016. The decrease from December 31, 2015 to September 30, 2016 was primarily due to a decrease in commercial and industrial loans of $1.3 billion, and multifamily loans of $417.2 million. These were offset by an increase in commercial real estate loans of $319.8 million and other commercial loans of $542.4 million.

Consumer Loans Secured By Real Estate

Consumer loans secured by real estate decreased $87.2 million, or 0.6%, from December 31, 2015 to September 30, 2016. The primary drivers of the decrease were related to the home equity loans and lines of credit portfolio of $109.6 million, offset by an increase in residential mortgages of $22.4 million.

Consumer Loans Not Secured By Real Estate

The consumer loan portfolio not secured by real estate increased $817.6 million, or 3.0%, from December 31, 2015 to September 30, 2016. The increase was primarily due to the $3.1 billion increase in the RICs and auto loans - originated portfolio. The growth was offset by a decrease in the RIC and auto loan portfolio - purchased portfolio of 2.1 billion.

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

As of September 30, 2016, 68.9% of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a Fair Isaac Corporation ("FICO") score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. While underwriting guidelines were designed to establish that the customer would be a reasonable credit risk, nonprime loans will nonetheless experience higher default rates than a portfolio of obligations of prime customers. Additionally, higher unemployment rates, higher gasoline prices, unstable real estate values, re-sets of adjustable rate mortgages to higher interest rates, the general availability of consumer credit, and other factors that impact consumer confidence or disposable income could lead to an increase in delinquencies, defaults, and repossessions, as well as decrease consumer demand for used automobiles and other consumer products, weaken collateral values and increase losses in the event of default. Because SC's historical focus for such credit has been predominantly on nonprime consumers, the actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn. The Company's automated originations process for these credits reflects a disciplined approach to credit risk management to mitigate the risks of nonprime customers. The Company's robust historical data on both organically originated and acquired loans provides it with the ability to perform advanced loss forecasting. Each applicant is automatically assigned a proprietary custom score using information such as FICO scores, debt-to-income ("DTI") ratios, loan-to-value ("LTV") ratios, and over 30 other predictive factors, placing the applicant in one of 100 pricing tiers. The pricing in each tier is continuously monitored and adjusted to reflect market and risk trends. In addition to the Company's automated process, it maintains a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers.

In early 2015, we increased our origination volume of RICs to borrowers with limited credit experience, such as those with less than 36 months of credit history or less than four trade lines. For these borrowers, many of whom do not have a FICO score, other factors such as the LexisNexis risk view score, LTV ratio, and payment-to-income ratio are utilized to assign an internal credit score. Our risk-based pricing methodology generally captures these credit bureau attributes in establishing a risk appropriate annual percentage rate ("APR") at the time of origination. Origination volume of RICs with less than four trade lines and less than 36 months of credit history was $2.1 billion and $3.0 billion for the nine-month periods ended September 30, 2016 and September 30, 2015, respectively. Our credit loss allowance forecasting models are not calibrated for this higher concentration of RICs with limited bureau information and, accordingly, as of December 31, 2015, we recorded a qualitative adjustment of $149.0 million, increasing the allowance ratio on individually acquired RICs by 0.5% of the unpaid principal balance. However, this qualitative adjustment was reduced to zero as of September 30, 2016 as origination metrics have improved and the additional charge-offs expected on this portfolio are included in the estimated credit loss allowance.



	September 30, 2016				December 31, 2015
Credit Score Range⁽²⁾	Retail installment contracts and auto loans⁽³⁾				Retail installment contracts and auto loans⁽³⁾
	Standard file⁽⁴⁾		Non-Standard file⁽⁵⁾		Standard file⁽⁴⁾		Non-Standard file⁽⁵⁾

No FICOs⁽¹⁾	5.7	%	62.7	%	6.0	%	64.5	%
<600	60.0	%	20.7	%	61.3	%	21.3	%
600-639	19.2	%	7.5	%	19.5	%	6.7	%
>=640	15.1	%	9.1	%	13.2	%	7.5	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

(1) Consists primarily of loans for which credit scores are not considered in the ALLL model.

(2) Credit scores updated quarterly.

(3) RICs include $1.5 billion and $905.7 million of LHFS at September 30, 2016 and December 31, 2015, respectively, that do not have an allowance.

(4) Defined as borrowers with greater than 36 months of credit history or four or more trade lines

(5) Defined as borrowers with less than 36 months of credit history or less than four trade lines.

At September 30, 2016, a typical RIC was originated with an average APR of 14.7% and was purchased from the dealer at a discount of 0.1%. All of the Company's RICs and auto loans are fixed rate loans.

Nonprime RICs and personal unsecured loans have a higher inherent risk of loss than prime loans. The Company records an ALLL to cover its estimate of inherent losses on its RICs incurred as of the balance sheet date. As of September 30, 2016, SC's personal unsecured portfolio was transferred to held for sale and thus does not have a related allowance. The ALLL as a percentage of loans held-for-investment increased from 3.7% at December 31, 2015 to 4.4% at September 30, 2016.

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

As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. In connection with this review, on October 9, 2015, SC delivered a 90-day notice of termination of its loan purchase agreement with LendingClub. On February 1, 2016, SC completed the sale of substantially all of its LendingClub loans to a third-party buyer at an immaterial premium to par value. The portfolio was comprised of personal installment loans with an unpaid principal balance of $920.3 million as of September 30, 2016.

SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of the agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. These and other, smaller, revolving loan portfolios are carried as held for sale in our Condensed Consolidated Financial Statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on these portfolios, and there may be further such adjustments required in future periods' financial statements. Management is currently evaluating alternatives for the Bluestem portfolio.

CREDIT RISK MANAGEMENT

Extending credit to customers exposes the Company to credit risk, which is the risk that contractual principal and interest due on loans will not be collected due to the inability or unwillingness of the borrower to repay the loan. The Company manages credit risk in its loan portfolio through adherence to consistent standards, guidelines, and limitations established by the Company’s Board of Directors as set forth in its Board-approved Risk Appetite Statement. Written loan policies establish underwriting standards, lending limits, and other standards or limits deemed necessary and prudent. Various approval levels based on the amount of the loan and other key credit attributes have also been established. To ensure consistency and quality in accordance with the Company's credit and governance standards, authority to approve loans is shared jointly between the businesses and the credit risk group. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.

The Credit Risk Review group conducts ongoing independent reviews of the credit quality of the Company’s loan portfolios and credit management processes to ensure the accuracy of the risk ratings and adherence to established policies and procedures, verify compliance with applicable laws and regulations, provide objective measurement of the risk inherent in the loan portfolio, and ensure that proper documentation exists. The results of these periodic reviews are reported to business line management, Risk Management and the Audit Committee of both the Company and the Bank. The Company maintains a classification system for loans that identifies those requiring a higher level of monitoring by management because of one or more factors, including borrower performance, business conditions, industry trends, the nature of the collateral, collateral margin, economic conditions, or other factors. Loan credit quality is subject to scrutiny by business unit management, credit risk professionals, and Internal Audit.

The following discussion summarizes the underwriting policies and procedures for the major categories within the loan portfolio and addresses SHUSA’s strategies for managing the related credit risk. Additional credit risk management related considerations are discussed further in the "Allowance for Loan and Lease Losses" section of this MD&A.

Commercial Loans

Commercial loans principally represent commercial real estate loans (including multifamily loans), loans to commercial and industrial customers, and automotive dealer floor plan loans. Credit risk associated with commercial loans is primarily influenced by prevailing and expected economic conditions and the level of underwriting risk SHUSA is willing to assume. To manage credit risk when extending commercial credit, the Company focuses on assessing the borrower’s capacity and willingness to repay and obtaining sufficient collateral. Commercial and industrial loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate loans are originated primarily within the Mid-Atlantic, New York, and New England market areas and are secured by real estate at specified LTV ratios and often by a guarantee of the borrower.

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

Consumer Loans Secured by Real Estate

Credit risk in the direct and indirect consumer loan portfolio is controlled by strict adherence to underwriting standards that consider DTI levels, the creditworthiness of the borrower, and collateral values. In the home equity loan portfolio, combined loan-to-value ("CLTV") ratios are generally limited to 90% for both first and second liens. SHUSA originates and purchases fixed-rate and adjustable rate residential mortgage loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores, and adherence to underwriting policies that emphasize conservative LTV ratios of generally no more than 80%. Residential mortgage loans originated or purchased in excess of an 80% LTV ratio are generally insured by private mortgage insurance, unless otherwise guaranteed or insured by the Federal, state, or local government. SHUSA also utilizes underwriting standards which comply with those of FHLMC or FNMA. Credit risk is further reduced, since a portion of the Company’s fixed-rate mortgage loan production is sold to investors in the secondary market without recourse.

Consumer Loans Not Secured by Real Estate

The Company’s consumer loans not secured by real estate include acquired RICs from manufacturer franchised dealers in connection with their sale of used and new automobiles and trucks, as well as acquired consumer marine, RV and credit card loans. Credit risk is mitigated to the extent possible through early and aggressive collection practices, which includes the repossession of vehicles.

Collections

The Company closely monitors delinquencies as another means of maintaining high asset quality. Collection efforts generally begin within 15 days after a loan payment is missed by attempting to contact all borrowers and offer a variety of loss mitigation alternatives. If these attempts fail, the Company will attempt to gain control of any and all collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all money owed to the Company. The Company monitors delinquency trends at 30, 60, and 90 days past due. These trends are discussed at monthly management Credit Risk Review Committee meetings and at the Company's and the Bank's Board of Directors' meetings.

