Santander Holdings USA, Inc. - Quarter Report: 2017 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, 2017



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

For the transition period from to .

Commission File Number: 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)



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

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

(617) 346-7200

Registrant’s telephone number including area code

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer o

Non-accelerated filer þ		(Do not check if smaller reporting company)

		Smaller reporting company o

		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act 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, 2017
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, 2017 and December 31, 2016	4

Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2017 and 2016	5

Condensed Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 30, 2017 and 2016	6

Condensed Consolidated Statements of Stockholder's Equity for the nine-month periods ended September 30, 2017 and 2016	7

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2017 and 2016	8

Notes to Condensed Consolidated Financial Statements	9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	92

Item 3. Quantitative and Qualitative Disclosures About Market Risk	147

Item 4. Controls and Procedures	147

PART II. OTHER INFORMATION	153

Item 1. Legal Proceedings	153

Item 1A. Risk Factors	153

Item 2. Unregistered Sales of Equity Securities and use of Proceeds	153

Item 3. Defaults upon Senior Securities	153

Item 4. Mine Safety Disclosures	153

Item 5. Other Information	153

Item 6. Exhibits	154

SIGNATURES	156


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

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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," "goal," "seek" 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. For more information regarding these risks and uncertainties as well as additional risks that the Company faces, refer to the Risk Factors detailed in Item 1A of Part 1 of the Company's annual report on Form 10-K for the year ended December 31, 2016. 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/or 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”), and other changes in monetary and fiscal policies and regulations, including interest rate policies of the Federal Reserve, as well as in the impact of changes in and interpretations of generally accepted accounting principles in the United States of America ("GAAP"), the failure to adhere to which could subject SHUSA to formal or informal regulatory compliance and enforcement actions;


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


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


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


•	regulatory uncertainties and changes faced by financial institutions in the U.S. and globally arising from the U.S. presidential administration and Congress and the potential impact those uncertainties and changes could have on SHUSA's business, results of operations, financial condition or strategy;


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


•	SHUSA’s ability to effectively manage its capital and liquidity, including approval of its capital plans by its regulators;


•	changes in credit ratings assigned to SHUSA or its subsidiaries;


•	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;


•	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;


•	changes in customer spending or savings behavior;


•	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, including as a result of cyber attacks, technological failure, human error, fraud or malice, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;


•	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;


•	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; and


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

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GLOSSARY OF ABBREVIATIONS AND ACRONYMS

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



ABS: Asset-backed securities		Deka Lawsuit: Purported securities class action lawsuit filed against SC on August 26, 2014
ACL: Allowance for credit losses		DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
AFS: Available-for-sale		DOJ: Department of Justice
ALLL: Allowance for loan and lease losses		DTI: Debt-to-income
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation		ECOA: Equal Credit Opportunity Act
AOD: Assurance of Discontinuance		EPS: Enhanced Prudential Standards
APR: Annual percentage rate		ETR: Effective tax rate
ASC: Accounting Standards Codification		Exchange Act: Securities Exchange Act of 1934, as amended
ASU: Accounting Standards Update		FASB: Financial Accounting Standards Board
ATM: Automated teller machine		FBO: Foreign banking organization
Bank: Santander Bank, National Association		FCA: Fiat Chrysler Automobiles US LLC
BEA: Bureau of Economic Analysis		FDIC: Federal Deposit Insurance Corporation
BHC: Bank holding company		Federal Reserve: Board of Governors of the Federal Reserve System
BOLI: Bank-owned life insurance		FHLB: Federal Home Loan Bank
BSI: Banco Santander International		FHLMC: Federal Home Loan Mortgage Corporation
CBP: Citizens Bank of Pennsylvania		FICO^®: Fair Isaac Corporation credit scoring model
CCAR: Comprehensive Capital Analysis and Review		Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CD: Certificate(s) of deposit		FNMA: Federal National Mortgage Association
CEO: Chief Executive Officer		FRB: Federal Reserve Bank
CEVF: Commercial equipment vehicle financing		FTP: Funds transfer pricing
CET1: Common equity Tier 1		FVO: Fair value option
CFPB: Consumer Financial Protection Bureau		GAAP: Accounting principles generally accepted in the United States of America
Change in Control: First quarter 2014 change in control and consolidation of SC		GCB: Global Corporate Banking
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC		HQLA: High-quality liquid assets
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement		IHC: U.S. intermediate holding company
CLTV: Combined loan-to-value		IPO: Initial public offering
CMO: Collateralized mortgage obligation		IRS: Internal Revenue Service
CMP: Civil monetary penalty		ISDA: International Swaps and Derivatives Association, Inc.
CODM: Chief Operating Decision Maker		IT: Information technology
Company: Santander Holdings USA, Inc.		Lending Club: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquired loans under flow agreements
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		LCR: Liquidity coverage ratio
Covered Fund: hedge fund or a private equity fund under the Volcker Rule		LHFI: Loans held-for-investment
CPR: Changes in anticipated loan prepayment rates		LHFS: Loans held-for-sale
CRA: Community Reinvestment Act		LIBOR: London Interbank Offered Rate
DCF: Discounted cash flow		LIHTC: Low Income Housing Tax Credit
DDFS: Dundon DFS LLC		LTD: Long-term debt

Table of Contents



LTV: Loan-to-value		Santander NY: New York branch of Banco Santander, S.A.
MBS: Mortgage-backed securities		Santander UK: Santander UK plc
Massachusetts AG: Massachusetts Attorney General		SBNA: Santander Bank, National Association
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations		SC: Santander Consumer USA Holdings Inc. and its subsidiaries
MSR: Mortgage servicing right		SC Common Stock: Common shares of SC
NCI: Non-controlling interest		SCF: Statement of cash flows
NMD: Non-maturity deposits		SDART: Santander Drive Auto Receivables Trust, a SC securitization platform
NPL: Non-performing loan		SDGT: Specially Designated Global Terrorist
NSFR: Net stable funding ratio		SEC: Securities and Exchange Commission
NYSE: New York Stock Exchange		Securities Act: Securities Act of 1933, as amended
OCC: Office of the Comptroller of the Currency		Separation Agreement: Agreement entered into by Thomas Dundon, the former Chief Executive Officer of SC, DDFS, SC and Santander on July 2, 2015
OEM: Original equipment manufacturer		SFS: Santander Financial Services, Inc.
OIS: Overnight indexed swap		SHUSA: Santander Holdings USA, Inc.
Order: OCC consent order signed by SBNA on January 26, 2012 which replaced a prior order signed by the Bank and other parties with the OTS		SIS: Santander Investment Securities Inc.
OREO: Other real estate owned		SPAIN: Santander Prime Auto Issuing Note Trust, a securitization platform
OTTI: Other-than-temporary impairment		SPE: Special purpose entity
Parent Company: the parent holding company of Santander Bank, National Association and other consolidated subsidiaries		Sponsor Holdings: Sponsor Auto Finance Holding Series LP
Pledge Agreement: Agreement which, pursuant to the loan agreement, 29,598,506 shares of SC’s common stock owned by DDFS LLC are pledged as collateral under a related pledge agreement.		SSLLC: Santander Securities, LLC
REIT: Real estate investment trust		TDR: Troubled debt restructuring
RIC: Retail installment contract		TLAC: Total loss-absorbing capacity
RV: Recreational vehicle		Trusts: Securitization trusts
RWA: Risk-weighted assets		UPB: Unpaid principal balance
S&P: Standard & Poor's		VIE: Variable interest entity
Santander: Banco Santander, S.A.		VOE: Voting interest entity
Santander BanCorp: Santander BanCorp and its subsidiaries

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PART I

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	September 30, 2017			December 31, 2016
	(in thousands)
ASSETS
Cash and cash equivalents	$	7,909,625		$	10,035,859
Investment securities:
Available-for-sale ("AFS") at fair value	17,233,046			17,024,225
Held-to-maturity (fair value of $1,542,093 and $1,635,413 as of September 30, 2017 and December 31, 2016, respectively)	1,560,850			1,658,644
Trading securities	9,098			1,630
Other investments	708,294			730,831
Loans held-for-investment ^{(1) (5)}	81,548,699			85,819,785
Allowance for loan and lease losses ("ALLL") ⁽⁵⁾	(3,956,145		)	(3,814,464		)
Net loans held-for-investment	77,592,554			82,005,321
Loans held-for-sale ⁽²⁾	1,988,097			2,586,308
Premises and equipment, net ⁽³⁾	883,186			996,498
Operating lease assets, net ⁽⁵⁾⁽⁶⁾	10,400,560			9,747,223
Accrued interest receivable ⁽⁵⁾	555,407			599,321
Equity method investments	223,380			255,344
Goodwill	4,454,925			4,454,925
Intangible assets, net	551,041			597,244
Bank-owned life insurance	1,790,201			1,767,101
Restricted cash ⁽⁵⁾	3,033,587			3,016,948
Other assets ^{(4) (5)}	3,092,266			2,882,868
TOTAL ASSETS	$	131,986,117		$	138,360,290
LIABILITIES
Accrued expenses and payables	$	2,591,266		$	2,821,712
Deposits and other customer accounts	61,877,808			67,240,690
Borrowings and other debt obligations ⁽⁵⁾	41,351,374			43,524,445
Advance payments by borrowers for taxes and insurance	181,903			163,498
Deferred tax liabilities, net	1,642,549			1,420,315
Other liabilities ⁽⁵⁾	871,417			810,872
TOTAL LIABILITIES	108,516,317			115,981,532
STOCKHOLDER'S EQUITY
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at both September 30, 2017 and December 31, 2016)	195,445			195,445
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both September 30, 2017 and December 31, 2016)	17,012,660			16,599,497
Accumulated other comprehensive loss	(145,210		)	(193,208		)
Retained earnings	3,368,210			3,020,149
TOTAL SHUSA STOCKHOLDER'S EQUITY	20,431,105			19,621,883
Noncontrolling interest	3,038,695			2,756,875
TOTAL STOCKHOLDER'S EQUITY	23,469,800			22,378,758
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	131,986,117		$	138,360,290

(1) Loans held-for-investment ("LHFI") includes $204.7 million and $217.2 million of loans recorded at fair value at September 30, 2017 and December 31, 2016, respectively.

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

(3) Net of accumulated depreciation of $1.4 billion and $1.2 billion at September 30, 2017 and December 31, 2016, respectively.

(4) Includes mortgage servicing rights ("MSRs") of $143.5 million and $146.6 million at September 30, 2017 and December 31, 2016, 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 $3.0 billion and $2.8 billion at September 30, 2017 and December 31, 2016, 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,
	2017		2016			2017		2016
	(in thousands)
INTEREST INCOME:
Loans	$	1,822,384	$	1,889,077		$	5,530,239	$	5,755,173
Interest-earning deposits	24,370		13,400			63,279		41,890
Investment securities:
Available-for-sale	93,599		60,844			270,041		235,851
Held-to-maturity	8,859		—			29,502		—
Other investments	4,688		7,641			15,876		25,224
TOTAL INTEREST INCOME	1,953,900		1,970,962			5,908,937		6,058,138
INTEREST EXPENSE:
Deposits and other customer accounts	56,707		64,288			177,524		213,135
Borrowings and other debt obligations	323,133		285,544			913,040		863,186
TOTAL INTEREST EXPENSE	379,840		349,832			1,090,564		1,076,321
NET INTEREST INCOME	1,574,060		1,621,130			4,818,373		4,981,817
Provision for credit losses	652,120		687,912			1,992,334		2,200,154
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	921,940		933,218			2,826,039		2,781,663
NON-INTEREST INCOME:
Consumer and Commercial fees	151,906		171,684			468,609		535,583
Mortgage banking income, net	14,783		22,537			43,049		50,005
Bank-owned life insurance ("BOLI")	17,807		14,150			49,159		44,315
Lease income	509,714		483,929			1,494,801		1,365,519
Miscellaneous income, net	93,805		35,637			180,217		94,842
TOTAL FEES AND OTHER INCOME	788,015		727,937			2,235,835		2,090,264
Other-than-temporary impairment ("OTTI") recognized in earnings	—		—			—		(44		)
Net gains/(losses) on sale of investment securities	6,707		(364		)	16,276		58,595
Net gains/(losses) recognized in earnings	6,707		(364		)	16,276		58,551
TOTAL NON-INTEREST INCOME	794,722		727,573			2,252,111		2,148,815
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits	452,587		426,162			1,360,444		1,282,094
Occupancy and equipment expenses	165,201		156,611			491,465		453,687
Technology expense	59,056		56,449			181,331		183,039
Outside services	46,994		57,742			154,272		207,472
Marketing expense	23,424		35,944			91,641		77,986
Loan expense	91,147		101,101			285,364		307,992
Lease expense	409,424		338,077			1,137,456		953,142
Other administrative expenses	95,712		109,189			293,046		310,078
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES	1,343,545		1,281,275			3,995,019		3,775,490
OTHER EXPENSES:
Amortization of intangibles	15,288		17,174			46,204		52,860
Deposit insurance premiums and other expenses	19,792		17,950			55,218		56,966
Loss on debt extinguishment	5,582		10,228			16,321		88,672
Other miscellaneous expenses	1,980		198			12,521		5,779
TOTAL OTHER EXPENSES	42,642		45,550			130,264		204,277
INCOME BEFORE INCOME TAX PROVISION	330,475		333,966			952,867		950,711
Income tax provision	93,448		108,320			264,368		339,968
NET INCOME INCLUDING NONCONTROLLING INTEREST	237,027		225,646			688,499		610,743
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	75,195		77,672			230,547		257,419
NET INCOME ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC.	$	161,832	$	147,974		$	457,952	$	353,324

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,
	2017			2016			2017		2016
	(in thousands)
NET INCOME INCLUDING NONCONTROLLING INTEREST	$	237,027		$	225,646		$	688,499	$	610,743
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments, net of tax ⁽¹⁾	(492		)	53,828			3,544		6,528
Net unrealized gains/(losses) on available-for-sale investment securities, net of tax	6,538			(66,418		)	42,856		112,786
Pension and post-retirement actuarial gains/(losses), net of tax	557			(4,449		)	1,598		(3,319		)
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX	6,603			(17,039		)	47,998		115,995
COMPREHENSIVE INCOME	243,630			208,607			736,497		726,738
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	75,195			77,672			230,547		257,419
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA	$	168,435		$	130,935		$	505,950	$	469,319

(1) Excludes $0.2 million and $0.3 million of other comprehensive loss attributable to non-controlling interest ("NCI") for the three-month and nine-month periods ended September 30, 2017, respectively, compared to other comprehensive income of $9.9 million and other comprehensive loss of $11.8 million for the corresponding periods in 2016.