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

NON-PERFORMING ASSETS

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



	September 30, 2016			December 31, 2015
	(dollars in thousands)
Non-accrual loans:
Commercial:
Commercial real estate	$	183,064		$	164,369
Commercial and industrial loans and other commercial	234,326			98,520
Multifamily	7,084			9,162
Total commercial loans	424,474			272,051
Consumer:
Residential mortgages	278,265			304,935
Consumer loans secured by real estate	119,114			127,171
RICs and auto loans - originated	913,186			701,785
RICs - purchased	291,178			417,276
Personal unsecured and other consumer	18,210			28,748
Total consumer loans	1,619,953			1,579,915
Total non-accrual loans	2,044,427			1,851,966

Other real estate owned	115,308			117,746
Repossessed vehicles	193,596			172,375
Other repossessed assets	1,780			374
Total other real estate owned and other repossessed assets	310,684			290,495
Total non-performing assets	$	2,355,111		$	2,142,461

Past due 90 days or more as to interest or principal and accruing interest	$	91,219		$	79,952
Annualized net loan charge-offs to average loans ⁽²⁾	(2.4		)%	(2.2		)%
Non-performing assets as a percentage of total assets	1.7		%	1.5		%
NPLs as a percentage of total loans	2.4		%	2.1		%
ACL as a percentage of total non-performing assets ⁽¹⁾	167.7		%	158.5		%
ACL as a percentage of total NPLs ⁽¹⁾	193.2		%	183.3		%


(1)	The ACL is comprised of the ALLL and the reserve for unfunded lending commitments. The reserve for unfunded lending commitments 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 year-to-date period ended September 30, 2016.

No commercial loans were 90 days or more past due and still accruing interest as of September 30, 2016. 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 $109.3 million and $118.6 million at September 30, 2016 and December 31, 2015, respectively. Potential problem consumer loans amounted to $3.9 billion and $3.8 billion at September 30, 2016 and December 31, 2015, respectively. Management has included these loans in its evaluation and reserved for them during the respective periods.

Non-performing assets increased during the period, to $2.4 billion, or 1.7% of total assets, at September 30, 2016, compared to $2.1 billion, or 1.5% of total assets, at December 31, 2015, primarily attributable to an increase in NPLs in the Commercial and Industrial and RIC auto loan portfolios, offset by a decrease in the mortgage and home equity loan portfolios.

General

Non-performing assets consist of NPLs, which represent loans and leases no longer accruing interest, other real estate owned ("OREO") properties, and other repossessed assets. When interest accruals are suspended, accrued but uncollected interest income is reversed, with accruals charged against earnings. The Company generally places all commercial loans and consumer loans secured by real estate on non-performing 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 RIC portfolio, non-performing status will 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 accrued but uncollected interest is removed from interest income.

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

In general, when the borrower's ability to make required interest and principal payments has resumed and collectability is no longer believed to be in doubt, the loan or lease is returned to accrual status. Generally, commercial loans categorized as non-performing remain in non-performing 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, 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 increased $152.4 million from December 31, 2015 to September 30, 2016. At September 30, 2016, commercial NPLs accounted for 0.9% of commercial loans held for investment, compared to 0.6% of commercial loans held for investment at December 31, 2015. The increase in commercial NPLs was primarily attributable to an increase of NPLs in the commercial real estate portfolio of $18.7 million and an increase of $135.8 million in the commercial and industrial portfolio, primarily related to the energy sector.

Consumer Loans Secured by Real Estate

The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of September 30, 2016 and December 31, 2015, respectively:



	September 30, 2016						December 31, 2015
	Residential mortgages			Home equity loans and lines of credit			Residential mortgages			Home equity loans and lines of credit
	(dollars in thousands)

Non-performing loans	$	278,265		$	119,114		$	304,935		$	127,171
Total loans held for investment	7,588,663			6,041,629			7,566,301			6,151,232
NPLs as a percentage of total loans held for investment	3.7		%	2.0		%	4.0		%	2.1		%

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.

Consumer Loans Not Secured by Real Estate

RICs 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 FVO, at the time a loan is placed on non-performing 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 loan. The accrual of interest on revolving personal loans continues until the loan is charged off.

NPLs in the RIC and auto loan portfolio increased $85.3 million from December 31, 2015 to September 30, 2016. The increase is attributed to a $211.4 million increase in RICs and auto loans - originated offset by a $126.1 million decrease in RICs - purchased. At September 30, 2016, non-performing RICs and auto loans accounted for 4.7% of total RIC and auto loans, compared to 4.5% of total RICs and auto loans at December 31, 2015. The decrease was primarily attributable to seasonality in the RIC and auto loan portfolio, where delinquencies tend to be highest during the holiday months of November to January. NPLs in the other consumer loan portfolio decreased $10.5 million from December 31, 2015 to September 30, 2016. At September 30, 2016 and December 31, 2015, non-performing personal unsecured and other consumer loans accounted for 0.9% and 1.3% of total other consumer loans, respectively.

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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 RIC portfolio, loans may return to accrual status when the balance is 60 days or less past due. 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:



	September 30, 2016		December 31, 2015
	(in thousands)
Performing
Commercial	$	177,485	$	158,828
Residential mortgage	275,616		273,521
RICs and auto loans	4,319,510		3,434,412
Other consumer	130,297		117,621
Total performing	4,902,908		3,984,382
Non-performing
Commercial	151,596		98,081
Residential mortgage	119,865		136,230
RICs and auto loans	534,681		421,356
Other consumer	46,753		48,933
Total non-performing	852,895		704,600
Total	$	5,755,803	$	4,688,982

Performing TDRs totaled $4.9 billion at September 30, 2016, a increase of $918.5 million compared to December 31, 2015. Non-performing TDRs totaled $852.9 million at September 30, 2016, an increase of $148.3 million compared to December 31, 2015.

The following table provides a summary of TDR activity:




	Nine-Month Period Ended September 30, 2016						Nine-Month Period Ended September 30, 2015
	Retail installment contracts and auto loan			All other loans⁽¹⁾			Retail installment contracts and auto loan			All other loans⁽¹⁾
	(in thousands)
TDRs, beginning of period	$	3,877,660		$	923,857		$	1,840,970		$	817,370
New TDRs	2,654,582			63,137			3,298,055			98,268
Charged-Off TDRs	(1,167,132		)	(16,609		)	(728,901		)	(11,228		)
Sold TDRs	5,351			(7,452		)	(603,088		)	(7,379		)
Payments on TDRs	(516,270		)	(97,521		)	(327,209		)	(156,618		)
TDRs, end of period	$	4,854,191		$	865,412		$	3,479,827		$	740,413

(1) Excludes SC personal unsecured loans, which amounted to $36.2 million and $17.3 million at September 30, 2016 and 2015, respectively, that were reclassified to LHFS during the third quarter of 2015.

Commercial

Performing commercial TDRs were $177.5 million, or 53.9% of total commercial TDRs at September 30, 2016 compared to $158.8 million, or 61.8% of total commercial TDRs at December 31, 2015. The increase in performing commercial TDRs is primarily attributable to one material borrower who was delinquent and non-performing which became current and performing. The decrease as a percentage of the total commercial TDRs and the overall increase to commercial TDRs can be attributed to three new obligors being modified during the period, comprising $68.6 million of the increase.

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

Residential Mortgages

Performing residential mortgage TDRs increased from $273.5 million, or 66.8% of total residential mortgage TDRs at December 31, 2015 to $275.6 million, or 69.7% of total residential TDRs at September 30, 2016.

RICs

The RIC and auto loan portfolio is primarily comprised of nonprime loans (68.9% at September 30, 2016), which lead to a higher rate of modifications and deferrals, and thus a higher volume of TDRs, than other portfolios. Total RIC and auto loan portfolio TDRs (performing and non-performing) comprised 15.6% of the Company’s total RIC and auto loan portfolio at December 31, 2015 and 19.0% at September 30, 2016. Loan portfolios acquired as part of a business combination like the Change in Control could not be designated as TDRs under GAAP at the Change in Control date. As a result, the increase is primarily driven by RICs and auto loans originated prior to the Change in Control date which received their first modification, deferral greater than 90 days or second deferral subsequent to the Change in Control date during the reporting period. As a percentage of the RIC and auto loan portfolio recorded investment, there have been no significant increases in modification or deferral activity during the reporting period. The increased TDR activity at SHUSA may continue until the loan portfolios acquired as part of the Change in Control either pay-off or charge-off.

In accordance with its policies and guidelines, the Company at times offers payment deferrals to borrowers on its RICs, under which the consumer is allowed to move up to three delinquent payments to the end of the loan. More than 90% of deferrals granted are for two months. The 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, while some marine and recreational vehicle contracts have a maximum of twelve months in extensions to reflect their longer term. Additionally, the Company generally limits the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, the Company continues 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. The Company evaluates the results of its deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred compared to the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, the Company believes that payment deferrals granted according to its 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. However, the timing of a charge-off may be affected if an account is modified resulting in a deferral. 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 used in the determination of the adequacy of the ALLL for loans classified as TDRs 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 ALLL and related provision for loan and lease losses. Changes in these ratios and periods are considered in determining the appropriate level of the ALLL and related provision for loan and lease losses.

Other Consumer Loans

Performing other consumer loan TDRs increased from $117.6 million, or 70.6% of total other consumer loan TDRs at December 31, 2015 to $130.3 million, or 73.6% of total other consumer loan TDRs at September 30, 2016. If a customer’s financial difficulty is not temporary, the Company 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 the Company's 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.

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

Delinquencies

At September 30, 2016 and December 31, 2015, the Company's delinquencies consisted of the following:



	September 30, 2016					December 31, 2015
	Consumer Loans Secured by Real Estate	Retail Installment Contracts and auto loans	Other Consumer Loans	Commercial Loans	Total	Consumer Loans Secured by Real Estate	Retail Installment Contracts and auto loans	Other Consumer Loans	Commercial Loans	Total
	(dollars in thousands)
Total Delinquencies	$547,922	$3,920,160	$243,907	$251,734	$4,963,723	$553,644	$3,713,852	$251,623	$258,992	$4,778,111
Total Loans⁽¹⁾	$14,023,224	$27,079,604	$2,988,517	$45,812,581	$89,903,926	$13,961,077	$25,553,507	$4,164,992	$46,536,277	$90,215,853
Delinquencies as a % of Loans	3.9%	14.5%	8.2%	0.5%	5.5%	4.0%	14.5%	6.0%	0.6%	5.3%

(1) Includes LHFS

Overall, total delinquencies increased by $185.6 million, or 3.9%, from December 31, 2015 to September 30, 2016. Consumer loans secured by real estate delinquencies decreased $5.7 million, primarily due to improvements in credit quality in the residential mortgage portfolio. RICs and auto loan and other consumer loan delinquencies increased $206.3 million and decreased $7.7 million, respectively, primarily due to seasonality in the RIC and auto loan portfolio, where delinquencies tend to be highest during the holiday months of November to January. Commercial delinquencies decreased $7.3 million.