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, 2017 AND 2016

(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, 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 ("NCI")	—	—			—			—			—			(11,790		)	(11,790		)
Net income attributable to NCI	—	—			—			—			—			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



	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, 2017	530,391	$	195,445	$	16,599,497		$	(193,208	)	$	3,020,149		$	2,756,875		$	22,378,758
Cumulative-effect adjustment upon adoption of ASU 2016-09 (Note 1)	—	—		(26,456		)	—			14,764			37,401			25,709
Comprehensive income attributable to Santander Holdings USA, Inc.	—	—		—			47,998			457,952			—			505,950
Other comprehensive loss attributable to NCI	—	—		—			—			—			(321		)	(321		)
Net income attributable to NCI	—	—		—			—			—			230,547			230,547
Impact of Santander Consumer USA Holdings Inc. stock option activity	—	—		—			—			—			14,193			14,193
Contribution of SFS from shareholder⁽¹⁾	—	—		430,783			—			(108,705		)	—			322,078
Capital contribution from shareholder	—	—		9,000			—			—			—			9,000
Stock issued in connection with employee benefit and incentive compensation plans	—	—		(164		)	—			—			—			(164		)
Dividends paid on common stock	—	—		—			—			(5,000		)	—			(5,000		)
Dividends paid on preferred stock	—	—		—			—			(10,950		)	—			(10,950		)
Balance, September 30, 2017	530,391	$	195,445	$	17,012,660		$	(145,210	)	$	3,368,210		$	3,038,695		$	23,469,800

(1) Refer to footnote 1 - Basis of Presentation and Accounting Policies for additional information

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,
	2017			2016

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including NCI	$	688,499		$	610,743
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	1,992,334			2,200,154
Deferred tax expense	256,111			271,057
Depreciation, amortization and accretion	758,926			746,607
Net loss on sale of loans	256,072			295,883
Net gain on sale of investment securities	(16,276		)	(58,595		)
Net gain on sale of operating leases	(288		)	(248		)
OTTI recognized in earnings	—			44
Loss on debt extinguishment	16,321			88,672
Net (gain)/loss on real estate owned and premises and equipment	(23,395		)	8,382
Stock-based compensation	940			13,360
Equity loss on equity method investments	747			4,719
Originations of loans held-for-sale ("LHFS"), net of repayments	(3,805,625		)	(4,570,257		)
Purchases of LHFS	(4,021		)	(3,677		)
Proceeds from sales of LHFS	4,272,628			3,859,060
Purchases of trading securities	(9,734		)	(505,254		)
Proceeds from sales of trading securities	18,074			525,660
Net change in:
Revolving personal loans	(139,360		)	(471,061		)
Other assets and BOLI ⁽¹⁾	(200,691		)	(120,709		)
Other liabilities ⁽¹⁾	(49,535		)	240,917
NET CASH PROVIDED BY OPERATING ACTIVITIES	4,011,727			3,135,457

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale investment securities	1,763,305			6,755,298
Proceeds from prepayments and maturities of available-for-sale investment securities	3,791,545			7,897,204
Purchases of available-for-sale investment securities	(6,088,005		)	(9,427,160		)
Proceeds from repayments and maturities of held to maturity investment securities	140,992			—
Purchases of held to maturity investment securities	(51,506		)	—
Proceeds from sales of other investments	205,445			443,715
Proceeds from maturities of other investments	560			45
Purchases of other investments	(154,928		)	(151,011		)
Net change in restricted cash	(22,760		)	(626,970		)
Proceeds from sales of LHFI	1,085,985			1,447,704
Proceeds from the sales of equity method investments	17,717			—
Distributions from equity method investments	7,572			4,244
Contributions to equity method and other investments	(55,236		)	(24,057		)
Purchases of LHFI	(517,844		)	(162,154		)
Net change in loans other than purchases and sales	2,299,699			(1,729,419		)
Purchases and originations of operating leases	(4,739,735		)	(4,624,096		)
Proceeds from the sale and termination of operating leases	2,911,643			1,740,389
Manufacturer incentives	778,748			1,076,593
Proceeds from sales of real estate owned and premises and equipment	97,976			54,205
Purchases of premises and equipment	(103,695		)	(159,608		)
NET CASH PROVIDED BY INVESTING ACTIVITIES	1,367,478			2,514,922

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	(5,171,305		)	2,120,695
Net change in short-term borrowings	2,105,048			(418,856		)
Net proceeds from long-term borrowings	35,094,920			35,337,224
Repayments of long-term borrowings	(36,051,143		)	(32,824,455		)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)	1,000,000			4,700,000
Repayments of FHLB advances (with terms greater than 3 months)	(4,500,000		)	(12,123,672		)
Net change in advance payments by borrowers for taxes and insurance	18,405			25,271
Cash dividends paid to preferred stockholders	(10,950		)	(11,478		)
Dividends paid on common stock	(5,000		)	—
Proceeds from the issuance of common stock	5,586			2,635
Capital contribution from shareholder	9,000			—
Redemption of preferred stock	—			(75,000		)
NET CASH USED IN FINANCING ACTIVITIES	(7,505,439		)	(3,267,636		)

NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS	(2,126,234		)	2,382,743
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	10,035,859			9,447,003
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	7,909,625		$	11,829,746


NON-CASH TRANSACTIONS
Loans transferred to other real estate owned	9,536			61,186
Loans transferred from held-for-investment to held-for-sale, net	4,899			41,803
Unsettled purchases of investment securities	—			4,613
Unsettled sales of investment securities	109,106			—
Residential loan securitizations	17,945			19,585
Contribution of SFS from shareholder ⁽²⁾	322,078			—

(1) September 30, 2016 cash flow activity has been updated for the deferred tax classification correction. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

(2) The contribution of SFS to SHUSA was accounted for as a non-cash transaction. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Introduction

Santander Holdings USA, Inc. ("SHUSA" or "the Company") 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 that offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico; Santander Securities, LLC ("SSLLC"), a broker-dealer headquartered in Boston, Massachusetts; Banco Santander International ("BSI"), an Edge Act corporation located in Miami, Florida, that 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 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 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 by asset size and revenue 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 and securitization of retail installment contracts ("RICs") principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime retail consumers.

In conjunction with a ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA") that became effective May 1, 2013 (the "Chrysler Agreement"), 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. Refer to Note 14 for additional details.

As of September 30, 2017, SC was owned approximately 58.7% by SHUSA and 41.3% by other shareholders. Common shares of SC ("SC Common Stock") are listed on the New York Stock Exchange (the "NYSE") under the trading symbol "SC."

Intermediate Holding Company ("IHC")

The enhanced prudential standards mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA")(the “Final Rule") were enacted by the Federal Reserve System (the "Federal Reserve") 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 IHC. Due to its U.S. non-branch total consolidated asset size, Santander is 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 and SSLLC, as well as several other subsidiaries.

On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. ("SFS"), a finance company located in Puerto Rico, was transferred to the Company. The contribution of SFS to the Company transferred approximately $679 million of assets, which were primarily comprised of cash and cash equivalents and loans held for sale, approximately $357 million of liabilities and approximately $322 million of equity to the Company. Moreover, the Company is in the process of dissolving the business assets.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

SFS is an entity under common control of Santander; however its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company has determined that it will report the results of SFS on a prospective basis beginning July 1, 2017 rather than, as required by GAAP, retrospectively restate its financial statements for the contribution of SFS. As a result, SHUSA's net income is understated for the nine-month period ended September 30, 2017 and September 30, 2016 by $3.3 million and $14.7 million, respectively, and a contribution to stockholder's equity of $322.1 million was recorded on July 1, 2017, which are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.

Basis of Presentation

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 VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and generally consolidates voting interest entities ("VOEs") in which the Company has a controlling financial interest. The Condensed Consolidated Financial Statements have been prepared by the Company pursuant to Securities and Exchange Commission ("SEC") regulations. All significant intercompany balances and transactions have been eliminated in consolidation. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and Statements of Cash Flows ("SCF") for the periods indicated, and contain adequate disclosure for the fair statement of this interim financial information.

Correction of Deferred Tax Classification

Beginning December 31, 2015 through March 31, 2017, net deferred tax assets and net deferred tax liabilities of entities filing separate U.S. Federal tax returns were improperly offset in the Company’s Consolidated Balance Sheet. As a result, the Company understated Deferred Tax Assets, Total Assets, Deferred Tax Liabilities and Total Liabilities by $981.7 million, $989.8 million, $791.2 million, $756.1 million, $743.0 million, and $804.5 million for the periods ended March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016, and December 31, 2015, respectively.

The Company has determined that the impact of the misclassification of deferred tax balances in the Consolidated Balance Sheets for the periods ended March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016, and December 31, 2015 and the corresponding impact of an overstatement of previously disclosed capital ratios ranging from 8 bps to 17 bps are immaterial for all periods.

There was no significant impact to the Company’s Consolidated Statements of Operations, Consolidated Statements of Other Comprehensive Income, Consolidated Statements of Equity, or Consolidated Statement of Cash Flows for any period.

The Company has corrected the balances described above as of December 31, 2016 in its Consolidated Balance Sheet included herein. In future filings, the Company will correct the deferred tax classification balances and capital ratio disclosures for the periods described above when presented.

Significant Accounting Policies

Management has identified (i) accounting for consolidation, (ii) business combinations, (iii) the allowance for loan losses for originated and purchased loans and the reserve for unfunded lending commitments, (iv) loan modifications and troubled debt restructurings (“TDRs”), (v) goodwill, (vi) derivatives and hedging activities, and (vii) income taxes as the Company's significant accounting policies and estimates, in that they are important to the portrayal of the Company's financial condition, 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 for the year ended December 31, 2016.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

As of September 30, 2017, with the exception of the items noted in the section captioned "Recently Adopted Accounting Policies" below, there have been no significant changes to the Company's accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.

Recently Adopted Accounting Policies

Since January 1, 2017, the Company adopted the following Financial Accounting Standards Board ("FASB") Accounting Standards Updates ("ASUs"):

•

ASU 2016-09, Compensation - Stock Compensation (Topic 718). This new guidance simplifies certain aspects related to income taxes, the Statement of Cash Flows, and forfeitures when accounting for share-based payment transactions. ASU 2016-09 eliminates the requirement to recognize excess tax benefits in Accumulated Paid In Capital pools, and instead requires companies to record all excess tax benefits and deficiencies at settlement, vesting or expiration in the income statement as provision for income taxes. At adoption of ASU 2016-09 on January 1, 2017, the cumulative-effect for previously unrecognized excess tax benefits totaled $27.1 million net of tax, and was recognized through an increase of $14.8 million to beginning retained earnings and $37.4 million to NCI, offset by a decrease of $26.5 million to common stock and paid in capital. The Company recorded excess tax benefits, net of tax of $194 thousand and $241 thousand in the provision for income taxes rather than as an increase to additional paid-in capital for the three-month and nine-month periods ended September 30, 2017, on a prospective basis. Therefore, the prior period presented has not been adjusted. All excess tax benefits along with other income tax cash flows will now be classified as an operating activity rather than financing activities in the Statement of Cash Flows on a prospective basis. In addition, the Company voluntarily changed its accounting policy on forfeitures from previously recognizing forfeitures based on estimating the number of awards expected to be forfeited to electing to recognize forfeiture of awards as they occur to simplify the accounting for forfeitures. This resulted in a cumulative adjustment, as a decrease to beginning retained earnings of $1.4 million.

•

In January 2017, the FASB also issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. It removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The new rules provide that a goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. The same one-step impairment test will be applied to goodwill at all reporting units. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for impairment tests performed after January 1, 2017. The Company adopted this ASU as of October 1, 2017.

The adoption of the following ASUs did not have an impact on the Company's financial position or results of operations.


•	ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.


•	ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.


•	ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323).


•	ASU 2016-17, Consolidation (Topic 810), Interest Held Through Related Parties That Are Under Common Control.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO 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). This ASU, as amended, 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 606. The amended standard will be effective for the Company for the first annual period beginning after December 15, 2017. It should be applied retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption.

Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), the Company does not expect the new guidance to have a material impact on the elements of its Consolidated Statements of Operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains and losses). In addition to potential timing differences for revenue recognition under the new standard, SHUSA is evaluating the standard’s guidance for assessment of gross versus net reporting of revenues and expenses related to certain arrangements such as security underwriting. The Company is also in the process of developing additional quantitative and qualitative disclosures that are required upon the adoption of the new revenue recognition standard. The Company expects to adopt this ASU in the first quarter of 2018 using a modified retrospective approach with a cumulative-effect adjustment to opening retained earnings. The Company does not expect the adjustment to be material.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance, as amended, 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 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 similarly 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. The Company currently recognizes assets and liabilities for all of its vehicle lease transactions. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. The Company does not intend to early adopt this ASU. Adoption of this amendment must be applied on a modified retrospective approach. The Company is in the process of reviewing our existing property and equipment lease contracts, as well as service contracts that may include embedded leases. Upon adoption, the Company expects to report higher assets and liabilities from recording the present value of the future minimum lease payments of the leases.

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 OTTI 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 this new guidance can be applied only on a prospective basis as a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of the new guidance on its Consolidated Financial Statements. It is expected that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset, and will consider expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Company’s allowance for credit losses (“ACL”), which will depend upon the nature and characteristics of the Company's portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. The Company currently does not intend to early adopt this new guidance.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

In addition to those described in detail above, the Company is also in the process of evaluating the following ASUs and does not expect them to have a material impact on the Company's financial position, results of operations, or disclosures:


•	ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.