ALLOWANCE FOR CREDIT LOSSES ("ACL")

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 and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, the level of originations, credit quality metrics such as FICO and CLTV, internal risk ratings, economic conditions 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 ALLL and the percentage of each loan type to total LHFI at the dates indicated:



	September 30, 2016				December 31, 2015
	Amount		% of Loans to Total HFI Loans		Amount		% of Loans to Total HFI Loans
	(dollars in thousands)
Allocated allowance:
Commercial loans	$	530,011	52.5	%	$	456,812	53.3	%
Consumer loans	3,237,026		47.5	%	2,742,088		46.7	%
Unallocated allowance	47,245		n/a		47,245		n/a
Total allowance for loan and lease losses	3,814,282		100.0	%	3,246,145		100.0	%
Reserve for unfunded lending commitments	134,565				149,021
Total allowance for credit losses	$	3,948,847			$	3,395,166

General

The ACL increased $553.7 million from December 31, 2015 to September 30, 2016. The increase in the overall ACL was primarily attributable to continued growth in SC's RIC and auto loan portfolio.

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

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

Generally, the Company’s loans held for investment are carried at amortized cost, net of ALLL, which includes the estimate of any related net discounts that are expected at the time of charge-off. In the case of loans purchased in a bulk purchase or business combination, the entire discount on the loan portfolio is considered as available to absorb the credit losses when determining the ALLL. For these loans, the Company records provisions for credit losses when incurred losses exceed the unaccreted purchase discount.

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 regulators regularly conduct examinations of the ACL and make assessments regarding its adequacy and the methodology employed in its determination.

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/or 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 and, 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 Credit Risk Review 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.

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 commercial loans are comprised of all TDRs plus non-accrual loans in excess of $1 million that are not TDRs. 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 regardless of loan size. 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 DCF methodology.

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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 and lease loss provisions taken on the remaining loan balance, if warranted, utilizing the same criteria.

The portion of the ALLL related to the commercial portfolio was $530.0 million at September 30, 2016 (1.2% of commercial LHFI) and $456.8 million at December 31, 2015 (1.0% of commercial LHFI). The primary factor resulting in the increased ACL allocated to the commercial portfolio is, in part, due to current economic environment impacting our commercial customers, primarily in the energy sector. Management recorded additional reserves for this portfolio during the first quarter of 2016.

Consumer

The consumer loan and small business loan portfolios are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency LTV ratios, and internal and external 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.

Residential mortgages not adequately secured by collateral are generally charged-off to fair value less cost to sell when deemed to be uncollectible or are delinquent 180 days or more, 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.

For residential mortgage loans, loss severity assumptions are incorporated into the loan and lease loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various 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 ALLL 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.

A home equity loan or line of credit not adequately secured by collateral is treated similarly to how residential mortgages are treated. The Company incorporates home equity loan or line of credit loss severity assumptions into the loan and lease loss reserve model following the same methodology as for residential mortgage loans. To ensure the Company has captured losses inherent in its home equity portfolios, the Company estimates its ALLL for home equity loans and lines of credit by segmenting its portfolio into sub-segments based on the nature of the portfolio and certain risk characteristics such as product type, lien positions, and origination channels. Projected future defaulted loan balances are estimated within each portfolio sub-segment by incorporating risk parameters, including the current payment status as well as historical trends in delinquency rates. Other assumptions, including prepayment and attrition rates, are also calculated at the portfolio sub-segment level and incorporated into the estimation of the likely volume of defaulted loan balances. The projected default volume is stratified across CLTV ratio bands, and a loss severity rate for each CLTV band is applied based on the Company's historical net credit loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market, or industry conditions, or changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral.

The Company considers the delinquency status of its senior liens in cases in which the Company services the lien. The Company currently services the senior lien on 24.9% junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 0.8% 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.

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

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 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. The Company currently monitors delinquency rates for amortizing and non-amortizing lines, as well as other credit quality metrics including FICO credit scoring model scores and LTV ratios. The Company's home equity lines of credit are generally underwritten considering fully drawn and fully amortizing levels. As a result, the Company currently does not anticipate a significant deterioration in credit quality when these home equity lines of credit begin to amortize.

For RICs and personal unsecured loans at SC, the Company estimates the ALLL at a level considered adequate to cover probable credit losses inherent in the non-TDR portfolio, and records impairment on the TDR portfolio using a discounted cash flow model. RICs and personal unsecured loans are considered separately in assessing the required ALLL using product-specific allowance methodologies applied on a pooled basis. For RICs, the Company segregates the portfolio based on homogeneity into pools based on source, then further stratifies each pool by vintage and custom loss forecasting score. For each vintage and risk segment, the Company's vintage model predicts timing of unit losses and the loan balances at the time of default. 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.

The Company considers changes in the used vehicle index when forecasting recovery rates to apply to the gross losses forecasted by the vintage model. Its models do not include other macro-economic factors. Instead, the ALLL process considers factors such as unemployment rates and bankruptcy trends as potential qualitative overlays. Management reviews idiosyncratic and systemic risks facing the business. This qualitative overlay framework enables the ALLL process to arrive at a provision that reflects all relevant information, including both quantitative model outputs and qualitative overlays.

No allowance was associated with the personal unsecured loan portfolio at SC as of September 30, 2016, as the portfolio was transferred to held-for-sale in the third quarter of 2015. Future originations will also be classified as held-for-sale. In previous periods, including the three months ended September 30, 2015, the Company employed product-specific models in determining the required ALLL. For the fixed rate installment loan portfolio, a vintage modeling approach was employed in which the models predicted the timing of losses and the loan balance at the time of default. As these were unsecured loans, the total loss was the loan balance at the time of default. For revolving loans, the model stratified the portfolio based on delinquency categories and age of account. Loss rates were derived from historical experience to determine expected portfolio losses over the next 12 months.

The allowance for consumer loans was $3.2 billion and $2.7 billion at September 30, 2016 and December 31, 2015, respectively. The allowance as a percentage of held-for-investment consumer loans was 7.8% at September 30, 2016 and 6.8% at December 31, 2015. The increase in the allowance for consumer loans is primarily attributable to SC's RIC and auto loan portfolio growth.

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 ALLL is maintained at a level sufficient to absorb inherent losses in the consumer portfolios.

Unallocated

Additionally, the Company reserves for certain inherent, but undetected, losses that are probable within the loan and lease portfolios. 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 ALLL was $47.2 million at September 30, 2016 and $47.2 million at December 31, 2015.

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

Reserve for Unfunded Lending Commitments

In addition to the ALLL, 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 Condensed Consolidated Balance Sheet. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the ALLL.

The reserve for unfunded lending commitments decreased from $149.0 million at December 31, 2015 to $134.6 million at September 30, 2016. This change was due to a change in off-balance sheet lending commitments, which was a result of the Company's commercial lending business. As a result of these shifts, the net impact of the change in the reserve for unfunded lending commitments to the overall ACL was immaterial.

INVESTMENT SECURITIES

Investment securities consist primarily of U.S. Treasuries, MBS, ABS and stock in the FHLB and the FRB. MBS consist of pass-through, CMOs, 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 decreased $5.1 billion to $16.6 billion at September 30, 2016, compared to $21.7 billion at December 31, 2015. During the nine-month period ended September 30, 2016, the composition of the Company's investment portfolio changed by decreases in U.S. Treasury securities, corporate debt securities, and state and municipal securities which were offset by increases in HQLA such as MBS. HQLA are low-risk assets that can easily and immediately be converted into cash at little or no loss of value, such as cash or investment securities guaranteed by a sovereign entity. U.S. Treasury securities decreased by $3.3 billion primarily due to sales and maturities of $5.2 billion offset by $2.0 billion of investment purchases. Corporate debt securities decreased by $1.5 billion primarily due to sales and maturities of $1.4 billion. State and municipal securities decreased by $767.8 million primarily due to sales of $748.0 million. The MBS portfolio increased by $0.5 billion primarily due to $4.4 billion of investment purchases offset by $1.3 billion of investment sales and maturities and $2.6 billion of principal pay-downs. During the third quarter of 2016, the Company continued the strategy it implemented in 2015 to improve its liquidity by selling non-HQLA and reinvesting the funds into HQLA. For additional information with respect to the Company’s investment securities, see Note 3 to the Condensed Consolidated Financial Statements.

Total gross unrealized losses decreased by $154.7 million to $64.3 million during the nine-month period ended September 30, 2016, primarily due to decreases in interest rates. The majority of the decreases in unrealized losses were in the MBS portfolios, corporate debt securities, and U.S. Treasury securities. The unrealized losses within the MBS portfolios decreased by $137.1 million, within the corporate debt securities portfolio by $11.2 million, and within the U.S. Treasury securities portfolio by $5.7 million. Refer to Note 3 to the Condensed Consolidated Financial Statements for additional details.

Other investments, which consists primarily of FHLB stock and FRB stock, decreased from $1.0 billion at December 31, 2015 to $747.8 million at September 30, 2016, primarily due to the FHLB's repurchase of its stock, offset by purchases of FHLB and FRB stock.

The average life of the available-for-sale investment portfolio (excluding certain ABS) at September 30, 2016 was approximately 4.35 years, compared to 3.94 years at December 31, 2015. The average effective duration of the investment portfolio (excluding certain ABS) at September 30, 2016 was approximately 2.55 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.

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

The following table presents the fair value of investment securities by obligor at the dates indicated:



	September 30, 2016		December 31, 2015
	(in thousands)
Investment securities available-for-sale:
U.S. Treasury securities and government agencies	$	7,196,184	$	9,087,134
FNMA and FHLMC securities	7,735,341		8,630,503
State and municipal securities	31		767,880
Other securities ⁽¹⁾	1,706,295		3,255,655
Total investment securities available-for-sale	16,637,851		21,741,172
Other investments	747,847		1,027,363
Total investment portfolio	$	17,385,698	$	22,768,535

(1) Other securities primarily include corporate debt securities and ABS.

The following table presents the securities of single issuers (other than obligations of the United States and its political subdivisions, agencies, and corporations) having an aggregate book value in excess of 10% of the Company's stockholder's equity that were held by the Company at September 30, 2016:



	At September 30, 2016
	Amortized Cost		Fair Value
	(in thousands)
FNMA	$	4,221,296	$	4,223,384
FHLMC	3,518,634		3,511,957
GNMA ⁽¹⁾	6,433,829		6,466,920
Total	$	14,173,759	$	14,202,261

(1) Includes U.S government agency MBS.

GOODWILL

The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At September 30, 2016, goodwill totaled $4.5 billion and represented 3.2% of total assets and 19.8% of total stockholder's equity. The following table shows goodwill by reportable segments at September 30, 2016:



	Consumer and Business Banking ⁽¹⁾		Commercial Real Estate⁽²⁾		Commercial Banking⁽²⁾		Global Corporate Banking		SC		Santander BanCorp ⁽³⁾		Total
	(in thousands)
Goodwill at September 30, 2016	$	1,880,303	$	870,411	$	542,584	$	131,130	$	1,019,960	$	10,537	$	4,454,925

(1) Consumer and Business Banking were formerly designated as the Retail Banking segment and was renamed during the first quarter of 2016.

(2) Commercial Real Estate and Commercial Banking were formerly disclosed as the combined Real Estate and Commercial Banking segment.

(3) As a result of the IHC reorganization, effective July 1, 2016, the Company retrospectively recorded $10.5 million of goodwill related to Santander BanCorp at December 31, 2015.

The Company conducted its annual goodwill impairment test as of October 1, 2015 using generally accepted valuation methods. After conducting an analysis of the fair valuation of each reporting unit as of October 1, 2015, the Company determined that there was no impairment of goodwill identified. During the fourth quarter of 2015, due to SC's share price, which declined during the quarter, the Company concluded that the fair value of our SC reporting unit was more likely than not less than its carrying value including goodwill. As a result, the Company performed an interim goodwill impairment analysis as of December 31, 2015, and the Company recorded an impairment of $4.5 billion. At September 30, 2016 there is $1.0 billion of goodwill allocated to the SC reporting unit.

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

During the first nine months of 2016, the Company continued to evaluate SC's share price. The Company determined there was no requirement to perform a goodwill impairment test at September 30, 2016. The Company is in the process of performing its annual goodwill impairment test as of October 1, 2016. It is reasonably possible that additional impairment, up to the amount of the remaining goodwill, could be recognized based on additional share price declines in future periods.

PREMISES AND EQUIPMENT

Total premises and equipment, net, was $985.4 million at September 30, 2016, compared to $1.0 billion at December 31, 2015. The decrease in total premises and equipment was primarily due to accumulated depreciation which increased $183.4 million from December 31, 2015 to September 30, 2016. The increase in accumulated depreciation was offset by increases in computer software of $92.7 million related to software and license purchases and increased IT services as well as increases in furniture, fixtures and equipment and leasehold improvements of $29.3 million and $19.5 million, respectively. The remaining changes were individually insignificant.

DEFERRED TAXES AND OTHER TAX ACTIVITY

The Company's net deferred tax balance was a liability of $567.7 million at September 30, 2016 and $230.6 million at December 31, 2015. The $337.2 million increase for the nine-month period ended September 30, 2016 was primarily due to a $63.2 million decrease in the deferred tax asset for unrealized gains and losses included in other comprehensive income; a $450.6 million increase in deferred tax liabilities related to accelerated depreciation on leasing transactions, and a $79.6 million increase in net deferred tax liabilities related to other temporary differences, partially offset by a $216.2 million increase in deferred tax assets related to net operating loss carryforwards and tax credits; and a $47.7 million increase in the deferred tax asset established for SC loan mark-to-market adjustments under Internal Revenue Code ("IRC") Section 475. The IRC Section 475 mark-to-market adjustment deferred tax asset is related to SC's business as a dealer in auto and other consumer loans. The mark-to-market adjustment is required under IRC Section 475 for tax purposes, but is not required for book purposes.

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 Company is entitled to a refund of the amounts paid. The Company has recorded a receivable in the Other assets line of the Condensed Consolidated Balance Sheets for the amount of these payments, less a tax reserve of $230.1 million, as of September 30, 2016.

On November 13, 2015, the Federal District Court issued a written opinion in favor of the Company on all contested issues, and in a judgment issued on January 13, 2016, ordered amounts assessed by the IRS for years 2003 through 2005 to be refunded to the Company. On March 11, 2016, the IRS filed a notice of appeal. The appeal was heard in the First Circuit on November 9, 2016.

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

OTHER ASSETS

Other assets at September 30, 2016 were $2.3 billion, compared to $2.1 billion at December 31, 2015. The increase in other assets was primarily due to activity in derivative assets and miscellaneous assets and receivables, partially offset by decreases in income tax receivables and MSRs.

Derivative assets increased $111.8 million, primarily related to an increase in capital markets trading due to fluctuations in mark-to-market valuations.

Miscellaneous assets and receivables increased $209.1 million, primarily due to increases in capitalized lease equipment.

The increases above were offset by a decrease in income tax receivables of $182.0 million related to federal tax receivables. In addition, there was a decrease in MSRs of $21.6 million between December 31, 2015 and September 30, 2016. This decrease in MSRs was primarily related to an $(18.1) million change in fair value due to valuation assumptions of MSRs.

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.

During the second quarter of 2016, there was a $1.2 billion reclassification of interest-bearing demand deposits to noninterest-bearing demand deposits. This was due to the end of a promotional product offered by the Company.

Total deposits and other customer accounts increased $2.1 billion from December 31, 2015 to September 30, 2016. This increase was primarily comprised of increases in non-interest-bearing demand deposits of $2.7 billion, or 20.7%, and money market accounts of $915.9 million, or 3.7%. These increases were offset by a decrease in interest-bearing deposit accounts of $1.5 billion, or 12.5%, and CDs of $18.2 million, or 0.2%, primarily due to the shift in deposits to money market accounts. The Company continues to focus its efforts on attracting and increasing lower-cost deposits. The cost of deposits was 0.54% and 0.56% for the third quarters of 2015 and 2016, respectively.

Time deposits of greater than $250,000 totaled $619.5 million and $1.5 billion at September 30, 2016 and December 31, 2015, respectively.

BORROWINGS AND OTHER DEBT OBLIGATIONS

The Company has term loans and lines of credit with Santander and other 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, SC has warehouse lines of credit and securitizes some of its RICs and operating leases, which are structured secured financings. Total borrowings and other debt obligations at September 30, 2016 were $44.6 billion, compared to $49.8 billion at December 31, 2015. Total borrowings decreased $5.2 billion, primarily due to a decrease of $7.3 billion in FHLB advances and the maturity of $475.7 million in SHUSA's senior notes. This was offset by $1.6 billion of new debt issued by SHUSA and net $1.4 billion of SC debt activity. See further detail on borrowings activity in Note 10 to the Condensed Consolidated Financial Statements.

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

ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued Expenses



	September 30, 2016		December 31, 2015
	(in thousands)
Accrued interest	$	124,696	$	128,647
Accrued federal/foreign/state tax credits	219,049		195,876
Deposits payable	87,903		105,530
Expense accruals	580,845		578,750
Payroll/tax benefits payable	353,924		391,747
Accounts payable	89,316		154,434
Miscellaneous payable	1,382,856		1,224,093
Total accrued expenses	$	2,838,589	$	2,779,077

Accrued expenses increased $59.5 million, or 2.1%, from December 31, 2015 to September 30, 2016. The increase in accrued expenses was primarily due to the decrease in payroll and tax benefits payable of $37.8 million, which was related to a $13.0 million decrease in accrued incentive compensation paid out at September 30, 2016 compared to December 31, 2015. Accounts payable decreased $65.1 million, or 42.2%, due to the timing of certain temporary accounts payable at December 31, 2015 compared to September 30, 2016. In addition, there was an increase in miscellaneous payables of $158.8 million from December 31, 2015 to September 30, 2016.

Other Liabilities



	September 30, 2016		December 31, 2015
	(in thousands)
Total derivative activity	$	424,041	$	339,730
Official checks and money orders in process	130,248		110,258
Deferred gains/credits	34,152		46,064
Reserve for unfunded commitments	134,565		149,021
Nostro Credit	110,844		5,335
Miscellaneous liabilities	22,554		16,520
Total other liabilities	$	856,404	$	666,928

Other liabilities increased $189.5 million, or 28.4%, from December 31, 2015 to September 30, 2016. The increase in other liabilities was primarily related to the increase in Nostro Credit, which is a clearing account for securities transactions, of $105.5 million, and the increase in liabilities associated with derivative activity of $84.3 million due to fluctuations in mark-to-market valuations. In addition, there was an decrease in the reserve for unfunded commitments of $14.5 million associated with off-balance sheet lending commitments.

OFF-BALANCE SHEET ARRANGEMENTS

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

PREFERRED STOCK

On May 15, 2006, the Company issued 8.0 million shares of Series C non-cumulative perpetual preferred stock and received net proceeds of $195.4 million. The perpetual preferred stock ranks senior to the Company's common stock. This is because perpetual preferred stockholders are entitled to receive dividends when and if declared by the Company’s Board of Directors at a rate of 7.30% per annum, payable quarterly, before the Board of Directors may declare or pay any dividend on the Company's common stock. The perpetual preferred stock is redeemable at par. As of September 30, 2016, no shares of the Series C non-cumulative perpetual preferred stock had been redeemed.