•	ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments


•	ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory


•	ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (A consensus of the FASB Emerging Issues Task Force)


•	ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business


•	ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets


•


•	ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost


•	ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities


•	ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting

•

ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception


•	ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

NOTE 3. INVESTMENT SECURITIES

Investment Securities Summary - Available-for-sale and Held-to-Maturity

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, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury securities	$	1,669,963	$	524	$	(2,380	)	$	1,668,107
Corporate debt securities	43,798		97		—			43,895
Asset-backed securities (“ABS”)	524,503		12,315		(985		)	535,833
Equity securities	11,364		1		(538		)	10,827
State and municipal securities	25		—		—			25
Mortgage-backed securities (“MBS”):
U.S. government agencies - Residential	5,243,543		7,268		(44,468		)	5,206,343
U.S. government agencies - Commercial	1,375,787		1,888		(9,440		)	1,368,235
Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association ("FNMA") - Residential debt securities	8,482,935		11,540		(117,466		)	8,377,009
FHLMC and FNMA - Commercial debt securities	23,163		—		(392		)	22,771
Non-agency securities	1		—		—			1
Total investment securities AFS	$	17,375,082	$	33,633	$	(175,669	)	$	17,233,046

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. INVESTMENT SECURITIES (continued)



	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury securities	$	1,857,357	$	1,826	$	(2,326	)	$	1,856,857
ABS	1,196,702		16,410		(2,388		)	1,210,724
Equity securities	11,716		—		(565		)	11,151
State and municipal securities	30		—		—			30
MBS:
U.S. government agencies - Residential	5,424,412		3,253		(64,537		)	5,363,128
U.S. government agencies - Commercial	948,696		1,998		(8,196		)	942,498
FHLMC and FNMA - Residential debt securities	7,765,003		6,712		(154,858		)	7,616,857
FHLMC and FNMA - Commercial debt securities	23,636		—		(670		)	22,966
Non-agency securities	14		—		—			14
Total investment securities AFS	$	17,227,566	$	30,199	$	(233,540	)	$	17,024,225

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of securities held-to-maturity at the dates indicated:



	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
MBS:
U.S. government agencies - Residential	$	1,509,428	$	2,207	$	(21,100	)	$	1,490,535
U.S. government agencies - Commercial	51,422		136		—			51,558
Total investment securities held-to-maturity	$	1,560,850	$	2,343	$	(21,100	)	$	1,542,093



	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
MBS:
U.S. government agencies - Residential	$	1,658,644	$	2,195	$	(25,426	)	$	1,635,413
Total investment securities held-to-maturity	$	1,658,644	$	2,195	$	(25,426	)	$	1,635,413

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

As of September 30, 2017 and December 31, 2016, the Company had investment securities available-for-sale with an estimated fair value of $6.5 billion and $7.2 billion, respectively, pledged as collateral, which was comprised of the following: $3.0 billion and $3.2 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the Federal Reserve Bank ("FRB"); $2.3 billion and $3.0 billion, respectively, were pledged to secure public fund deposits; $119.6 million and $109.7 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $623.8 million and $622.0 million, respectively, were pledged to deposits with clearing organizations; and $422.1 million and $271.2 million, respectively, were pledged to secure the Company's customer overnight sweep product.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. INVESTMENT SECURITIES (continued)

At September 30, 2017 and December 31, 2016, the Company had $48.1 million and $44.8 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.

Contractual Maturity of Debt Securities

Contractual maturities of the Company’s debt securities available-for-sale at September 30, 2017 were as follows:



	Amortized Cost		Fair Value
	(in thousands)
Due within one year	$	875,069	$	875,216
Due after 1 year but within 5 years	1,221,182		1,231,546
Due after 5 years but within 10 years	210,785		210,395
Due after 10 years	15,056,682		14,905,062
Total	$	17,363,718	$	17,222,219

Contractual maturities of the Company’s debt securities held-to-maturity at September 30, 2017 were as follows:



	Amortized Cost		Fair Value
	(in thousands)
Due after 10 years	$	1,560,850	$	1,542,093
Total	$	1,560,850	$	1,542,093

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 and Held-to-maturity

The following tables present the aggregate amount of unrealized losses as of September 30, 2017 and December 31, 2016 on securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:



	September 30, 2017
	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	$	1,028,957	$	(2,380	)	$	—	$	—		$	1,028,957	$	(2,380	)
ABS	28,047		(280		)	99,474		(705		)	127,521		(985		)
Equity securities	666		(11		)	9,981		(527		)	10,647		(538		)
MBS:
U.S. government agencies - Residential	2,706,703		(34,342		)	887,686		(10,126		)	3,594,389		(44,468		)
U.S. government agencies - Commercial	905,790		(5,797		)	77,367		(3,643		)	983,157		(9,440		)
FHLMC and FNMA - Residential debt securities	4,382,804		(54,005		)	1,587,768		(63,461		)	5,970,572		(117,466		)
FHLMC and FNMA - Commercial debt securities	22,316		(382		)	455		(10		)	22,771		(392		)
Total investment securities AFS	$	9,075,283	$	(97,197	)	$	2,662,731	$	(78,472	)	$	11,738,014	$	(175,669	)

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. INVESTMENT SECURITIES (continued)



	December 31, 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	$	1,016,654	$	(2,326	)	$	—	$	—		$	1,016,654	$	(2,326	)
ABS	76,552		(1,021		)	111,758		(1,367		)	188,310		(2,388		)
Equity securities	770		(16		)	9,800		(549		)	10,570		(565		)
MBS:
U.S. government agencies - Residential	3,831,354		(46,846		)	1,027,609		(17,691		)	4,858,963		(64,537		)
U.S. government agencies - Commercial	532,334		(4,451		)	98,918		(3,745		)	631,252		(8,196		)
FHLMC and FNMA - Residential debt securities	4,740,824		(58,514		)	1,981,886		(96,344		)	6,722,710		(154,858		)
FHLMC and FNMA - Commercial debt securities	22,504		(659		)	462		(11		)	22,966		(670		)
Total investment securities AFS	$	10,220,992	$	(113,833	)	$	3,230,433	$	(119,707	)	$	13,451,425	$	(233,540	)

The following tables present the aggregate amount of unrealized losses as of September 30, 2017 and December 31, 2016 on securities in the Company’s held-to-maturity investment portfolios classified according to the amount of time those securities have been in a continuous loss position:



	September 30, 2017
	Less than 12 months					12 months or longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
MBS:
U.S. government agencies - Residential	$	1,198,222	$	(21,100	)	$	—	$	—	$	1,198,222	$	(21,100	)
Total investment securities held-to-maturity	$	1,198,222	$	(21,100	)	$	—	$	—	$	1,198,222	$	(21,100	)



	December 31, 2016
	Less than 12 months					12 months or longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
MBS:
U.S. government agencies - Residential	$	1,311,390	$	(25,426	)	$	—	$	—	$	1,311,390	$	(25,426	)
Total investment securities held-to-maturity	$	1,311,390	$	(25,426	)	$	—	$	—	$	1,311,390	$	(25,426	)

OTTI

Management evaluates all investment securities in an unrealized loss position for OTTI on a quarterly basis. 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. INVESTMENT SECURITIES (continued)

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 for the three-month and nine-month periods ended September 30, 2017 and recognized $0 thousand and $44 thousand OTTI for the three-month and nine-month periods ended September 30, 2016, respectively.

Management has concluded that the unrealized losses on its debt and equity securities for which it has not recognized OTTI (which were comprised of 520 individual securities at September 30, 2017) are temporary in nature since (1) they reflect the increase in interest rates which lowers the current fair value of the securities, (2) they are not related to the underlying credit quality of the issuers, (3) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (4) the Company does not intend to sell these investments at a loss and (5) 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.

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,
	2017		2016		2017		2016
	(in thousands)				(in thousands)
Proceeds from the sales of AFS securities	$	566,286	$	—	$	1,872,411	$	6,755,298

Gross realized gains	$	7,123	$	—	$	18,247	$	60,328
Gross realized losses	—		—		—		(2,558		)
OTTI	—		—		—		(44		)
Net realized gains ⁽¹⁾	$	7,123	$	—	$	18,247	$	57,726

(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 $7.1 million and $18.2 million for the three-month and nine-month periods ended September 30, 2017, in net gains on the sale of AFS investment securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the three-month period ended September 30, 2017 was primarily comprised of the sale of MBS's, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a book value of $558.6 million for a gain of $7.0 million. The net gain realized for the nine-month period ended September 30, 2017 was primarily comprised of the sale of U.S. Treasury securities with a book value of $739.4 million for a gain of $1.8 million, and the sale of MBS's, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a book value of $1.1 billion for a gain of $16.3 million.

The Company recognized $57.7 million for the nine-month period ended September 30, 2016, in net gains on the sale of AFS 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 state and municipal securities with a book value of $748.0 million for a gain of $19.9 million, the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, corporate debt securities sold with a book value of $1.4 billion for a gain of $5.9 million, and 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. INVESTMENT SECURITIES (continued)

Trading Securities

The Company held $9.1 million of trading securities as of September 30, 2017, compared to $1.6 million held at December 31, 2016. Gains and losses on trading securities are recorded within Net gains/(losses) on sale of investment securities on the Company's Condensed Consolidated Statement of Operations.

Other Investments

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB with aggregate carrying amounts of $630.2 million and $680.5 million as of September 30, 2017 and December 31, 2016, respectively. These 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 FHLB stock can be sold back only to the FHLB or to another member institution. Accordingly, these stocks are carried at cost. During the three-month and nine-month periods ended September 30, 2017, the Company purchased $65.9 million and $154.8 million of FHLB stock at par, respectively, and redeemed $88.4 million and $205.4 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the three-month and nine-month periods ended September 30, 2017, the Company did not purchase any FRB stock. Other investments also include $78.1 million and $50.4 million of low-income housing tax credit ("LIHTC") investments as of September 30, 2017 and December 31, 2016, 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.

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 $50.8 billion at September 30, 2017 and $53.5 billion at December 31, 2016.

Loans that the Company intends to sell are classified as loans-held-for-sale (“LHFS”). The LHFS portfolio balance at September 30, 2017 was $2.0 billion, compared to $2.6 billion at December 31, 2016. LHFS in the residential mortgage portfolio are either reported at fair value or 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 through the provision for credit losses to value the portfolio at the lower of cost or market. Upon transferring the loans to LHFS at fair value, the adjusted ACL was released as a charge-off. Loan originations and purchases under SC’s personal lending platform during 2016 have been classified as held for sale and subsequent adjustments to lower of cost or market are recorded through Miscellaneous Income (Expense), net on the Condensed Consolidated Statements of Operations. As of September 30, 2017, the carrying value of the personal unsecured held-for-sale portfolio was $929.5 million.

Interest on loans is credited to income as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized as adjustments to interest income in the Condensed Consolidated Statements of Operations over the contractual life of the loan utilizing the interest method using estimated prepayment speeds, which are updated on a quarterly basis. At September 30, 2017 and December 31, 2016, accrued interest receivable on the Company's loans was $507.3 million and $554.5 million, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial LHFI:
Commercial real estate loans	$	9,690,850	11.9	%	$	10,112,043	11.8	%
Commercial and industrial loans	15,196,539		18.6	%	18,812,002		21.9	%
Multifamily loans	8,293,232		10.2	%	8,683,680		10.1	%
Other commercial⁽²⁾	6,876,521		8.4	%	6,832,403		8.0	%
Total commercial LHFI	40,057,142		49.1	%	44,440,128		51.8	%
Consumer loans secured by real estate:
Residential mortgages	8,476,935		10.4	%	7,775,272		9.1	%
Home equity loans and lines of credit	5,855,086		7.2	%	6,001,192		7.0	%
Total consumer loans secured by real estate	14,332,021		17.6	%	13,776,464		16.1	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	23,074,936		28.3	%	22,104,918		25.8	%
RICs and auto loans - purchased	2,162,540		2.7	%	3,468,803		4.0	%
Personal unsecured loans	1,262,591		1.5	%	1,234,094		1.4	%
Other consumer⁽³⁾	659,469		0.8	%	795,378		0.9	%
Total consumer loans	41,491,557		50.9	%	41,379,657		48.2	%
Total LHFI⁽¹⁾	$	81,548,699	100.0	%	$	85,819,785	100.0	%
Total LHFI:
Fixed rate	$	49,274,614	60.4	%	$	51,752,761	60.3	%
Variable rate	32,274,085		39.6	%	34,067,024		39.7	%
Total LHFI⁽¹⁾	$	81,548,699	100.0	%	$	85,819,785	100.0	%

(1)Total LHFI 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 $1.2 billion and $845.8 million as of September 30, 2017 and December 31, 2016, respectively.

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

(3)Other consumer primarily includes recreational vehicle ("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 CEVF business.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 allowance for loan and lease losses (“ALLL”) and other credit quality disclosures at September 30, 2017 and December 31, 2016, respectively:



Commercial Portfolio Segment⁽²⁾
Major Loan Classifications⁽¹⁾	September 30, 2017		December 31, 2016
	(in thousands)
Commercial LHFI:
Commercial real estate:
Corporate Banking	$	3,467,935	$	3,693,109
Middle Market Real Estate	5,188,460		5,180,572
Santander Real Estate Capital	1,034,455		1,238,362
Total commercial real estate	9,690,850		10,112,043
Commercial and industrial ⁽³⁾	15,196,539		18,812,002
Multifamily	8,293,232		8,683,680
Other commercial	6,876,521		6,832,403
Total commercial LHFI	$	40,057,142	$	44,440,128


(1)	These represent the Company's loan categories based on 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 $83.3 million of LHFS at September 30, 2017 and excluded $121.1 million of LHFS at December 31, 2016.

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 RV and marine 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 unaccreted discount balance that is expected at the time of charge-off, while it considers the entire unaccreted discount for loan portfolios purchased at a discount as available to absorb the credit losses when determining the ACL specific to these portfolios. 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, 2017		December 31, 2016
	(in thousands)
Consumer loans secured by real estate:
Residential mortgages⁽³⁾	$	8,476,935	$	7,775,272
Home equity loans and lines of credit	5,855,086		6,001,192
Total consumer loans secured by real estate	14,332,021		13,776,464
Consumer loans not secured by real estate:
RICs and auto loans - originated ⁽⁴⁾	23,074,936		22,104,918
RICs and auto loans - purchased ⁽⁴⁾	2,162,540		3,468,803
Personal unsecured loans⁽⁵⁾	1,262,591		1,234,094
Other consumer	659,469		795,378
Total consumer LHFI	$	41,491,557	$	41,379,657


(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 $212.6 million and $462.9 million of LHFS at September 30, 2017 and December 31, 2016, respectively.


(4)	RIC and auto loans exclude $762.6 million and $924.7 million of LHFS at September 30, 2017 and December 31, 2016, respectively.


(5)	Personal unsecured loans exclude $929.5 million and $1.1 billion of LHFS at September 30, 2017 and December 31, 2016, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017			December 31, 2016
	(in thousands)
RICs - Purchased:
Unpaid principal balance ("UPB") ⁽¹⁾	$	2,289,692		$	3,765,714
UPB - FVO ⁽²⁾	31,003			29,481
Total UPB	2,320,695			3,795,195
Purchase marks ⁽³⁾	(158,155		)	(326,392		)
Total RICs - Purchased	2,162,540			3,468,803

RICs - Originated:
UPB ⁽¹⁾	23,391,153			22,527,753
Net discount	(335,015		)	(441,131		)
Total RICs - Originated	23,056,138			22,086,622
SBNA auto loans	18,798			18,296
Total RICs - originated post change in control	23,074,936			22,104,918
Total RICs and auto loans	$	25,237,476		$	25,573,721

(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 $6.8 million and $6.7 million related to purchase loan portfolios on which we elected to apply the FVO at September 30, 2017 and December 31, 2016, respectively.