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

In August 2010, Santander BanCorp, a subsidiary of the Company, issued 3.0 million shares of Series B preferred stock, $25 par value, for $75 million designated as the 8.75% noncumulative preferred stock to an affiliate. The shares of the Series B preferred stock are redeemable in whole or in part for cash on or after September 30, 2015, and semiannually thereafter on each March 31 and September 30 at the option of Santander BanCorp, with the consent of the FDIC and any applicable regulatory authority. Dividends on the Series B preferred stock are payable when, as and if, declared by the Board of Directors of Santander BanCorp. On March 31, 2016, 3.0 million shares of the Series B preferred stock were redeemed.

BANK REGULATORY CAPITAL

The Company's capital priorities are to support client growth and business investment and to maintain appropriate capital in light of economic uncertainty and the Basel III framework. The Company continues to improve its capital levels and ratios through retention of quarterly earnings and risk weighted asset optimization.

The Company is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At September 30, 2016 and December 31, 2015, 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" in 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 SHUSA 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 are 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 SC, 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 and nine-month periods ended September 30, 2016.

The following schedule summarizes the actual capital balances of the Bank and SHUSA at September 30, 2016:



	BANK

	September 30, 2016		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽¹⁾
Common equity tier 1 capital ratio	15.66	%	6.50	%	4.50	%
Tier 1 capital ratio	15.66	%	8.00	%	6.00	%
Total capital ratio	16.99	%	10.00	%	8.00	%
Leverage ratio	12.25	%	5.00	%	4.00	%

(1) As defined by OCC regulations. Presentation under a Basel III phased in basis.

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



	SHUSA

	September 30, 2016		Well-capitalized Requirement⁽²⁾		Minimum Requirement⁽²⁾
Common equity tier 1 capital ratio	14.12	%	6.50	%	4.50	%
Tier 1 capital ratio	15.72	%	8.00	%	6.00	%
Total capital ratio	17.55	%	10.00	%	8.00	%
Leverage ratio	12.48	%	5.00	%	4.00	%

(2) As defined by FRB regulations. Presentation under a Basel III phased in basis.

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 Company's 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 and the Bank have several sources of funding to meet liquidity requirements, including the Bank's 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. 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.

On September 15, 2014, the Company entered into a written agreement with the FRB of Boston. Under the terms of this 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 July 2, 2015, the Company entered into another written agreement with the FRB of Boston. Under the terms of this written agreement, the Company is required to make enhancements with respect to, among other matters, Board oversight of the consolidated organization, risk management, capital planning and liquidity risk management.

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

SC requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. SC funds its operations through its lending relationships with 15 third-party banks, SHUSA and Santander, as well as through securitizations in the ABS market and large flow agreements. SC seeks to issue debt that appropriately matches the cash flows of the assets that it originates. SC has over $5.1 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the nine months ended September 30, 2016, SC completed on-balance sheet funding transactions totaling approximately $9.7 billion, including:


•	two securitizations on its SDART platform for $2.1 billion;


•	issuances of retained bonds on its SDART platform for $127.0 million;


•	two securitizations on its DRIVE, deeper subprime platform for $1.9 billion;


•	a securitization on its CCART platform for $945.0 million;


•	four private amortizing lease facilities for $1.4 billion;


•	four top-ups of private amortizing lease facilities for $1.8 billion; and


•	three private amortizing loan facilities for $1.4 billion.

SC also completed $3.2 billion in asset sales, which consisted of $2.3 billion of recurring monthly sales with its third party flow partners, and the sale of LendingClub assets of $869.3 million to an unrelated third party.

For information regarding SC's debt, see Note 10 to the Condensed Consolidated Financial Statements.

IHC

Santander Investment Securities Inc. entered into a two year revolving subordinated loan agreement with BSSA, effective June 8, 2015, not to exceed $290.0 million in aggregate with a maturity date of June 8, 2017.

Banco Santander International primary sources of liquidity are in overnight or demand deposits with other banks.

Banco Santander Puerto Rico primary sources of liquidity include core deposits, FHLB borrowings, wholesale and broker deposits, and liquid investment securities.

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 September 30, 2016, the Bank had approximately $23.2 billion in committed liquidity from the FHLB and the FRB. Of this amount, $15.3 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At September 30, 2016 and December 31, 2015, liquid assets (cash and cash equivalents and LHFS), and securities available-for-sale exclusive of securities pledged as collateral) totaled approximately $29.2 billion and $25.5 billion, respectively. These amounts represented 43.1% and 38.8% of total deposits at September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, the Bank, Banco Santander International and Banco Santander Puerto Rico had $1.1 billion, $2.9 billion, and $930.8 million, respectively, in cash held at the Federal Reserve. Management believes that the Company has ample liquidity to fund its operations.

Santander Investment Securities Inc. has committed liquidity of $290.0 million from BSSA, all of which was unused as of September 30, 2016.

Banco Santander Puerto Rico has $952.3 million in committed liquidity from the FHLB, all of which was unused as of September 30, 2016.

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

Cash and cash equivalents



	Nine-Month Period Ended September 30,
	2016			2015
	(in thousands)
Net cash provided by operating activities	$	3,135,457		$	3,542,881
Net cash provided by / (used in) investing activities	2,514,922			(14,164,683		)
Net cash (used in) / provided by financing activities	(3,267,636		)	14,142,718

Cash provided by operating activities

Net cash provided by operating activities was $3.1 billion for the nine-month period ended September 30, 2016, which is comprised of net income of $0.6 billion, $3.9 billion in proceeds from sales of LHFS, and $2.2 billion of provisions for credit losses, partially offset by $4.6 billion of originations of LHFS, net of repayments.

Net cash provided by operating activities was $3.5 billion for the nine-month period ended September 30, 2015, which was comprised of net income of $0.6 billion, $3.0 billion of provisions for credit losses, $4.7 billion in proceeds from sales of LHFS, and $1.7 billion in proceeds from sales of trading securities, partially offset by $5.6 billion of originations of LHFS, net of repayments.

Cash used in investing activities

For the nine-month period ended September 30, 2016, net provided by investing activities was $2.5 billion, primarily due $14.7 billion of available-for-sale investment securities sales, maturities and prepayments, $1.4 billion in proceeds from sales of loans held-for-investment, and $1.7 billion in proceeds from sales of leased vehicles partially offset by $9.4 billion of purchases of investment securities available-for-sale, $4.6 billion in leased vehicle purchases, and $1.7 billion in normal loan activity .

For the nine-month period ended September 30, 2015, net cash used in investing activities was $14.2 billion, primarily due to $11.7 billion of purchases of investment securities available-for-sale, $7.5 billion in normal loan activity, and $4.7 billion in leased vehicle purchases, partially offset by $7.1 billion of investment sales, maturities and repayments and $1.8 billion in proceeds from sales of leased vehicles.

Cash provided by financing activities

For the nine-month period ended September 30, 2016, net cash used in financing activities was $3.3 billion, which was primarily due to a decrease in net borrowing activity of $5.3 billion, partially offset by a $2.1 billion increase in deposits.

Net cash provided by financing activities for the nine-month period ended September 30, 2015 was $14.1 billion, which was primarily due to an increase in deposits of $3.7 billion and an increase in net borrowing activity of $10.3 billion.

See the Condensed Consolidated Statements of Cash Flows ("SCF") for further details on the Company's sources and uses of cash.

Credit Facilities

Third-Party Revolving Credit Facilities

Warehouse Facilities

SC uses warehouse lines to fund its originations. Each line specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. SC's warehouse lines generally are backed by auto RICs and, in some cases, leases or personal loans. These credit lines generally have one- or two-year commitments, staggered maturities and floating interest rates. SC 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.

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

SC's warehouse lines generally have net spread, delinquency, and net loss ratio limits. Generally, these limits are calculated based on the portfolio collateralizing the respective line; however, for certain of SC's warehouse lines, delinquency and net loss ratios are calculated with respect to its serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased overcollateralization 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 lenders could elect to declare all amounts outstanding under the agreement to be immediately due and payable, enforce their interests against collateral pledged under the agreement, restrict SC's ability to obtain additional borrowings under the agreement, and/or remove SC as servicer. SC 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 agreements can be enforced only with respect to the impacted warehouse line.

SC has two credit facilities with eight banks providing an aggregate commitment of $4.2 billion for the exclusive use of supplying short-term liquidity needs to support Chrysler Capital retail financing. As of September 30, 2016 and December 31, 2015, there was an outstanding balance on these facilities of $3.7 billion and $2.9 billion, respectively. One of the facilities can be used exclusively for loan financing and the other for lease financing. Both facilities require reduced advance rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.

Repurchase Facility

SC also obtains financing through two investment management agreements under which it pledges retained subordinated bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 180 days. As of September 30, 2016, there was an outstanding balance of $1.0 billion under these repurchase facilities.

Santander Credit Facilities

Santander historically has provided, and continues to provide, SC's business with significant funding support in the form of committed credit facilities. Through Santander’s New York branch (“Santander NY"), Santander provides SC with $3.0 billion of long-term committed revolving credit facilities.

The facilities offered through Santander NY are structured as three- and five-year floating rate facilities, with current maturity dates of December 31, 2016 and 2018. These facilities currently permit unsecured borrowing, but generally are collateralized by RICs as well as securitization notes payable and residuals owned by SC. 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.

Until March 4, 2016, when the facilities offered through Santander NY were lowered to $3.0 billion, the commitments from the branch totaled $4.5 billion. There was an average outstanding balance of approximately $2.4 billion and $3.7 billion under these facilities during the nine-month periods ended September 30, 2016 and 2015, respectively. The maximum outstanding balance during each period was $3.0 billion and $4.4 billion, respectively.

Santander also serves as the counterparty for many of SC's derivative financial instruments, with outstanding notional amounts of $8.6 billion and $13.7 billion at September 30, 2016 and December 31, 2015, respectively.

In August 2015, under a new agreement with Santander, SC agreed to begin paying Santander a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations.

Secured Structured Financings

SC's secured structured financings primarily consist of public, SEC-registered securitizations. SC also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”) and privately issues amortizing notes.

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

SC obtains long-term funding for its receivables through securitizations in the ABS market. ABS provides an attractive source of funding due to the cost efficiency of the market, 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, SC may choose to issue floating rate securities based on market conditions; in such cases, SC generally executes hedging arrangements outside of the securitization trust (the “Trust") to lock in its cost of funds. Because of prevailing market rates, SC did not issue ABS in 2008 or 2009, but began issuing ABS again in 2010. SC was the largest issuer of retail auto ABS every year from 2011 through 2015, and has issued a total of over $51 billion in retail auto ABS since 2010.

SC executes each securitization transaction by selling receivables to securitization trusts ("Trusts") that issue ABS to investors. In order to attain specified credit ratings for each class of bonds, these securitization transactions have credit enhancement requirements in the form of subordination, restricted cash accounts, excess cash flow, and overcollateralization, whereby more receivables are transferred to the Trusts than the amount of ABS issued by the Trusts.

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 in the Trusts, increasing overcollateralization until the targeted percentage level of assets has been reached. Once the targeted percentage level of overcollateralization is reached and maintained, excess cash flows generated by the Trusts are released to SC as distributions from the Trusts. SC also receives monthly servicing fees as servicer for the Trusts. SC's securitizations may require an increase in credit enhancement levels if cumulative net losses exceed a specified percentage of the pool balance. None of SC's securitizations have cumulative net loss percentages above their respective limits.

SC's on-balance sheet securitization transactions utilize bankruptcy-remote special purpose entities, which are considered VIEs that meet the requirements to be consolidated in SC's financial statements. Following a securitization, the finance receivables and notes payable related to the securitized RICs remain on SC's Condensed Consolidated Balance Sheet. SC recognizes finance and interest income and fee income, as well as provisions for credit losses, on the collateralized RICs, and interest expense on the ABS issued. While these Trusts are consolidated in SC's financial statements, they are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by the Trusts, available only to satisfy the notes payable related to the securitized RICs, and not available to SC's creditors or other subsidiaries.

ABS credit spreads have been widening, beginning in the second half of 2015 and continuing into 2016. Highly liquid, frequent issuers with public shelf registrations, such as SC, have remained active in the market while smaller, newer market entrants have experienced significant spread widening. SC has completed five securitizations in 2016. SC currently has 40 securitizations outstanding in the market with a cumulative ABS balance of approximately $14.1 billion. SC's securitizations generally have several classes of notes, with principal paid sequentially based on seniority and any excess spread distributed to the residual holder. SC generally retains the lowest bond class and the residual, except in the case of off-balance sheet securitizations, which are described further below. SC uses the proceeds from securitization transactions to repay borrowings outstanding under its credit facilities, originate and acquire loans and leases, and for general corporate purposes. SC generally exercises clean-up call options on its securitizations when the collateral pool balance reaches 10% of its original balance.

SC also periodically privately issues amortizing notes in transactions that are structured similarly to its public and Rule 144A securitizations, but are issued to banks and conduits. SC's securitizations and private issuances are collateralized by vehicle RICs, loans and leases.

Off-Balance Sheet Financing

SC periodically executes Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Historically, as all of the notes and residual interests in these securitizations were issued to third parties, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Condensed Consolidated Balance Sheets. In April and November 2016, SC executed a Chrysler Capital securitization for which it has not sold the residual and as a result has retained the associated assets and bonds on its Condensed Consolidated Balance Sheet.

In 2015, SC sold its residual interests in certain aged Trusts, resulting in the deconsolidation of the assets and liabilities of those Trusts. As these Trusts season to the point of reaching the threshold for the optional clean-up call, SC has been exercising the call options, paying off the remaining debt, and returning the remaining assets to its books.

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

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.

Santander Investment Securities Inc. uses liquidity primarily to support underwriting deals.

Banco Santander International uses liquidity in order to have the ability to meet client liquidity requirements, such as maturing deposits, as well as for payment of other current expenses.

Banco Santander Puerto Rice uses liquidity for funding loan commitments, satisfying deposit withdrawal requests, and repayments of borrowings.

Dividends and Stock Issuances

At September 30, 2016, 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 nine-month period ended September 30, 2016. As of September 30, 2016, the Company had 530,391,043 shares of common stock outstanding.

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⁾	$	6,137,729	$	3,845,616	$	2,292,113	$	—	$	—
Notes payable - revolving facilities	10,349,229		7,200,777		3,148,452		—		—
Notes payable - secured structured financings	21,205,811		361,751		6,064,143		9,064,974		5,714,943
Other debt obligations ^{(1) (2)}	8,376,722		1,023,418		4,543,154		1,452,767		1,357,383
Junior subordinated debentures due to capital trust entities ^{(1) (2)}	434,970		10,103		20,206		20,206		384,455
CDs ⁽¹⁾	9,100,139		6,968,254		1,332,224		799,661		—
Non-qualified pension and post-retirement benefits	70,445		6,881		13,906		14,159		35,499
Operating leases⁽³⁾	639,198		126,163		206,958		123,749		182,328
Total contractual cash obligations	$	56,314,243	$	19,542,963	$	17,621,156	$	11,475,516	$	7,674,608


(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 September 30, 2016. 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.

In January 2016, the Bank early terminated $0.4 billion of advances maturing in April 2016 for which it recognized a termination fee of $4.4 million. In March 2016, the Bank early terminated $0.9 billion of advances with maturities ranging from September 2016 to February 2018, for which the Bank recognized a termination fee of $28.5 million.

In the second quarter of 2016, the Company terminated $1.5 billion in FHLB advances, with prepayment fees of $45.6 million.

In February 2016, SHUSA issued a $1.5 billion of senior unsecured floating rate notes with a maturity of August 2017 to Santander. As of September 30, 2016 the Company repaid this note at par with no prepayment penalty.

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

On May 23, 2016, the Company issued $1.0 billion in aggregate principal amount of its 2.70% Senior Notes due May 2019 and $600 million in aggregate principal amount of its senior floating rate notes due November 2017, which have a floating rate equal to three-month LIBOR plus 145 basis points.

Excluded from the above table are deposits of $58.1 billion that are due on demand by customers.

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 14 to the Condensed Consolidated Financial Statements.

Flow Agreements

In addition to its credit facilities and secured structured financings, SC has flow agreements with Bank of America and CBP for Chrysler Capital RICs, and with another third party for charged off assets. The Bank of America flow agreement will terminate effective January 31, 2017. Loans and leases sold under these flow agreements are not on SC's balance sheet but provide a stable stream of servicing fee income and may also provide a gain or loss on sale. SC continues to actively seek additional such flow agreements.

Lending Arrangements

SC was obligated to make purchase price holdback payments to a third-party originator of auto loans it has purchased, when losses are lower than originally expected. SC also was obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased loans were greater than originally expected. As of September 30, 2016, all purchase price holdback payments, and all total return settlement payments due in 2016, have been made. These obligations are accounted for as derivatives (Note 11).

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

SC is party to certain agreements with Bluestem under which SC is committed to purchase receivables originated by Bluestem for an initial term ending in April 2020 and renewable through April 2022 at Bluestem's option.

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

In 2015, SC made a strategic decision to exit the personal lending market to focus on its core objectives of expanding the reach and realizing the full value of its vehicle finance platform. SC believes that this will create other opportunities, such as expanding its serviced for others platform, diversifying its funding sources and growing its capital. SC commenced certain marketing activities to find buyers for its personal lending assets. On February 1, 2016, SC completed the sale of assets from its personal lending portfolio to an unrelated third party. The portfolio was comprised solely of LendingClub installment loans with an unpaid principal balance of approximately $869.3 million. Additionally, on March 24, 2016, in preparation for the sale or liquidation of SC's portfolio of loans originated under terms of an agreement under which SC reviews point-of-sale credit applications for retail store customers, SC notified most of the retailers for which it reviews applications that it will no longer fund new originations effective April 11, 2016.

In April 2014, SC entered into an application transfer agreement with Nissan, under which SC has the first opportunity to review for its own portfolio any credit applications turned down by Nissan's captive finance company. The agreement does not require SC to originate any loans, but for each loan originated SC pays Nissan a referral fee, comprised of a volume bonus fee and a loss betterment bonus fee. The loss betterment bonus fee is calculated annually and is based on the amount by which losses on loans originated under the agreement are lower than an established percentage threshold.

Other

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. 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.

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

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month LIBOR. 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 and balance sheet valuation simulations, shocks to those 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 about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.

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 at September 30, 2016 and December 31, 2015, respectively:



If interest rates changed in parallel by the amounts below at September 30, 2016	The following estimated percentage increase/(decrease) to net interest income would result
Down 100 basis points	(1.90	)%
Up 100 basis points	2.93	%
Up 200 basis points	4.81	%

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 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 September 30, 2016 and December 31, 2015.



	The following estimated percentage increase/(decrease) to MVE would result
If interest rates changed in parallel by	September 30, 2016
Down 100 basis points	(5.33	)%
Up 100 basis points	3.09	%
Up 200 basis points	3.86	%

As of September 30, 2016, the Company’s MVE profile showed a decrease of 5.33% for downward parallel interest rate shocks of 100 basis points and an increase of 3.86% for upward parallel interest rate shocks of 200 basis points. This is due to the negative convexity as a result of the prepayment option embedded in mortgage-related products, the impact of which is not fully offset by the behavior of the funding base (largely NMDs).

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

In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates already close to zero, the Company cannot effectively transfer interest rate declines to its NMD customers. For upward parallel interest rate shocks, extension risk weighs on a sizable portion of the Company’s mortgage-related products, which are predominantly long-term and fixed-rate; and for larger shocks the loss in market value is not offset by the change in NMD.