During the nine months ended September 30, 2017 and 2016, the Company originated $5.2 billion and $6.5 billion, respectively, in Chrysler Capital loans, which represented 46% and 51%, respectively, of the total RIC originations. As of September 30, 2017 and December 31, 2016, the Company's auto RIC portfolio consisted of $6.9 billion and $7.4 billion, respectively, of Chrysler loans, which represented 31% and 32%, respectively, of the Company's auto RIC portfolio.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017 and 2016 was as follows:



	Three-Month Period Ended September 30, 2017
	Commercial			Consumer			Unallocated		Total
	(in thousands)
ALLL, beginning of period	$	428,247		$	3,478,337		$	47,023	$	3,953,607
Provision for loan and lease losses	17,129			630,048			—		647,177
Other⁽¹⁾	356			5,283			—		5,639
Charge-offs	(30,576		)	(1,224,296		)	—		(1,254,872		)
Recoveries	9,635			594,959			—		604,594
Charge-offs, net of recoveries	(20,941		)	(629,337		)	—		(650,278		)
ALLL, end of period	$	424,791		$	3,484,331		$	47,023	$	3,956,145

Reserve for unfunded lending commitments, beginning of period	$	111,015		$	796		$	—	$	111,811
Release of reserve for unfunded lending commitments	5,241			(298		)	—		4,943
Loss on unfunded lending commitments	(668		)	—			—		(668		)
Reserve for unfunded lending commitments, end of period	115,588			498			—		116,086
Total ACL, end of period	$	540,379		$	3,484,829		$	47,023	$	4,072,231

	Nine-Month Period Ended September 30, 2017
	Commercial			Consumer			Unallocated		Total
	(in thousands)
ALLL, beginning of period	$	449,835		$	3,317,606		$	47,023	$	3,814,464
Provision for loan and lease losses	62,597			1,933,602			—		1,996,199
Other⁽¹⁾	356			5,283			—		5,639
Charge-offs	(117,263		)	(3,590,495		)	—		(3,707,758		)
Recoveries	29,266			1,818,335			—		1,847,601
Charge-offs, net of recoveries	(87,997		)	(1,772,160		)	—		(1,860,157		)
ALLL, end of period	$	424,791		$	3,484,331		$	47,023	$	3,956,145
Reserve for unfunded lending commitments, beginning of period	$	121,613		$	806		$	—	$	122,419
Release of reserve for unfunded lending commitments	(3,557		)	(308		)	—		(3,865		)
Loss on unfunded lending commitments	(2,468		)	—			—		(2,468		)
Reserve for unfunded lending commitments, end of period	115,588			498			—		116,086
Total ACL, end of period	$	540,379		$	3,484,829		$	47,023	$	4,072,231
Ending balance, individually evaluated for impairment⁽²⁾	$	60,492		$	1,765,790		$	—	$	1,826,282
Ending balance, collectively evaluated for impairment	364,299			1,718,541			47,023		2,129,863

Financing receivables:
Ending balance	$	40,140,421		$	43,396,375		$	—	$	83,536,796
Ending balance, evaluated under the FVO or lower of cost or fair value	83,279			1,959,926			—		2,043,205
Ending balance, individually evaluated for impairment⁽¹⁾	514,846			6,650,254			—		7,165,100
Ending balance, collectively evaluated for impairment	39,542,296			34,786,195			—		74,328,491

(1) Includes transfers in for the period ending September 30, 2017.

(2) Consists of loans in TDR status.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	Three-Month Period Ended September 30, 2016
	Commercial			Consumer			Unallocated		Total
	(in thousands)
ALLL, beginning of period	$	528,858		$	3,189,784		$	47,245	$	3,765,887
(Release of) / Provision for loan and lease 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		)
ALLL, 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
(Release of) / 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 ACL, 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)
ALLL, 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		)
ALLL, 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 / (Release of) 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 ACL, 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⁽¹⁾	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

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

The following table presents the activity in the allowance for loan losses for the RICs acquired 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, 2017									September 30, 2017
	Purchased			Originated			Total			Purchased			Originated			Total
	(in thousands)
ALLL, beginning of period	$	468,671		$	2,792,666		$	3,261,337		$	559,092		$	2,538,127		$	3,097,219
Provision for loan and lease losses	47,106			523,832			570,938			128,372			1,686,611			1,814,983
Charge-offs	(142,561		)	(1,043,732		)	(1,186,293		)	(481,389		)	(2,991,112		)	(3,472,501		)
Recoveries	52,406			535,677			588,083			219,547			1,574,817			1,794,364
Charge-offs, net of recoveries	(90,155		)	(508,055		)	(598,210		)	(261,842		)	(1,416,295		)	(1,678,137		)
ALLL, end of period	$	425,622		$	2,808,443		$	3,234,065		$	425,622		$	2,808,443		$	3,234,065



	Three-Month Period Ended									Nine-Month Period Ended
	September 30, 2016									September 30, 2016
	Purchased			Originated			Total			Purchased			Originated			Total
	(in thousands)
ALLL, beginning of period	$	615,623		$	2,342,440		$	2,958,063		$	590,807		$	1,891,989		$	2,482,796
Provision for 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		)
ALLL, end of period	$	593,040		$	2,419,550		$	3,012,590		$	593,040		$	2,419,550		$	3,012,590

Refer to Note 14 for discussion of contingencies and possible losses related to the impact of hurricane activity in regions where the Company has lending activities.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017		December 31, 2016
	(in thousands)
Non-accrual loans:
Commercial:
Commercial real estate:
Corporate banking	$	88,459	$	104,879
Middle market commercial real estate	57,536		71,264
Santander real estate capital	921		3,077
Commercial and industrial	184,089		182,368
Multifamily	10,715		8,196
Other commercial	20,767		11,097
Total commercial loans	362,487		380,881
Consumer:
Residential mortgages	284,415		287,140
Home equity loans and lines of credit	116,482		120,065
RICs and auto loans - originated	1,553,954		1,045,587
RICs - purchased	274,374		284,486
Personal unsecured loans	5,412		5,201
Other consumer	10,393		12,694
Total consumer loans	2,245,030		1,755,173
Total non-accrual loans	2,607,517		2,136,054

Other real estate owned ("OREO")	146,362		116,705
Repossessed vehicles	157,757		173,754
Foreclosed and other repossessed assets	1,711		3,838
Total OREO and other repossessed assets	305,830		294,297
Total non-performing assets	$	2,913,347	$	2,430,351

Age Analysis of Past Due Loans

For reporting of past due loans, a payment of 90% or more of the amount due is considered to meet the contractual requirements. For certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90% of the scheduled payment, regardless of which origination channel the receivable was originated through. 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

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, 2017
		30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Financing Receivables⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking		$	21,114	$	49,274	$	70,388	$	3,397,547	$	3,467,935	$	—
Middle market commercial real estate		67,854		33,344		101,198		5,087,262		5,188,460		—
Santander real estate capital		—		525		525		1,033,930		1,034,455		—
Commercial and industrial		80,116		52,117		132,233		15,147,585		15,279,818		—
Multifamily		59		1,837		1,896		8,291,336		8,293,232		—
Other commercial		72,944		4,614		77,558		6,798,963		6,876,521		10
Consumer:
Residential mortgages		282,297		217,899		500,196		8,189,377		8,689,573		—
Home equity loans and lines of credit		41,210		77,589		118,799		5,736,287		5,855,086		—
RICs and auto loans - originated		3,381,392		331,033		3,712,425		20,125,142		23,837,567		—
RICs and auto loans - purchased		551,123		51,261		602,384		1,560,156		2,162,540		—
Personal unsecured loans		104,796		107,060		211,856		1,980,284		2,192,140		96,246
Other consumer		14,978		15,774		30,752		628,717		659,469		—
Total		$	4,617,883	$	942,327	$	5,560,210	$	77,976,586	$	83,536,796	$	96,256


(1)	Financing receivables include LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	As of
		December 31, 2016
		30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Financing Receivable⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking		$	14,973	$	40,170	$	55,143	$	3,637,966	$	3,693,109	$	—
Middle market commercial real estate		6,967		57,520		64,487		5,116,085		5,180,572		—
Santander real estate capital		177		—		177		1,238,185		1,238,362		—
Commercial and industrial		46,104		33,800		79,904		18,853,163		18,933,067		—
Multifamily		7,133		2,339		9,472		8,674,208		8,683,680		—
Other commercial		45,379		2,590		47,969		6,784,434		6,832,403		1
Consumer:
Residential mortgages		230,850		224,790		455,640		7,782,525		8,238,165		—
Home equity loans and lines of credit		37,209		75,668		112,877		5,888,315		6,001,192		—
RICs and auto loans - originated		3,092,841		296,085		3,388,926		19,640,740		23,029,666		—
RICs and auto loans - purchased		800,993		71,273		872,266		2,596,537		3,468,803		—
Personal unsecured loans		89,524		103,698		193,222		2,118,474		2,311,696		93,845
Other consumer		31,980		20,386		52,366		743,012		795,378		—
Total		$	4,404,130	$	928,319	$	5,332,449	$	83,073,644	$	88,406,093	$	93,846


(1)	Financing receivables include LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017
	Recorded Investment⁽¹⁾		UPB		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	$	90,335	$	118,315	$	—	$	89,675
Middle market commercial real estate	49,207		72,294		—		54,647
Santander real estate capital	—		—		—		1,309
Commercial and industrial	86,831		90,543		—		77,483
Multifamily	8,980		9,939		—		9,675
Other commercial	884		1,029		—		961
Consumer:
Residential mortgages	172,400		222,662		—		173,735
Home equity loans and lines of credit	42,483		42,483		—		45,678
RICs and auto loans - originated	—		—		—		—
RICs and auto loans - purchased	19,395		24,883		—		26,884
Personal unsecured loans⁽²⁾	30,459		30,459		—		28,234
Other consumer	10,335		14,183		—		14,835
With an allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	61,629		73,893		15,488		71,035
Middle market commercial real estate	26,179		32,368		6,090		38,225
Santander real estate capital	8,405		8,405		1,135		8,498
Commercial and industrial	144,503		175,042		35,138		180,541
Multifamily	6,242		6,242		354		4,586
Other commercial	15,717		15,783		2,287		11,468
Consumer:
Residential mortgages	292,426		334,044		41,218		288,528
Home equity loans and lines of credit	49,808		62,042		1,704		49,835
RICs and auto loans - originated	4,679,505		4,742,581		1,334,552		3,975,411
RICs and auto loans - purchased	1,324,976		1,497,436		379,300		1,590,462
Personal unsecured loans	16,710		16,904		6,835		16,784
Other consumer	11,758		15,640		2,181		12,426
Total:
Commercial	$	498,912	$	603,853	$	60,492	$	548,103
Consumer	6,650,255		7,003,317		1,765,790		6,222,812
Total	$	7,149,167	$	7,607,170	$	1,826,282	$	6,770,915


(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

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

The Company recognized interest income, not including the impact of purchase accounting adjustments, of $633.3 million for the nine-month period ended September 30, 2017 on approximately $6.0 billion of TDRs that were in performing status as of September 30, 2017.



	December 31, 2016
	Recorded Investment⁽¹⁾		UPB		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	$	89,014	$	106,212	$	—	$	93,495
Middle market commercial real estate	60,086		83,173		—		69,206
Santander real estate capital	2,618		2,618		—		2,717
Commercial and industrial	68,135		74,034		—		40,163
Multifamily	10,370		11,127		—		9,919
Other commercial	1,038		1,038		—		639
Consumer:
Residential mortgages	175,070		222,142		—		160,373
Home equity loans and lines of credit	48,872		48,872		—		39,976
RICs and auto loans - originated	—		—		—		8
RICs and auto loans - purchased	34,373		44,296		—		55,036
Personal unsecured loans⁽²⁾	26,008		26,008		—		19,437
Other consumer	19,335		23,864		—		15,915
With an allowance recorded:
Commercial:
Corporate banking	80,440		85,309		21,202		71,667
Middle market commercial real estate	50,270		66,059		12,575		44,158
Santander real estate capital	8,591		8,591		890		4,623
Commercial and industrial	216,578		232,204		57,855		166,999
Multifamily	2,930		2,930		876		4,292
Other commercial	7,218		7,218		5,198		5,217
Consumer:
Residential mortgages	284,630		324,188		38,764		303,845
Home equity loans and lines of credit	49,862		63,775		3,467		60,855
RICs and auto loans - originated	3,271,316		3,332,297		997,169		2,298,646
RICs and auto loans - purchased	1,855,948		2,097,520		471,687		2,155,028
Personal unsecured loans	16,858		17,126		6,846		9,349
Other consumer	13,093		17,253		2,442		15,878
Total:
Commercial	$	597,288	$	680,513	$	98,596	$	513,095
Consumer	5,795,365		6,217,341		1,520,375		5,134,346
Total	$	6,392,653	$	6,897,854	$	1,618,971	$	5,647,441


(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.

The Company recognized interest income of $657.5 million for the year ended December 31, 2016 on approximately $5.2 billion of TDRs that were in performing status as of December 31, 2016.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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:




September 30, 2017	Corporate banking		Middle market commercial real estate		Santander real estate capital		Commercial and industrial		Multifamily		Remaining commercial		Total⁽¹⁾
	(in thousands)
Rating:
Pass	$	2,893,695	$	4,814,655	$	997,914	$	14,183,443	$	8,162,600	$	6,747,806	$	37,800,113
Special mention	361,652		234,793		18,173		553,863		82,209		39,160		1,289,850
Substandard	199,883		115,409		18,368		490,616		48,423		89,555		962,254
Doubtful	12,705		23,603		—		51,896		—		—		88,204
Total commercial loans	$	3,467,935	$	5,188,460	$	1,034,455	$	15,279,818	$	8,293,232	$	6,876,521	$	40,140,421


(1)	Financing receivables include LHFS.