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, 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 environments.

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. The majority of the Company's residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 8 to the Condensed Consolidated Financial Statements.

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

The Company also utilizes forward contracts to manage market risk associated with certain expected investment securities sales and equity options, which manage its 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.

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

EUROPEAN EXPOSURE

Concerns about the European Union countries’ sovereign debt and the future of the euro have caused uncertainty for financial markets globally.

The Company's exposure to European countries, at book value as of December 31, 2015 included the following:



	December 31, 2015
Country	Covered Bonds		Financial Institution Bonds		Non-Financial Institutions Bonds		Total
	(in thousands)
France	$	—	$	6,000	$	4,964	$	10,964
Germany	—		—		137,904		137,904
Great Britain	—		80,106		255,018		335,124
Italy	—		—		56,670		56,670
Netherlands	—		45,966		—		45,966
Norway	—		—		7,996		7,996
Portugal	—		—		40,749		40,749
Spain	93,325		6,999		44,231		144,555
Sweden	—		51,950		—		51,950
Switzerland	—		4,998		—		4,998
	$	93,325	$	196,019	$	547,532	$	836,876

The fair value of the Company's European exposure at December 31, 2015 was $837.9 million.

These investments were included within corporate debt securities discussed in Note 3 to the Condensed Consolidated Financial Statements. The Company sold all of its European investments during the second quarter of 2016.

As of September 30, 2016, the Company had approximately $272.0 million of loans that were denominated in a currency other than the U.S. dollar.

Overall, gross exposure to the foregoing countries was approximately 0.2% of the Company's total assets as of September 30, 2016, 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.

Management conducts periodic stress tests of the Company's significant country risk exposures, analyzing the direct and indirect impacts on the risk of loss from various macroeconomic and capital markets scenarios. The Company does not have significant exposure to foreign country risks because its foreign portfolio is relatively small. However, the Company has identified exposure to increased loss from U.S. borrowers associated with the potential indirect impact of a European downturn on the U.S. economy.

The Company mitigates these potential impacts through its normal risk management processes, which includes active monitoring and, if necessary, the application of loss mitigation strategies.

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Item 3.	Quantitative and Qualitative Disclosures about Market Risk

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



Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision of its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of September 30, 2016, we did not maintain effective disclosure controls and procedures because of the material weaknesses in internal control over financial reporting described below. We previously identified and reported certain material weaknesses in internal control over financial reporting in our December 31, 2015 Annual Report on Form 10-K/A. Notwithstanding these material weaknesses, based on the additional analysis and other post-closing procedures performed, management believes that the financial statements included in this report fairly present in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented in conformity with generally accepted accounting principles (“GAAP”).

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses:

Control Environment, Risk Assessment, Control Activities and Monitoring

The Company's financial reporting involves complex accounting matters (such as purchase accounting, goodwill, allowance and TDR matters) emanating from our majority owned subsidiary, Santander Consumer USA Holdings Inc. (“SC”), which require significant resources, time and technical expertise. We determined there was a material weakness in the design and operating effectiveness of the controls pertaining to the Company’s oversight of its SC subsidiary activities and the Company’s accounting for transactions that are significant to the Company’s internal control over financial reporting. These activities were (a) ineffective oversight to ensure accountability for the performance of internal control over financial reporting responsibilities or to ensure corrective actions were appropriately prioritized and implemented in a timely manner; and (b) inadequate resources, time and technical expertise to perform effective oversight of the application of accounting and financial reporting activities that are significant to the Company’s consolidated financial statements. We have identified the following material weaknesses emanating from SC:

SC's Control Environment, Risk Assessment, Control Activities and Monitoring

We did not maintain effective internal control over financial reporting related to the following areas: control environment, risk assessment, control activities and monitoring:


•	Management did not effectively execute a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting.


•	The tone at the top was insufficient to ensure there were adequate mechanisms and oversight to ensure accountability for the performance of internal control over financial reporting responsibilities and to ensure corrective actions were appropriately prioritized and implemented in a timely manner.


•	There was not adequate management oversight of accounting and financial reporting activities in implementing certain accounting practices to conform to the Company’s policies and GAAP.


•	There was not an adequate assessment of changes in risks by management that could significantly impact internal control over financial reporting or an adequate determination and prioritization of how those risks should be managed.


•	There was not adequate management oversight and identification of models material to financial reporting.


•	There were insufficiently documented Company accounting policies and insufficiently detailed Company procedures to put policies into effective action.

•

There was a lack of appropriate tone at the top in establishing an effective control owner of the risk and controls self-assessment process, which contributed to a lack of clarity for ownership of risk assessments and control design and effectiveness. There was insufficient governance, oversight and monitoring of the credit loss allowance and accretion processes, and a lack of defined roles and responsibilities in monitoring functions.

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Application of Effective Interest Method for Accretion

The Company’s policies and controls related to the methodology used for applying the effective interest rate method in accordance with GAAP, specifically as it relates to the review of key assumptions over prepayment curves, pool segmentation and presentation in financial statements were not designed appropriately or failed to operate effectively. Additionally the resources dedicated to the reviews were not sufficient to identify all relevant instances of non-compliance with policies and GAAP and did not sufficiently review supporting methodologies and practices to identify variances from the Company’s policy and GAAP.

This resulted in errors in the Company’s application of the effective interest method for accreting discounts, which include discounts upon origination of the loan, subvention payments from manufacturers, and other origination costs on individually acquired retail installment contracts.

This material weakness relates to the following financial statement line items: loans held for investment, loans held-for-sale, the allowance for loan and lease losses, interest income-loans, the provision for credit losses, miscellaneous income, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

Methodology to Estimate Credit Loss Allowance

The Company’s policies and controls related to the methodology used for estimating the credit loss allowance in accordance with GAAP, specifically as it relates to the calculation of impairment for troubled debt restructurings (TDRs) separately from the general allowance on loans not classified as TDRs and the consideration of net discounts when estimating the allowance were not designed appropriately or failed to operate effectively. Additionally the resources dedicated to the reviews were not sufficient to identify all relevant instances of non-compliance with policies and GAAP and did not sufficiently review supporting methodologies and practices to identify variances from the Company’s policy and GAAP.

This resulted in errors in the Company’s methodology for determining the credit loss allowance, specifically not calculating impairment for TDRs separately from a general allowance on loans not classified as TDRs and inappropriately omitting the consideration of net discounts when estimating the allowance and recording charge-offs.

This material weakness relates to the following financial statement line items: the allowance for loan and lease losses, the provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

Loans Modified as TDRs

The following controls over the identification of TDRs and inputs used to estimate TDR impairment did not operate effectively:


•	Review controls of the TDR footnote disclosures and supporting information did not effectively identify that parameters used to query the loan data were incorrect.


•	A review of inputs used to estimate the expected and present value of cash flows of loans modified in TDRs did not identify errors in types of cash flows included and in the assumed timing and amount of defaults and did not identify that the discount rate was incorrect.

The Company reported a material weakness in control environment relating to inadequate management oversight of accounting and financial reporting activities in implementing certain accounting practices to conform to the Company’s policies and GAAP, and insufficiently documented Company accounting policies and insufficiently detailed Company procedures to put policies into effective action, as well as ineffective execution of a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting which contributed to this material weakness.

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As a result, management determined that it had incorrectly identified the population of loans that should be classified as TDRs and, separately, had incorrectly estimated the impairment on these loans due to model input errors.

Development, Approval, and Monitoring of Models Used to Estimate the Credit Loss Allowance

Various deficiencies were identified in the credit loss allowance process related to review, monitoring and approval processes over models and model changes that aggregated to a material weakness. The following controls did not operate effectively:


•	Review controls over data, inputs and assumptions in models used for estimating credit loss allowance and related model changes were not effective and management did not adequately challenge significant assumptions.


•	Review and approval controls over the development of new models to estimate credit loss allowance and related model changes were ineffective.


•	Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.

The Company reported a material weakness in control environment relating to inadequate assessment of changes in risks by management that could significantly impact internal control over financial reporting or determination and prioritization of how those risks should be managed and ineffective execution of a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting which contributed to this material weakness.

This material weakness relates to the following financial statement line items: the allowance for loan and lease losses, provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

Development, Approval, and Monitoring of Models Used to Estimate Accretion

Various deficiencies were identified in the accretion process related to review, monitoring and approval processes over models and model changes that aggregated to a material weakness. The following controls did not operate effectively:


•	Review controls over data, inputs and assumptions in models used for estimating accretion and related model changes were not effective and management did not adequately challenge significant assumptions.


•	Review and approval controls over the development of new models to estimate accretion and related model changes were ineffective.


•	Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.

The Company reported a material weakness in control environment relating to inadequate assessment of changes in risks by management that could significantly impact internal control over financial reporting or determination and prioritization of how those risks should be managed and inadequate management oversight and identification of models material to financial reporting as well as ineffective execution of a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting which contributed to this material weakness.

This material weakness relates to the following financial statement line items: loans held for investment, net, loans held for sale, net, the allowance for loan and lease losses, interest income - loans, provision for credit losses, miscellaneous income and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

Review of New, Unusual or Significant Transactions

Management identified an error in the accounting treatment of certain transactions related to separation agreements with the former Chairman of the Board and CEO of SC. Specifically, controls over the review of new, unusual or significant transactions related to application of the appropriate accounting and tax treatment to this transaction in accordance with GAAP did not operate effectively in that management failed to detect as part of the review procedures that regulatory approval was prerequisite to recording the transaction and that approval had not been obtained prior to recording the transaction and therefore should have not been recorded.

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The Company reported a material weakness in control environment relating to inadequate management oversight of accounting and financial reporting activities in implementing certain accounting practices to conform to the Company’s policies and GAAP, and ineffective execution of a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting which contributed to this material weakness.

This material weakness relates to the following financial statement line items: compensation and benefits expense, other liabilities, deferred tax liabilities, net, common stock and paid-in capital and the related disclosures within Note 13 - Accumulated Other Comprehensive Income/(Loss).