December 31, 2016	Corporate banking		Middle market commercial real estate		Santander real estate capital		Commercial and industrial		Multifamily		Remaining commercial		Total⁽¹⁾
	(in thousands)
Rating:
Pass	$	3,303,428	$	4,843,468	$	1,170,259	$	17,865,871	$	8,515,866	$	6,804,184	$	42,503,076
Special mention	144,125		136,989		44,281		541,828		120,731		10,651		998,605
Substandard	226,206		161,962		23,822		503,185		47,083		11,932		974,190
Doubtful	19,350		38,153		—		22,183		—		5,636		85,322
Total commercial loans	$	3,693,109	$	5,180,572	$	1,238,362	$	18,933,067	$	8,683,680	$	6,832,403	$	44,561,193


(1)	Financing receivables include LHFS.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Consumer Lending Asset Quality Indicators-Credit Score

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, 2017				December 31, 2016
Credit Score Range⁽²⁾	RICs and auto loans⁽³⁾		Percent		RICs and auto loans⁽³⁾		Percent
	(dollars in thousands)
No FICO^®(1)	$	4,312,044	16.5	%	$	4,154,228	15.7	%
<600	13,819,835		53.2	%	14,100,215		53.2	%
600-639	4,413,269		17.0	%	4,597,541		17.4	%
>=640	3,454,959		13.3	%	3,646,485		13.7	%
Total	$	26,000,107	100.0	%	$	26,498,469	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 $762.6 million and $924.7 million of LHFS at September 30, 2017 and December 31, 2016 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.

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



	Residential Mortgages⁽¹⁾⁽³⁾
September 30, 2017	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⁾	$	332,686	$	10,295	$	1,220	$	—	$	—	$	—	$	—	$	344,201
<600	27		223,552		64,225		53,315		29,774		4,664		24,310		399,867
600-639	39		153,329		47,086		37,683		35,296		2,361		5,797		281,591
640-679	102		288,451		104,426		87,570		93,608		4,322		11,046		589,525
680-719	53		521,023		235,751		138,110		152,743		4,896		10,144		1,062,720
720-759	95		895,781		468,835		177,903		173,269		6,896		12,500		1,735,279
>=760	552		2,686,523		1,099,436		270,981		192,950		8,726		17,222		4,276,390
Grand Total	$	333,554	$	4,778,954	$	2,020,979	$	765,562	$	677,640	$	31,865	$	81,019	$	8,689,573

(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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	Home Equity Loans and Lines of Credit⁽²⁾
September 30, 2017	N/A⁽¹⁾		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A⁽¹⁾	$	153,230	$	620	$	564	$	—	$	—	$	154,414
<600	8,561		166,488		64,193		13,307		10,019		262,568
600-639	5,960		143,081		70,451		10,181		10,789		240,462
640-679	7,960		265,434		145,426		22,790		13,371		454,981
680-719	8,035		452,532		281,087		32,697		18,979		793,330
720-759	7,699		654,371		389,602		43,180		22,235		1,117,087
>=760	18,516		1,758,747		923,209		84,817		46,955		2,832,244
Grand Total	$	209,961	$	3,441,273	$	1,874,532	$	206,972	$	122,348	$	5,855,086

(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, 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⁾	$	696,730	$	102,911	$	4,635	$	2,327	$	196	$	150	$	—	$	806,949
<600	80		228,794		70,793		49,253		30,720		6,622		5,885		392,147
600-639	147		152,728		48,006		42,443		42,356		4,538		6,675		296,893
640-679	98		283,054		101,495		81,669		93,552		5,287		4,189		569,344
680-719	112		487,257		193,351		136,937		146,090		6,766		11,795		982,308
720-759	56		767,192		348,524		163,163		178,264		8,473		16,504		1,482,176
>=760	495		2,415,542		860,582		219,014		180,841		11,134		20,740		3,708,348
Grand Total	$	697,718	$	4,437,478	$	1,627,386	$	694,806	$	672,019	$	42,970	$	65,788	$	8,238,165

(1) Includes LHFS.

(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.



	Home Equity Loans and Lines of Credit⁽²⁾
December 31, 2016	N/A⁽¹⁾		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A⁽¹⁾	$	172,836	$	530	$	157	$	—	$	—	$	173,523
<600	10,198		166,702		64,446		14,474		12,684		268,504
600-639	7,323		143,666		68,415		16,680		8,873		244,957
640-679	10,225		278,913		139,940		27,823		14,127		471,028
680-719	11,507		461,285		271,264		39,668		25,158		808,882
720-759	12,640		662,217		383,186		45,496		28,608		1,132,147
>=760	25,425		1,814,060		919,295		94,522		48,849		2,902,151
Grand Total	$	250,154	$	3,527,373	$	1,846,703	$	238,663	$	138,299	$	6,001,192

(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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

TDR Loans

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



	September 30, 2017		December 31, 2016
	(in thousands)
Performing	$	5,959,537	$	5,169,788
Non-performing	941,936		937,127
Total	$	6,901,473	$	6,106,915

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.

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. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. 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 of the collateral, less costs to sell and classified as non-accrual/non-performing loans for the remaining life of the loan.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

TDR Impact to ALLL

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, by discounting expected future cash flows 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

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, 2017 and September 30, 2016, respectively:



	Three-Month Period Ended September 30, 2017
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Capitalized⁽⁴⁾		Rate Reduction		Principal Forbearance			Fee Waiver			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	18	$	4,632	$	—		$	—	$	—	$	(2	)	$	—		$	(125	)	$	4,505
Commercial and industrial	252	3,079		(3		)	—		—		—			—			(31		)	3,045
Consumer:
Residential mortgages⁽³⁾	38	7,750		—			357		—		—			—			(769		)	7,338
Home equity loans and lines of credit	9	995		—			—		—		—			—			(29		)	966
RICs and auto loans - originated	67,044	1,166,434		(1,228		)	—		—		—			—			65			1,165,271
RICs - purchased	19	1,057		4			—		—		—			—			2			1,063
Personal unsecured loans	3,109	5,330		—			—		—		—			—			(106		)	5,224
Other consumer	35	581		—			1		—		—			—			(1		)	581
Total	70,524	$	1,189,858	$	(1,227	)	$	358	$	—	$	(2	)	$	—		$	(994	)	$	1,187,993

	Nine-Month Period Ended September 30, 2017
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Capitalized⁽⁴⁾		Rate Reduction		Principal Forbearance			Fee Waiver			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	72	$	143,976	$	(13,676	)	$	—	$	127	$	(13,483	)	$	(38	)	$	(416	)	$	116,490
Middle market commercial real estate	1	19,979		(595		)	—		—		—			—			—			19,384
Commercial and industrial	639	15,486		(10		)	—		—		—			—			(35		)	15,441
Consumer:
Residential mortgages⁽³⁾	187	36,724		6			698		133		—			—			(1,310		)	36,251
Home equity loans and lines of credit	45	3,838		—			—		—		—			—			509			4,347
RICs and auto loans - originated	163,797	2,870,605		(2,949		)	—		—		—			—			(82		)	2,867,574
RICs - purchased	98	1,447		(2		)					—						—			1,445
Personal unsecured loans	10,999	18,470		—			—		—		—			—			(219		)	18,251
Other consumer	97	2,385		—			1		—		—			—			(1		)	2,385
Total	175,935	$	3,112,910	$	(17,226	)	$	699	$	260	$	(13,483	)	$	(38	)	$	(1,554	)	$	3,081,568

(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 fee waivers, or capitalization of fees.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	Three-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	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

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 period-end recorded investment balances of 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, 2017 and September 30, 2016, respectively.



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2017			2016			2017			2016
	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
Middle Market Commercial Real Estate	5	6,386		—	—		10	6,825		—	—
Commercial and industrial	61	2,210		76	2,838		163	5,842		194	14,223
Consumer:
Residential mortgages	55	8,594		5	579		175	23,659		22	3,171
Home equity loans and lines of credit	2	47		19	2,991		6	257		54	8,457
RICs and auto loans	11,275	199,045		12,112	208,762		34,496	606,327		35,299	588,127
Unsecured loans	731	2,029		719	1,676		2,667	6,769		3,594	5,048
Other consumer	7	58		263	766		29	334		263	766
Total	12,136	$	218,369	13,194	$	217,612	37,546	$	650,013	39,426	$	619,792


(1)	The recorded investment represents the period-end balance at September 30, 2017 and 2016. Does not include Chapter 7 bankruptcy TDRs.

NOTE 5. OPERATING LEASE ASSETS, NET

The Company has operating leases which are included in the Company's Condensed Consolidated Balance Sheets as Operating lease assets, net. The leased vehicle portfolio consists primarily of leases originated under the Chrysler Agreement.

Operating lease assets, net consisted of the following as of September 30, 2017 and December 31, 2016:



	September 30, 2017			December 31, 2016
	(in thousands)
Leased vehicles	$	14,391,725		$	13,603,494
Origination fees and other costs	28,507			23,141
Manufacturer subvention payments	(1,112,522		)	(1,126,323		)
Leased vehicles, gross	13,307,710			12,500,312
Less: accumulated depreciation	(2,979,073		)	(2,811,855		)
Leased vehicles, net	10,328,637			9,688,457

Commercial equipment vehicles and aircraft, gross	86,910			65,401
Less: accumulated depreciation	(14,987		)	(6,635		)
Commercial equipment vehicles and aircraft, net	71,923			58,766

Total operating lease assets, net	$	10,400,560		$	9,747,223

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. OPERATING LEASE ASSETS, NET (continued)

Periodically, the Company executes bulk sales of leases originated under the Chrysler Capital program. During the three-month and nine-month periods ended September 30, 2017 and September 30, 2016, the Company did not execute any bulk sales of leases originated under the Chrysler Capital program.

The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of September 30, 2017 (in thousands):




2017	$	496,600
2018	1,516,400
2019	859,503
2020	219,541
2021	4,282
Thereafter	—
Total	$	3,096,326

Lease income for the three-month and nine-month periods ended September 30, 2017 was $509.7 million and $1.5 billion, respectively, compared to $483.9 million and $1.4 billion, respectively, for the three-month and nine-month periods ended September 30, 2016.

Lease expense for the three-month and nine-month periods ended September 30, 2017 was $409.4 million and $1.1 billion, respectively, compared to $338.1 million and $953.1 million, respectively, for the three-month and nine-month periods ended September 30, 2016.

NOTE 6. VARIABLE INTEREST ENTITIES

VIEs

The Company transfers RICs and leased vehicles into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. The Trusts are considered VIEs under GAAP, and the Company may or may not consolidate these VIEs on the Condensed Consolidated Balance Sheets.

For further description of the Company's securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Note 7 of the 2016 Annual Report on Form 10-K.

On-balance sheet VIEs

The assets of consolidated VIEs that are included in the Company's Condensed Consolidated Financial Statements, presented reflecting the transfer of the underlying assets in order to reflect legal ownership, that can be used to settle obligations of the consolidated VIEs 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:

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. VARIABLE INTEREST ENTITIES (continued)



	September 30, 2017		December 31, 2016
	(in thousands)
Assets
Restricted cash	$	1,969,094	$	2,087,177
Loans⁽¹⁾⁽²⁾	22,592,031		23,568,066
Operating lease assets, net	9,931,283		8,564,628
Various other assets	634,338		686,253
Total Assets	$	35,126,746	$	34,906,124
Liabilities
Notes payable⁽²⁾	$	28,654,850	$	31,667,976
Various other liabilities	153,942		91,234
Total Liabilities	$	28,808,792	$	31,759,210

(1) Includes $832.4 million and $1.0 billion of RICs held for sale at September 30, 2017 and December 31, 2016, respectively.

(2) Reflects the impacts of purchase accounting.

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, 2017 and December 31, 2016, the Company was servicing $26.2 billion and $27.4 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,
	2017		2016		2017		2016
	(in thousands)
Assets securitized	$	2,998,430	$	2,043,114	$	15,395,158	$	12,026,706

Net proceeds from new securitizations ⁽¹⁾	$	2,936,719	$	1,688,822	$	11,998,611	$	9,509,135
Net proceeds from sale of retained bonds	—		—		273,733		128,798
Cash received for servicing fees ⁽²⁾	228,131		200,634		653,048		595,070
Net distributions from Trusts ⁽²⁾	666,179		776,306		2,073,965		2,167,512
Total cash received from Trusts	$	3,831,029	$	2,665,762	$	14,999,357	$	12,400,515

(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.

Off-balance sheet VIEs

During the three-month and nine-month periods ended September 30, 2017, the Company sold $1.3 billion and $2.6 billion of gross RICs to VIEs in off-balance sheet securitizations for a loss of $6.8 million and $13.0 million, respectively. The transaction was executed under the new securitization platform with Santander, Santander Prime Auto Issuing Note (“SPAIN"). Santander will hold eligible vertical interests in notes and certificates of not less than 5% to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”) risk retention rules. For 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. VARIABLE INTEREST ENTITIES (continued)

As of September 30, 2017 and December 31, 2016, the Company was servicing $4.0 billion and $2.7 billion, respectively, of gross RICs that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. The portfolio was comprised as follows:



		September 30, 2017		December 31, 2016
	(in thousands)
SPAIN		$	2,265,206	$	—
Total serviced for related parties		2,265,206		—

Chrysler Capital securitizations		1,690,729		2,472,756
Other third parties		—		268,345
Total serviced for third parties		1,690,729		2,741,101
Total serviced for other portfolio		$	3,955,935	$	2,741,101

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,
	2017		2016		2017		2016
	(in thousands)
Assets securitized ⁽¹⁾	$	1,347,010	$	—	$	2,583,341	$	—

Net proceeds from new securitizations	$	1,347,430	$	—	$	2,588,227	$	—
Cash received for servicing fees	12,309		10,027		25,677		38,885
Total cash received from Trusts	$	1,359,739	$	10,027	$	2,613,904	$	38,885

(1) Represents the UPB at the time of original securitization.

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presents the Company's goodwill by its reporting units at September 30, 2017:



	Consumer and Business Banking		Commercial Real Estate		Commercial Banking		Global Corporate Banking		SC		Santander BanCorp		Total
	(in thousands)
Goodwill at September 30, 2017	$	1,880,303	$	870,411	$	542,584	$	131,130	$	1,019,960	$	10,537	$	4,454,925

There were no impairments, additions, or re-allocations of goodwill for the Nine-Month Period Ended September 30, 2017.

The Company, including its Santander BanCorp subsidiary, conducted its last annual goodwill impairment tests as of October 1, 2016 using generally accepted valuation methods. After conducting an analysis of the fair value of each reporting unit as of October 1, 2016, the Company determined that no impairments of goodwill were identified as a result of the annual impairment tests.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. GOODWILL AND OTHER INTANGIBLES (continued)

Other Intangible Assets

The following table details amounts related to the Company's intangible assets subject to amortization for the dates indicated.



	September 30, 2017					December 31, 2016
	Net Carrying Amount		Accumulated Amortization			Net Carrying Amount		Accumulated Amortization
	(in thousands)
Intangibles subject to amortization:
Dealer networks	$	436,214	$	(143,786	)	$	465,625	$	(114,375	)
Chrysler relationship	83,750		(55,000		)	95,000		(43,750		)
Core deposit intangibles	—		—			—		(295,842		)
Trade name	16,200		(1,800		)	17,100		(900		)
Other intangibles	14,877		(54,654		)	19,519		(98,492		)
Total intangibles subject to amortization	$	551,041	$	(255,240	)	$	597,244	$	(553,359	)

At September 30, 2017 and December 31, 2016, the Company did not have any intangibles, other than goodwill, that were not subject to amortization.

Amortization expense on intangible assets was $15.3 million and $46.2 million and $17.2 million and $52.9 million for the three-month and nine-month periods ended September 30, 2017 and September 30, 2016, 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. During 2016, $48.5 million of the Company's customer relationships associated with BSI 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)
2017	$	61,491	$	46,204	$	15,287
2018	60,644		—		60,644
2019	58,975		—		58,975
2020	58,642		—		58,642
2021	55,603		—		55,603
Thereafter	301,890		—		301,890

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. OTHER ASSETS

The following is a detail of items that comprise other assets at September 30, 2017 and December 31, 2016:



	September 30, 2017		December 31, 2016
	(in thousands)
Income tax receivables	$	319,045	$	294,796
Derivative assets at fair value	431,267		413,779
Other repossessed assets	159,468		177,592
MSRs	146,958		150,343
Prepaid expenses	160,222		172,559
Other real estate owned ("OREO")	146,362		116,705
Deferred tax asset, net	958,214		989,767
Miscellaneous assets and receivables	770,730		567,327
Total other assets	$	3,092,266	$	2,882,868

Income tax receivables

Income tax receivables consists primarily of accrued federal tax receivables.

Derivative assets at fair value

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.

MSRs

Residential real estate

The Company maintains an MSR asset for sold residential real estate loans serviced for others. At September 30, 2017 and December 31, 2016, the balance of these loans serviced for others accounted for at fair value was $15.1 billion and $15.4 billion, respectively. The Company accounts for a majority of its 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, 2017 and December 31, 2016 was $143.5 million and $146.6 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. The remainder of MSRs not accounted for using the FVO are accounted for at lower of cost or market.

For the three-month and nine-month periods ended September 30, 2017, the Company recorded net changes in the fair value of MSRs due to valuation totaling $(1.6) million and $(1.3) million, respectively, compared to $7.7 million and $(18.1) million for the corresponding periods in 2016.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. OTHER ASSETS (continued)



	Three-Month Period Ended						Nine-Month Period Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	(in thousands)
Fair value at beginning of period⁽¹⁾	$	146,091		$	117,792		$	146,589		$	147,233
Mortgage servicing assets recognized	4,099			6,057			12,696			14,450
Principal reductions	(5,088		)	(5,446		)	(14,446		)	(17,456		)
Change in fair value due to valuation assumptions	(1,578		)	7,711			(1,315		)	(18,113		)
Fair value at end of period⁽¹⁾	$	143,524		$	126,114		$	143,524		$	126,114

(1) The Company had total MSRs of $147.0 million and $150.3 million as of September 30, 2017, and December 31, 2016, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or market and are not presented within this table.

Fee income and gain on sale of mortgage loans

Included in Mortgage banking income, net on the Condensed Consolidated Statements of Operations was mortgage servicing fee income of $10.2 million and $31.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $10.8 million and $32.4 million for the corresponding periods in 2016. The Company had gains on sales of mortgage loans included in Mortgage banking income, net on the Condensed Consolidated Statements of Operations of $13.6 million and $19.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $8.0 million and $18.1 million for the corresponding periods in 2016.

Other repossessed assets and OREO

Other repossessed assets primarily consist of SC's vehicle inventory, which is obtained through repossession. OREO consists primarily of the Company's foreclosed properties.

Deferred tax assets, net

The Company recorded $958.2 million of deferred tax assets, net as of September 30, 2017, compared to $989.8 million at December 31, 2016.

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. The third quarter increase is due to a receivable for trade date sale of $110.0 million at SBNA, $81.0 million related to a receivable from customers and brokers associated with unsettled security trades, and $16.4 million related to capital market receivable at SIS, offset by a decrease in subvention receivables of $59.1 million as of September 30, 2017.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. DEPOSITS AND OTHER CUSTOMER ACCOUNTS

Deposits and other customer accounts are summarized as follows:



	September 30, 2017				December 31, 2016
	Balance		Percent of total deposits		Balance		Percent of total deposits
	(in thousands)
Interest-bearing demand deposits	$	8,635,650	14.0	%	$	11,284,881	16.8	%
Non-interest-bearing demand deposits	15,950,662		25.8	%	15,413,609		22.9	%
Savings	6,012,896		9.7	%	5,988,852		8.9	%
Customer repurchase accounts	918,033		1.5	%	868,544		1.3	%
Money market	24,625,925		39.8	%	24,511,906		36.5	%
Certificates of deposit ("CDs")	5,734,642		9.2	%	9,172,898		13.6	%
Total Deposits ⁽¹⁾	$	61,877,808	100.0	%	$	67,240,690	100.0	%

(1) Includes foreign deposits, as defined by the FRB, of $9.8 billion and $10.7 billion at September 30, 2017 and December 31, 2016, respectively.

Deposits collateralized by investment securities, loans, and other financial instruments totaled $2.3 billion and $3.0 billion at September 30, 2017 and December 31, 2016, respectively.

Demand deposit overdrafts that have been reclassified as loan balances were $46.2 million and $42.3 million at September 30, 2017 and December 31, 2016, respectively.

NOTE 10. BORROWINGS

Total borrowings and other debt obligations at September 30, 2017 were $41.4 billion, compared to $43.5 billion at December 31, 2016. 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.

Bank

During the first quarter of 2017, the Bank repurchased $881.0 million of its 2.00% senior notes due 2018 and senior floating rate notes due 2018.

During the second quarter of 2017, the Bank repurchased $14.2 million of its real estate investment trust ("REIT") preferred debt.

Subsequent to the third quarter, on October 18, 2017, the Bank repurchased $307.8 million of its 8.75% subordinated notes due 2018. The Bank recorded loss on debt extinguishment related to this repurchase of $14.0 million.

The Bank did not repurchase any outstanding borrowings in the open market during the three- or nine-month period ended September 30, 2016.

SHUSA

During the first quarter of 2017, the Company issued $1.0 billion in aggregate principal amount of its 3.70% senior notes due March 2022. The proceeds of these notes were primarily used for general corporate purposes.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. BORROWINGS (continued)

During the second quarter of 2017, the Company issued $759.7 million in aggregate principal amount of its senior floating rate notes in two separate private offerings. These notes have a floating rate equal to the three-month London Interbank Offered Rate (“LIBOR") plus 100 basis points. The proceeds of these notes will be used for general corporate purposes.

During the third quarter of 2017, the Company issued $1.24 billion in aggregate principal amount of its senior notes, comprised of an additional $440.0 million of 3.70% senior notes due March 2022 and $800.0 million of 4.40% senior notes due May 2027. The Company also repurchased $255.4 million of its 3.45% senior notes due in August 2018. In addition, the Company redeemed and extinguished $70.3 million and $10.0 million of its Capital Trust VI junior subordinated debentures due June 2036. The Company did not repurchase any outstanding borrowings in the open market during the three- or nine-month periods ended September 30, 2016.

On October 6, 2017, the Company issued $302.6 million in aggregate principal amount of its senior floating rate notes. These senior floating rate notes have a floating rate equal to the three-month LIBOR plus 100 basis points, with a maturity of January 2020. The proceeds of these notes will be used for general corporate purposes.

The Company recorded loss on debt extinguishment related to debt repurchases and early repayments at SHUSA and the Bank of $5.6 million and $16.3 million in total for the three-month and nine-month periods ended September 30, 2017, respectively. During the three-month and nine-month periods ended September 30, 2016, the Company recorded loss on debt extinguishment related to repurchases of FHLB advances of $10.2 million and $88.7 million, respectively.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. BORROWINGS (continued)

Parent Company and other IHC Entities Borrowings and Debt Obligations

The following table presents information regarding the Parent Company and its subsidiaries' borrowings and other debt obligations at the dates indicated:



	September 30, 2017				December 31, 2016
	Balance		Effective Rate		Balance		Effective Rate
	(dollars in thousands)
Parent Company
Senior notes, due November 2017⁽¹⁾	$	599,861	2.93	%	$	599,206	2.67	%
3.45% senior notes, due August 2018	244,213		3.62	%	498,604		3.62	%
2.70% senior notes, due May 2019	998,060		2.82	%	997,207		2.82	%
2.65% senior notes, due April 2020	995,842		2.82	%	994,672		2.82	%
3.70% senior notes, due March 2022 ⁽²⁾	1,440,039		3.74	%	—		—	%
4.50% senior notes, due July 2025	1,095,324		4.56	%	1,094,955		4.56	%
4.40% senior notes, due July 2027	794,838		4.48	%	—		—	%
Junior subordinated debentures - Capital Trust VI , due June 2036 ⁽³⁾	—		—	%	69,798		7.91	%
Common securities - Capital Trust VI ⁽³⁾	—		—	%	10,000		7.91	%
Junior subordinated debentures - Capital Trust IX, due July 2036	149,455		3.13	%	149,434		2.49	%
Common securities - Capital Trust IX	4,640		3.13	%	4,640		2.49	%
Senior notes, due July 2019⁽⁴⁾	388,532		2.27	%	—		—	%
Senior notes, due September 2019 ⁽⁴⁾	370,730		2.30	%	—		—	%
Other IHC Entities
Overnight Funds Purchase, due within one year, due October 2017	580		1.05	%	830		0.50	%
2.00% subordinated debt, maturing through 2042	40,793		2.00	%	40,457		2.00	%
Short-term borrowings, due within one year, due October 2017	194,000		1.13	%	54,000		0.63	%
Total due to others overnight, due within one year, due October 2017	15,000		1.13	%	17,000		0.63	%
Short-term borrowings, due within one year, October 2017	54,471		0.25	%	207,173		0.25	%
Total Parent Company and other subsidiaries' borrowings and other debt obligations	$	7,386,378	3.35	%	$	4,737,976	3.21	%

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

(2) During the first quarter of 2017, the Company issued $1.0 billion in aggregate principal amount of its 3.70% senior notes due March 2022. During the third quarter of 2017, the Company issued an additional $440.0 million of 3.70% senior notes due March 2022.

(3) The Company redeemed and extinguished $70.3 million and $10.0 million of its Capital Trust VI junior subordinated debentures and common securities due June 2036.

(4) These notes bear interest at a rate equal to the three-month LIBOR plus 100 basis points per annum.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. BORROWINGS (continued)

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, 2017				December 31, 2016
	Balance		Effective Rate		Balance		Effective Rate
	(dollars in thousands)
2.00% senior notes, due January 2018	$	77,001	2.24	%	$	748,143	2.24	%
Senior notes, due January 2018⁽¹⁾	41,900		2.35	%	249,705		1.99	%
8.750% subordinated debentures, due May 2018 ⁽²⁾	499,456		8.92	%	498,882		8.92	%
Subordinated term loan, due February 2019	111,697		7.12	%	122,313		6.78	%
FHLB advances, maturing through July 2019	4,550,000		1.41	%	5,950,000		0.85	%
Securities sold under repurchase agreements	20,000		1.35	%	—		—	%
REIT preferred, due May 2020 ⁽³⁾	143,814		13.30	%	156,457		13.46	%
Subordinated term loan, due August 2022	28,524		8.89	%	29,202		8.35	%
Total Bank borrowings and other debt obligations	$	5,472,392	2.58	%	$	7,754,702	1.92	%

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

(2) On October 18, 2017 the Bank repurchased $307.8 million of its 8.75% subordinated notes due 2018.

(3) During the second quarter of 2017, the Company repurchased $14.2 million of the REIT preferred notes.

The Bank had outstanding irrevocable letters of credit totaling $762.5 million from the FHLB of Pittsburgh at September 30, 2017, used to secure uninsured deposits placed with the Bank by state and local governments and their political subdivisions.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. BORROWINGS (continued)

Revolving Credit Facilities

The following tables present information regarding SC's credit facilities as of September 30, 2017 and December 31, 2016:



	September 30, 2017
	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
	(dollars in thousands)
Warehouse line, maturing on various dates⁽¹⁾	$	258,545	$	1,250,000	1.21	%	$	387,668	$	11,554
Warehouse line, due November 2018	57,820		500,000		4.54	%	63,712		2,215
Warehouse line, due August 2018⁽²⁾	—		780,000		1.39	%	2,329		121
Warehouse line, due August 2018⁽³⁾	2,766,543		3,120,000		2.22	%	3,724,088		61,367
Warehouse line, due October 2018	445,277		1,800,000		3.45	%	661,090		12,644
Warehouse line, due October 2018	87,965		400,000		3.72	%	132,197		2,852
Warehouse line, due January 2018	181,083		500,000		2.96	%	276,519		—
Warehouse line, due November 2018	274,499		1,000,000		3.44	%	401,219		7,920
Warehouse line, due October 2017⁽⁴⁾	235,700		300,000		2.67	%	276,521		9,278
Repurchase facility, due December 2017⁽⁵⁾	254,120		254,120		3.35	%	—		13,708
Repurchase facility, due April 2018⁽⁵⁾	202,311		202,311		2.62	%	—		—
Repurchase facility, due March 2018⁽⁵⁾	148,690		148,690		3.88	%	—		—
Repurchase facility, due November 2017⁽⁵⁾	53,335		53,335		2.43	%	—		—
Line of credit with related party, due December 2017⁽⁶⁾	—		1,000,000		3.04	%	—		—
Line of credit with related party, due December 2018⁽⁶⁾	—		1,000,000		3.09	%	—		—
Line of credit with related party, due December 2018⁽⁶⁾	265,400		750,000		3.77	%	—		—
Total SC revolving credit facilities	$	5,231,288	$	13,058,456	2.63	%	$	5,925,343	$	121,659

(1) As of September 30, 2017, half of the outstanding balance on this facility will mature in March 2018 and half matures in March 2019.

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

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

(4) In October 2017, the warehouse line that matured was extended to December 2017.