Review of Financial Statement Disclosures

Management identified errors relating to financial statement disclosures. Specifically, controls over both the preparation and review of financial statement disclosures did not operate effectively to ensure complete, accurate, and proper presentation of the financial statement disclosures in accordance with GAAP.

The Company reported a material weakness in control environment relating to inadequate management oversight of accounting and financial reporting activities in implementing certain accounting practices to conform to the Company’s policies and GAAP, and ineffective execution of a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting which contributed to this material weakness.

This material weakness relates to various disclosures in the financial statements.

Impact of Purchase Accounting on TDR Loan Accounting

In the process of estimating the allowance for loan losses related to SC loans in the Company’s consolidated financial statements, SC’s discount rates were used in the TDR methodology rather than the discount rate required for the Company related to the original purchase accounting discount. Management’s review control of the methodology did not operate effectively.

This material weakness relates to the following financial statement line items: loans held for investment, net, the allowance for loan and lease losses, provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

Goodwill

In connection with the annual goodwill impairment test conducted as of October 1, the Company determined there was a material weakness in the operating effectiveness of management’s review control over the calculation of the carrying value of the Company’s SC reporting unit used in the Company’s step one goodwill impairment tests performed in accordance with ASC 350-20. A review of the calculation did not identify an error which resulted in an understatement of the carrying value used in the goodwill impairment tests. While the impact of the error did not result in a different conclusion regarding the step one impairment test that was conducted, it was reasonably possible that the understated carrying value could have resulted in a different conclusion that would not have been prevented or detected.

Additionally, in performing step two of the impairment test on the SC reporting unit as of December 31, 2015, in accordance with ASC 350-20, the review control over data utilized in the valuation was not operating effectively.

Statement of Cash Flows and Footnotes

Management identified a material weakness in internal control over the Company's process to prepare and review the Statement of Cash Flows (SCF) and Notes to the Consolidated Financial Statements. Specifically, the Company concluded that it did not have adequate controls designed and in place over the preparation and review of the Condensed Consolidated SCF and financial statement disclosures in the Loans and Allowance for Credit Losses footnote, as a result of which errors were not identified in a timely manner.

During 2015, with the oversight of senior management and the Audit Committee, the Company implemented a number of new controls to remediate the SCF and footnotes material weakness described above. The Company has revised the design of the former process to prepare and review the Company’s SCF and Notes to the Consolidated Financial Statements, and designed and implemented additional controls over the preparation and data providers, to remediate the underlying control weakness that gave rise to the material weakness. The newly implemented controls include additional reviews at a detailed level at the statement preparation and data provider levels.

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The Company believes these enhancements have remediated the SCF controls design aspect of this material weakness. However, we continue to monitor the operating effectiveness of the new controls and believe these changes will strengthen internal control over financial reporting for the preparation and review of the SCF and Notes to the Consolidated Financial Statements in order to address the remaining material weakness related to the operating effectiveness of the controls.

Remediation Status of Reported Material Weaknesses

We are currently working to remediate the material weaknesses described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses.

The following remediation steps are among the measures currently being implemented at the time of this filing by the Company and SC:


•	The Company and SC have begun efforts to hire additional personnel with the requisite skill sets in certain areas important to financial reporting. Three key positions at SC, Head of Internal Control, Director of SEC Reporting and a Vice President of Accounting Policy, were recently filled by SC. A number of positions also were added and filled in the credit loss allowance area.


•	The Company has established regular working group meetings, with appropriate oversight by management of both SC and the Company to strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.


•	In conjunction with previously developing new credit loss allowance models and refining our loss forecasting methodology to be in compliance with GAAP, the Company also is enhancing its accounting documentation relating to credit loss allowance, to demonstrate how the Company’s policies and procedures align with GAAP and produce a repeatable process.


•	Management is also in the process of performing a comprehensive review of current accounting practices to ensure compliance with the Company’s accounting policies and GAAP, and to ensure sufficient specificity in procedures. Additionally, management will implement a recurring review by a team of qualified individuals.


•	Processes to identify, track, and report TDRs, that take into account changes to TDRs and new modification types, were enhanced and are being documented.

•

A formal and comprehensive ongoing performance monitoring plan related to credit loss allowance with specific details relating to monitoring activities performed to allow for repeatable and consistent testing is being developed. This plan is intended to be consistent with the Company’s overarching model risk management policy and will provide a consistent methodology for measuring performance across all models.


•	Management is ensuring that all models significant to financial reporting are subject to appropriate validation, documentation and procedures.


•	Model documentation is being developed, or in some cases enhanced to address model documentation gaps, related to credit loss allowance and accretion models.


•	A framework and documentation are being developed to outline model security attributes/procedures for models related to credit loss allowance and models are being placed in an environment where access is restricted to authorized personnel and an audit trail is retained.


•	The Company is enhancing its Material Risk Program and Assessment documentation.


•	The Company is enhancing the internal documentation requirements and procedures to be performed related to goodwill impairment testing and the procedures to be performed over the work prepared by third-party valuation specialists.


•	The Company has designed and implemented additional controls (including additional reviews at a detailed level) over the preparation and review of the SCF and Notes to the Consolidated Financial Statements.


•	The Company is enhancing the internal documentation requirements and procedures to be performed in the implementation of new accounting models used by the Company for financial reporting purposes.

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•	The Company has begun efforts to enhance its oversight of subsidiaries by establishing additional procedures to identify high risk, unusual, or material transactions to ensure that there are sufficient activities performed to ensure accurate and timely financial reporting.

While progress has been made to enhance processes, procedures and controls related to these areas, we are still in the process of developing and implementing these processes and procedures and testing these controls and believe additional time is required to complete development and implementation, and demonstrate the sustainability of these procedures. We believe our remedial actions will be effective in remediating the material weaknesses and we will continue to devote significant time and attention to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weaknesses are not remediated at September 30, 2016.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's 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 quarter ended September 30, 2016 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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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 IRS 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. Other than the risk factors disclosed below, 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/A for the year ended December 31, 2015.

Failure to satisfy obligations associated with being a public company may have adverse regulatory, economic, and reputational consequences.

As a public company, we are required to prepare and distribute periodic reports containing our consolidated financial statements with the SEC, evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; and maintain internal policies, including those relating to disclosure controls and procedures.

On March 31, 2016, we filed an extension request under Rule 12b-25 with the SEC, resulting in the extension of the deadline for filing our Annual Report on Form 10-K from 90 days after the fiscal year-end (March 30, 2016) to 105 days after the fiscal year end (April 14, 2016). On August 16, 2016, we filed an extension request under Rule 12b-25 with the SEC, resulting in the extension of the deadline for filing our Quarterly Report on Form 10-Q from 46 days after the fiscal quarter-end (August 15, 2016) to 53 days after the fiscal quarter-end (August 22, 2016). On November 15, 2016, we filed an extension request under Rule 12b-25 with the SEC, resulting in the extension of the deadline for filing our Quarterly Report on Form 10-Q for the period ending September 30, 2016 from 45 days after the fiscal quarter-end (November 14, 2016) to 51 days after the fiscal quarter-end (November 21, 2016). We did not file those quarterly reports by the extensions of the deadlines for them. Those failures to file our periodic reports for the second and third quarters of 2016 within the time periods prescribed by the SEC, have, among other consequences, resulted in the suspension of our eligibility to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 months. This will increase the time and resources we need to expend if we choose to access the public capital markets. If in the future we are not able to file our periodic reports within the time periods prescribed by the SEC, among other consequences, the suspension of our eligibility to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 months would continue.

Internal controls over financial reporting may not prevent or detect all errors or acts of fraud.

We maintain disclosure controls and procedures designed to ensure that we timely report information as required in the SEC’s rules and regulations. We also maintain a system of internal control over financial reporting. However, these controls may not achieve, and in some cases have not achieved, their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management override. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis. If our controls are not effective, it could have a material adverse effect on our financial condition, and results of operations, and could subject us to regulatory scrutiny.

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In the course of preparing the consolidated financial statements as of and for the six months ended June 30, 2016, we identified certain material weaknesses in internal control over financial reporting. These material weaknesses are described in Item 4 of this Quarterly Report on Form 10-Q. Certain of these material weaknesses involve failures in the design and operating effectiveness of our controls, resulting in misstatements in our publicly filed financial statements for the years ended December 31, 2015, 2014 and 2013, and interim periods in 2016, 2015 and 2014. We have evaluated the impact of errors on previously filed Quarterly Reports on Form 10-Q as of and for the three months ended March 31, 2015, June 30, 2015, September 30, 2015, and March 31,2016 as well as the Annual Report on Form 10-K as of and for the year ended December 31, 2015 and concluded that the previously filed financials for those periods were materially misstated. Accordingly, we have restated the previous filed financial statements to reflect the error corrections.

If we are unable to effectively remediate and adequately manage our internal controls over financial reporting in the future, we may be unable to produce accurate or timely financial information. Any negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory requirements could lead investors and other users to lose confidence in our financial data and could adversely affect our business. Significant deficiencies or material weaknesses in our internal controls over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain.



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.

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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, Santander Consumer USA Holdings Inc., Santander Consumer 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, Santander Consumer USA Holdings Inc., 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)

(10.3)	Written Agreement, dated as of September 15, 2014, by and between Santander Holdings USA, Inc. and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed September 18, 2014 (Commission File Number 001-16581)

(10.4)	Written Agreement, dated as of July 2, 2015, by and between Santander Holdings USA, Inc. and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed July 7, 2015 (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)

(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)

(101)	Interactive Data File (XBRL). (Filed herewith)

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SIGNATURES

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



		SANTANDER HOLDINGS USA, INC. (Registrant)

Date:	December 12, 2016	/s/ Scott E. Powell
		Scott E. Powell
		President and Chief Executive Officer (Authorized Officer)


Date:	December 12, 2016	/s/ Madhukar Dayal
		Madhukar Dayal
		Chief Financial Officer and Senior Executive Vice President

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