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

(6) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of September 30, 2017, no portion of these facilities was unsecured.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. BORROWINGS (continued)



	December 31, 2016
	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
	(dollars in thousands)
Warehouse line, maturing on various dates⁽¹⁾	$	462,085	$	1,250,000	2.52	%	$	653,014	$	14,916
Warehouse line, due August 2018⁽²⁾	534,220		780,000		1.98	%	608,025		24,520
Warehouse line, due August 2018⁽³⁾	3,119,943		3,120,000		1.91	%	4,700,774		70,991
Warehouse line, due October 2018⁽⁵⁾	702,377		1,800,000		2.51	%	994,684		23,378
Warehouse line, due October 2018	202,000		400,000		2.22	%	290,867		5,435
Warehouse line, due January 2018	153,784		500,000		3.17	%	213,578		—
Warehouse line, due November 2018	578,999		1,000,000		1.56	%	850,758		17,642
Warehouse line, due October 2017	243,100		300,000		2.38	%	295,045		9,235
Warehouse line, due November 2018	—		500,000		2.07	%	—		—
Repurchase facility, due December 2017⁽⁴⁾	507,800		507,800		2.83	%	—		22,613
Repurchase facility, due April 2017⁽⁴⁾	235,509		235,509		2.04	%	—		—
Line of credit with related party, due December 2017⁽⁵⁾	1,000,000		1,000,000		2.86	%	—		—
Line of credit with related party, due December 2017⁽⁵⁾	500,000		500,000		3.04	%	—		—
Line of credit with related party, due December 2018⁽⁵⁾	175,000		500,000		3.87	%	—		—
Line of credit with related party, due December 2018⁽⁵⁾	1,000,000		1,000,000		2.88	%	—		—
Total SC revolving credit facilities	$	9,414,817	$	13,393,309	2.36	%	$	8,606,745	$	188,730

(1) Half of the outstanding balance on this facility had matured in March 2017 and half will mature in March 2018.

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

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

(4) 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.

(5) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of December 31, 2016, $1.3 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, 2017 and December 31, 2016:



	September 30, 2017
	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral		Restricted Cash
	(dollars in thousands)
SC public securitizations, maturing on various dates^(1,2)	$	14,930,690	$	35,870,432	0.90% - 2.80%	$	19,625,345	$	1,487,227
SC privately issued amortizing notes, maturing on various dates⁽¹⁾	8,330,626		12,229,241		0.88% - 2.86%	9,923,095		371,117
Total SC secured structured financings	$	23,261,316	$	48,099,673	0.88% - 2.86%	$	29,548,440	$	1,858,344

(1) SC has entered into various securitization transactions involving its retail automobile 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.

(2) Securitizations executed under Rule 144A of the Securities Act of 1933 (the “Securities Act”) are included within this balance.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. BORROWINGS (continued)



	December 31, 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^(1,2)	$	13,444,543	$	32,386,082	0.89% - 2.46%	$	17,474,524	$	1,423,599
SC privately issued amortizing notes, maturing on various dates⁽¹⁾	8,172,407		14,085,991		0.88% - 2.86%	12,021,887		500,868
Total SC secured structured financings	$	21,616,950	$	46,472,073	0.88% - 2.86%	$	29,496,411	$	1,924,467

(2) Securitizations executed under Rule 144A of the Securities Act are included within this balance.

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, 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 asset, index or interest rate as specified in the contract. Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged, is not recorded on the balance sheet, and does not represent the Company`s exposure to credit loss. The notional amount is the basis on which the financial obligation of each party to the contract is calculated to determine required payments under the derivative contract. The Company controls the credit risk of its derivative contracts through credit approvals, limits and monitoring procedures. The underlying asset is typically a referenced interest rate (commonly the Overnight Indexed Swap ("OIS") rate or LIBOR), security, credit spread or index.

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

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 a specified level, typically investment grade. As of September 30, 2017, derivatives in this category had a fair value of $7.8 million. The credit ratings of the Company and Bank are currently considered investment grade. During the third quarter of 2017, no additional collateral would be required if there were a further 1- or 2- notch downgrade by either Standard & Poor's ("S&P") or Moody's Investor Services ("Moody's").

As of September 30, 2017 and December 31, 2016, 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 $21.2 million and $27.0 million, respectively. The Company had $19.1 million and $28.3 million in cash and securities collateral posted to cover those positions as of September 30, 2017 and December 31, 2016, respectively.

Hedge Accounting

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

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

Fair Value Hedges

During the three-month period ended June 30, 2017, the Company entered into interest rate swaps to hedge the interest rate risk on certain fixed-rate borrowings. These derivatives were designated as fair value hedges at inception of the hedge relationship. The Company included 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, 2017. The Company terminated the interest rate swap during the three-month period ended September 30, 2017.

Cash Flow Hedges

The Company has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets, and liabilities (including its borrowed funds). All of these swaps have been deemed as highly effective cash flow hedges. The effective portion of the hedging gains and losses associated with these hedges is recorded in accumulated other comprehensive income; the ineffective portion of the hedging gains and losses is recorded in earnings.

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 nine-month periods ended September 30, 2017 and 2016. As of September 30, 2017, the Company expected $1.4 million of gross gains 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

NOTE 11. DERIVATIVES (continued)

Derivatives Designated in Hedge Relationships – Notional and Fair Values

Derivatives designated as accounting hedges at September 30, 2017 and December 31, 2016 included:



	Notional Amount		Asset		Liability		Weighted Average Receive Rate		Weighted Average Pay Rate		Weighted Average Life (Years)
	(dollars in thousands)
September 30, 2017
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	5,235,818		40,173		5,304		1.27	%	1.25	%	2.26
Pay variable - receive fixed interest rate swaps	4,000,000		467		51,508		1.41	%	1.24	%	3.23
Total	$	9,235,818	$	40,640	$	56,812	1.33	%	1.24	%	2.68

December 31, 2016
Cash flow hedges:
Pay fixed — receive floating interest rate swaps ⁽¹⁾	$	8,124,172	$	45,681	$	5,083	0.83	%	1.13	%	2.57
Pay variable - receive fixed interest rate swaps ⁽¹⁾	2,000,000		—		54,729		1.19	%	0.62	%	4.79
Total	$	10,124,172	$	45,681	$	59,812	0.91	%	1.03	%	3.01

(1) The prior period amounts have been revised. The revision had no impact on the Company's Consolidated Balance Sheets or its results of operations.

During the third quarter of 2017, the Company terminated fair value hedges with a notional of $650.0 million. The fair value mark of the previously hedged debt will be amortized into interest expense over the remaining term of the debt. The amounts previously deferred in AOCI will be amortized into interest expense as the hedged cash flows impact interest expense.

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

Other Derivative Activities

The Company also enters into derivatives that are not designated as accounting hedges under GAAP. The majority of these derivatives are customer-related derivatives relating to foreign exchange and lending arrangements, as well as derivatives to hedge interest rate risk on SC's 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 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

NOTE 11. DERIVATIVES (continued)

The Company typically retains the servicing rights related to residential mortgage loans that are sold. Most 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.

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, 2017 and December 31, 2016 included:



	Notional				Asset derivatives Fair value				Liability derivatives Fair value
	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
	(in thousands)
Mortgage banking derivatives:
Forward commitments to sell loans	$	354,698	$	693,137	$	586	$	8,577	$	—	$	—
Interest rate lock commitments	181,810		253,568		2,564		2,316		—		—
Mortgage servicing	330,000		295,000		3,334		838		605		1,635
Total mortgage banking risk management	866,508		1,241,705		6,484		11,731		605		1,635

Customer related derivatives:
Swaps receive fixed	9,175,060		9,646,151		106,446		127,123		42,410		49,642
Swaps pay fixed	9,441,107		9,785,170		74,067		85,877		74,939		97,759
Other	2,214,898		1,611,342		15,507		3,421		13,891		1,989
Total customer related derivatives	20,831,065		21,042,663		196,020		216,421		131,240		149,390

Other derivative activities:
Foreign exchange contracts	3,056,076		3,366,483		33,767		56,742		35,550		46,430
Interest rate swap agreements	1,507,232		1,064,289		8,801		2,075		1,884		2,647
Interest rate cap agreements	11,927,449		9,491,468		116,646		76,387		26,255		—
Options for interest rate cap agreements	11,900,578		9,463,935		26,304		—		116,563		76,281
Total return settlement	—		658,471		—		—		—		30,618
Other	1,239,201		1,265,583		9,307		12,293		14,292		16,325
Total	$	51,328,109	$	47,594,597	$	397,329	$	375,649	$	326,389	$	323,326

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. DERIVATIVES (continued)

The Company purchased price holdback payments and total return settlement payments that were considered to be derivatives, collectively referred to herein as total return settlement, and accordingly were marked to fair value each reporting period. The Company was obligated to make purchase price holdback payments on a periodic basis to a third-party originator of loans that the Company has purchased, when losses are lower than originally expected. The Company also was obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased loans are greater than originally expected. All purchase price holdback payments and all total return settlement payments due in 2016 and 2017 have been made and as of September 30, 2017, the derivative instrument has been settled.

Gains (Losses) on All Derivatives

The following Condensed Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the nine-month periods ended September 30, 2017 and 2016:



		Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
Derivative Activity⁽¹⁾	Line Item	2017			2016			2017			2016
		(in thousands)
Fair value hedges:
Cross-currency swaps ⁽²⁾	Miscellaneous income	$	—		$	—		$	—		$	174
Interest rate swaps	Miscellaneous income	(235		)	190			(2,397		)	1,959
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Net interest income	(1,846		)	(254		)	(8,317		)	(4,379		)
Pay variable receive-fixed interest rate swap	Net interest income	(1,668		)	—			(7,955		)	—
Other derivative activities:
Forward commitments to sell loans	Mortgage banking income	(667		)	4,128			(7,991		)	(4,348		)
Interest rate lock commitments	Mortgage banking income	(332		)	(793		)	248			6,645
Mortgage servicing	Mortgage banking income	1,525			(2,803		)	3,525			21,024
Customer related derivatives	Miscellaneous income	627			24,108			(2,385		)	18,985
Foreign exchange	Miscellaneous income	1,951			967			5,097			4,694
Interest rate swaps, caps, and options	Miscellaneous income	1,918			4,329			3,429			(1,790		)
Interest rate swaps, caps, and options	Net interest income	(552		)	12,391			3,110			42,563

Total return settlement	Other administrative expenses	—			343			(505		)	(2,337		)
Other	Miscellaneous income	(303		)	(765		)	(1,247		)	974

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

(2) Cross currency swaps designated as hedges matured in the first quarter of 2016.

Disclosures about Offsetting Assets and Liabilities

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. DERIVATIVES (continued)

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 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 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.

Information about financial assets and liabilities that are eligible for offset on the Condensed Consolidated Balance Sheet as of September 30, 2017 and December 31, 2016, 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, 2017
Cash flow hedges	40,640		—		40,640		—		22,524		18,116
Other derivative activities⁽¹⁾	394,520		6,702		387,818		4,940		90,510		292,368
Total derivatives subject to a master netting arrangement or similar arrangement	435,160		6,702		428,458		4,940		113,034		310,484
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	2,809		—		2,809		—		—		2,809
Total Derivative Assets	$	437,969	$	6,702	$	431,267	$	4,940	$	113,034	$	313,293


December 31, 2016
Cash flow hedges	$	45,681	$	—	$	45,681	$	—	$	21,690	$	23,991
Other derivative activities⁽¹⁾	374,052		7,551		366,501		4,484		39,474		322,543
Total derivatives subject to a master netting arrangement or similar arrangement	419,733		7,551		412,182		4,484		61,164		346,534
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	1,597		—		1,597		—		—		1,597
Total Derivative Assets	$	421,330	$	7,551	$	413,779	$	4,484	$	61,164	$	348,131


(1)	Includes customer-related and other derivatives.


(2)	Includes mortgage banking derivatives.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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		Cash Collateral Pledged		Net Amount
	(in thousands)
September 30, 2017
Cash flow hedges ⁽³⁾	56,812		—		56,812		150,150		—
Other derivative activities⁽¹⁾	326,389		21,503		304,886		68,896		235,990
Total derivatives subject to a master netting arrangement or similar arrangement	383,201		21,503		361,698		219,046		235,990

Reverse repurchase, securities borrowing, and similar arrangement	20,000		—		20,000		—		20,000
Total Financial Liabilities	$	403,201	$	21,503	$	381,698	$	219,046	$	255,990

December 31, 2016
Cash flow hedges ⁽³⁾	$	59,812	$	—	$	59,812	$	110,856	$	—
Other derivative activities⁽¹⁾	292,708		34,197		258,511		95,138		163,373
Total derivatives subject to a master netting arrangement or similar arrangement	352,520		34,197		318,323		205,994		163,373
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	30,618		—		30,618		—		30,618
Total Derivative Liabilities	$	383,138	$	34,197	$	348,941	$	205,994	$	193,991


(1)	Includes customer-related and other derivatives


(2)	Includes mortgage banking derivatives


(3)	In certain instances, the Company is over-collateralized since the actual amount of cash pledged as collateral exceeds the associated financial liability. As a result, the actual amount of cash collateral pledged that is reported in Other Liabilities may be greater than the amount shown. The prior period have been revised to conform with current period presentation.

NOTE 12. INCOME TAXES

An income tax provision of $93.4 million and $264.4 million was recorded for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $108.3 million and $340.0 million for the corresponding periods in 2016. This resulted in an effective tax rate ("ETR") of 28.3% and 27.7% for the three-month and nine-month periods ended September 30, 2017, respectively, compared to 32.4% and 35.8% for the corresponding periods in 2016.

The decrease in the ETR for the three-month and nine-month periods ended September 30, 2017 was predominantly due to the undistributed net earnings of a Puerto Rico subsidiary that will be indefinitely reinvested outside the U.S.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 filed a lawsuit against the United States in 2009 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.

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. The IRS appealed that judgment. On December 15, 2016, the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court. Pursuant to the First Circuit's decision, the Company is not entitled to claim the foreign tax credits it claimed but will be allowed to exclude from income $132.0 million (representing half of the U.K. taxes the Company paid) and will be allowed to claim the interest expense deductions. The First Circuit ordered the case to be remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On March 16, 2017, the Company filed a petition requesting the U.S. Supreme Court to hear its appeal of the First Circuit Court's decision. On June 26, 2017 the U.S. Supreme Court denied the Company’s request, and the case has now been remanded to the Federal District Court as ordered by the Court of Appeals. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.0 million tax reserve in relation to items that have not yet been determined by the courts, including potential penalties. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $36.0 million to an increase of zero.

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

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, 2017 and 2016, respectively.



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Three-Month Period Ended September 30, 2017									June 30, 2017						September 30, 2017
	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	$	5,298		$	(955	)	$	4,343
Reclassification adjustment for net (losses)/gains on cash flow hedge derivative financial instruments ⁽¹⁾	(6,837		)	2,002			(4,835		)
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments	(1,539		)	1,047			(492		)	$	(2,689	)	$	(492	)	$	(3,181	)

Change in unrealized gains/(losses) on investment securities available-for-sale	16,795			(5,910		)	10,885
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	(6,707		)	2,360			(4,347		)
Reclassification adjustment for net (gains)/losses included in net income/(expense) on OTTI securities	—			—			—
Net unrealized gains/(losses) on investment securities available-for-sale	10,088			(3,550		)	6,538			(94,436		)	6,538			(87,898		)

Pension and post-retirement actuarial gains/(losses)⁽³⁾	912			(355		)	557			(54,688		)	557			(54,131		)

As of September 30, 2017	$	9,461		$	(2,858	)	$	6,603		$	(151,813	)	$	6,603		$	(145,210	)

(1) Net (losses)/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.

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

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Nine-Month Period Ended September 30, 2017									December 31, 2016					September 30, 2017
	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	$	12,469		$	(2,950	)	$	9,519
Reclassification adjustment for net (losses)/gains on cash flow hedge derivative financial instruments ⁽¹⁾	(8,315		)	2,340			(5,975		)
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	4,154			(610		)	3,544			$	(6,725	)	$	3,544	$	(3,181	)

Change in unrealized gains/(losses) on investment securities available-for-sale	83,175			(29,892		)	53,283
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	(16,276		)	5,849			(10,427		)
Reclassification adjustment for net (gains)/losses included in net income/(expense) on OTTI securities	—			—			—
Net unrealized gains/(losses) on investment securities available-for-sale	66,899			(24,043		)	42,856			(130,754		)	42,856		(87,898		)

Pension and post-retirement actuarial gains/(losses)⁽³⁾	2,736			(1,138		)	1,598			(55,729		)	1,598		(54,131		)

As of September 30, 2017	$	73,789		$	(25,791	)	$	47,998		$	(193,208	)	$	47,998	$	(145,210	)

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

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	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		)
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	—			—			—
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities ⁽³⁾	—			—			—
Reclassification adjustment for net (gains)/losses included in net income	—			—			—
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⁽⁴⁾	(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.

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

(3) Unrealized losses/(gains) 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

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




	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	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	)

(2) Net (gains)/losses 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

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, 2017		December 31, 2016
	(in thousands)
Commitments to extend credit	$	29,128,608	$	28,889,904
Letters of credit	1,608,257		2,071,089
Unsecured revolving lines of credit	27,126		30,547
Recourse exposure on sold loans	70,036		69,877
Commitments to sell loans	29,010		49,121
Total commitments	$	30,863,037	$	31,110,538

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, 2017 and December 31, 2016 are $6.8 billion and $6.3 billion, respectively, of commitments that can be canceled by the Company without notice.

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



	September 30, 2017		December 31, 2016
	(in thousands)
1 year or less	$	5,223,450	$	5,656,552
Over 1 year to 3 years	5,226,031		5,265,685
Over 3 years to 5 years	3,909,397		4,680,057
Over 5 years ⁽¹⁾	14,769,730		13,287,610
Total	$	29,128,608	$	28,889,904

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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, 2017 was 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, 2017 was $1.6 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, 2017. 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, 2017 and December 31, 2016, the liability related to these letters of credit was $15.0 million and $8.1 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, 2017 and December 31, 2016 were lines of credit outstanding of $101.1 million and $114.4 million, respectively.

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



	September 30, 2017		December 31, 2016
	(in thousands)
1 year or less	$	1,047,330	$	1,360,495
Over 1 year to 3 years	463,334		399,866
Over 3 years to 5 years	68,451		283,975
Over 5 years	29,142		26,753
Total	$	1,608,257	$	2,071,089

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 UPB outstanding of loans sold in these programs was $152.6 million as of September 30, 2017 and $341.7 million as of December 31, 2016. 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, 2017 and $34.4 million as of December 31, 2016, 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

At the time of the sale, the Company established a liability which represented 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, 2017 and December 31, 2016, the Company had $1.6 million and $3.8 million, respectively, of reserves classified in Accrued expenses and payables on the Condensed Consolidated Balance Sheets related to 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 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 of September 30, 2017 and December 31, 2016, SC was obligated to purchase $12.9 million and $12.6 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. During the year ended December 31, 2015, SC and the third-party retailer executed an amendment that, among other provisions, increases the profit-sharing percentage retained by SC, gives the retailer the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement, and, provided that the repurchase right is exercised, gives the retailer the right to retain up to 20% of new accounts subsequently originated.

Under terms of an application transfer agreement with an original equipment manufacturer (“OEM") other than Fiat Chrysler Automobiles US LLC ("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 will pay the OEM a referral fee.

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, 2017, 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 RIC 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 to FCA when residual gains on leased vehicles exceed a specified threshold. SC had accrued $13.3 million and $10.1 million at September 30, 2017 and December 31, 2016, respectively, related to these obligations.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

The Chrysler Agreement requires, among other things, that SC bears the risk of loss on loans originated pursuant to the agreement, but also that FCA shares in any residual gains and losses from consumer leases. The agreement also requires that SC maintains at least $5.0 billion in funding available for dealer inventory financing and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to SC. The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of its ongoing obligations under the agreement. These obligations include SC's meeting specified escalating penetration rates for the first five years of the agreement. SC has not met these penetration rates at September 30, 2017. If the Chrysler Agreement were to terminate, there could be a materially adverse impact to our and SC's business financial condition and results of operations.

Until January 31, 2017, SC had a flow agreement with Bank of America whereby SC was committed to sell up to $300.0 million of eligible loans to the bank each month. On October 27, 2016, Bank of America notified SC that it was terminating the flow agreement effective January 31, 2017 and, accordingly, the flow agreement has terminated. 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 the time of sale. Servicer payments are due six years from the cut-off date of each loan sale. SC had accrued $8.1 million and $9.8 million at September 30, 2017 and December 31, 2016, respectively, related to this obligation.

Until May 1, 2017, SC sold loans to Citizens Bank of Pennsylvania ("CBP") under terms of a flow agreement and predecessor sale agreements. Under the flow agreement, as amended, CBP's committed purchases of Chrysler Capital prime loans were a maximum of $200.0 million and a minimum of $50.0 million per quarter. 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. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale. The Company had accrued $4.9 million and $4.6 million at September 30, 2017 and December 31, 2016, respectively, related to this obligation.

As of September 30, 2017, SC was party to a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell charged-off loan receivables in bankruptcy status on a quarterly basis until sales total at least $200.0 million in proceeds. On June 29, 2015, SC and the third party executed an amendment to the forward flow asset sale agreement which increased the committed sales of charged-off loan receivables in bankruptcy status to $275.0 million. On September 30, 2015, SC and the third party executed a second amendment to the forward flow asset sale agreement which required sales to occur quarterly. On November 13, 2015, SC and the third party executed a third amendment to the forward flow asset sale agreement which increased the committed sales of charged-off loan receivables in bankruptcy status to $350.0 million. However, any sale of more than $275.0 million is subject to a market price check. As of September 30, 2017 and December 31, 2016, the remaining aggregate commitments were $108.4 million and $166.2 million, respectively.

Pursuant to the terms of a separation agreement among SC`s former Chief Executive Officer ("CEO") Thomas G. Dundon, SC, DDFS LLC, the Company and Santander, upon satisfaction of applicable conditions, including receipt of required regulatory approvals, SC will owe Mr. Dundon a cash payment of up to $115.1 million. Refer to Note 15 for additional transactions involving the Company and the former CEO of SC.

SC is or may be subject to potential liability under various other contingent exposures. SC had accrued $8.6 million and zero at September 30, 2017 and December 31, 2016, respectively, for other miscellaneous contingencies.

Impact from Hurricanes

Our footprint was impacted by three significant hurricanes during the third quarter of 2017, Hurricane Harvey, which struck the State of Texas and surrounding region, Hurricane Irma, which primarily struck the State of Florida, and Hurricane Maria, which struck the island of Puerto Rico. Each of these hurricanes resulted in widespread flooding, power outages and associated damage to real and personal property in the affected areas Our SC subsidiary headquartered in Dallas, Texas, our BSI subsidiary headquartered in Miami, Florida, and our Santander BanCorp, BSPR and SSLLC subsidiaries in Puerto Rico were most directly affected by these hurricanes. In Puerto Rico, there was significant damage to the infrastructure and the power grid in the entire island, which resulted in extended delays in BSPR returning to normal operations.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions and has increased its allowance for loan losses by approximately $95 million in the third quarter of 2017. However, for credit exposures in Puerto Rico, given the current state in the region, the Company has had limited information with which to estimate probable credit losses. As of September 30, 2017, the Company has approximately $3.6 billion of loan exposures in Puerto Rico consisting of $1.7 billion in consumer loans, $1.6 billion in commercial loans, and $300 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses and may establish additional reserves for losses in future periods.

See discussion under the "Puerto Rico FINRA Arbitrations" section of Note 14 below for further discussion.

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.

Legal and Regulatory Proceedings

Periodically, the Company is party to, or otherwise involved in, various lawsuits, investigations, regulatory matters and other legal proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such lawsuit, investigation, regulatory matter and/or legal proceeding, 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. Accordingly, except as provided below, the Company is unable to reasonably estimate a range of its potential exposure, if any, to these lawsuits, investigations, regulatory matters and other legal proceedings at this time. However, it is reasonably possible that actual outcomes or losses may differ materially from the Company's current assessments and estimates and any adverse resolution of any of these matters against it could have a material adverse effect on the Company's financial position, liquidity, and results of operations.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, investigation, regulatory matters and other legal proceedings when those matters present material 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, investigation 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 material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter 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.

As of September 30, 2017 and December 31, 2016, the Company has accrued aggregate legal and regulatory liabilities of $63.7 million and $98.8 million, respectively. Further, the Company believes that the estimate of the aggregate range of reasonably possible losses for legal and regulatory proceedings in excess of reserves established up to $18.0 million as of September 30, 2017. Descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject are set forth below.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

OCC 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. 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 ("CMP") of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of SIP. Prior to entering into the SIP Consent Order, the Bank made $37.3 million in remediation payments to customers, representing the total 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 is $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 quarterly reporting to the OCC.

CFPB Overdraft Coverage Consent Order

On April 1, 2014, the Bank received a civil investigative demand from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for automated teller machine ("ATM") and onetime debit card transactions through a third-party vendor. On July 14, 2016, the Bank entered into a consent order with the CFPB regarding these practices. Pursuant to the terms of the consent order, the Bank paid a CMP of $10.0 million and agreed to validate the elections made by customers who opted in to overdraft coverage for ATM and onetime debit card transactions in connection with 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. By letter dated July 31, 2017, the CFPB indicated that it does not object to the Bank’s validation plan. The Bank is currently executing that plan and working to meet the other consent order requirements. It is possible that additional litigation could be filed as a result of these issues.

FIRREA Subpoena

On May 22, 2013, the Bank received a subpoena from the U.S. Attorney's Office for the Southern District of New York seeking information regarding claims for foreclosure expenses incurred in connection with the foreclosure of loans insured or guaranteed by the Federal Housing Agency, the FNMA or the FHLMC. The Bank continues to cooperate with the investigation; however, there can be no assurance that claims or litigation will not arise from this matter. There is insufficient information/status to assess a likelihood of fines/penalties or other loss and/or estimates at this time.

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.

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"). The Deka Lawsuit was 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 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 of 1933 and 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 December 2, 2016, the plaintiffs moved to certify the proposed classes, on February 17, 2017, SC filed an opposition to the plaintiffs' motion to certify the proposed classes, and on March 31, 2017, the plaintiffs filed their reply brief. On July 11, 2017, the court granted an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int'l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. Lexis 91938 (S.D. Tex. June 15, 2017).

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 of Directors, 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. 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 December 20, 2016, the plaintiffs filed an amended class action complaint. The amended class action complaint in the Parmelee Lawsuit alleges 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, among other things, SC’s change in its methodology for estimating its ACL and correction of such allowance for prior periods in, among other public disclosures, SC’s Annual Report on Form 10-K for the year ended December 31, 2015, SC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, and SC’s amended filings for prior reporting periods. The amended class action complaint asserts claims under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks damages and other relief. On March 14, 2017, SC filed a motion to dismiss the Parmelee Lawsuit. On March 14, 2017, SC filed a motion to dismiss the Parmelee Lawsuit. On April 25, 2017, the plaintiffs filed an opposition to the motion to dismiss, and on June 9, 2017, SC filed a reply to the plaintiffs’ opposition.

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 of Directors, 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. On April 13, 2017 the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit.

SC is also party to various lawsuits pending in federal and state courts alleging violations of state and federal consumer lending laws, including, without limitation, the Equal Credit Opportunity Act (the “ECOA”), the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Truth in Lending Act, wrongful repossession laws, usury laws and laws related to unfair and deceptive acts or practices. In general, these cases seek damages and equitable and/or other relief.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

SC is party to, or is periodically otherwise involved in reviews, investigations, examinations 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 Federal Trade Commission and various state regulatory and enforcement agencies. Currently, such proceedings include, but are not limited to, a civil subpoena from the DOJ, under the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), 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 2013.

On March 21, 2017, SC and SHUSA entered into a written agreement (the "2017 Written Agreement") with the FRBB. Under the terms of the 2017 Written Agreement, SC is required to enhance its compliance risk management program, board oversight of risk management and senior management oversight of risk management, and SHUSA is required to enhance its oversight of SC's management and operations.

In October 2014, May 2015, July 2015, and February 2017, SC also received civil subpoenas and/or CIDs from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. SC has been informed that these states serve as an executive committee on behalf of a group of 30 state Attorneys General. The subpoenas and/or CIDs from the executive committee states contained broad requests for information and documents related to SC's underwriting, securitization, servicing and collection of nonprime auto loans. SC believes that several other companies in the auto finance sector have received similar subpoenas and CIDs. SC is cooperating with the Attorneys General of the states involved. SC believes that it is reasonably possible that it will suffer a loss related to the Attorneys General, however, any such loss is not currently estimable.

On January 10, 2017, the Attorney General of the State of Mississippi (the "Mississippi AG") filed a lawsuit against SC in the Chancery Court of the First Judicial District of Hinds County, State of Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that SC engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act (the "MCPA") and seeks unspecified civil penalties, equitable relief and other relief. On March 31, 2017, SC filed motions to dismiss the Mississippi AG’s lawsuit. On May 18, 2017, SC filed a motion to stay the Mississippi AG’s lawsuit pending the resolution of an interlocutory appeal relating to the MCPA before the Mississippi Supreme Court in Purdue Pharma, L.P., et al. v. State, No. 2017-IA- 00300-SCT. On May 30, 2017, the Mississippi AG filed an opposition to the motion to stay, and on June 14, 2017, SC filed a reply to the Mississippi AG’s opposition. On September 25, 2017, the court granted the motion to stay and ordered a stay of all proceedings, excluding discovery and final briefing on motions to discuss.

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, which resolves the DOJ's claims against the Company that certain of its repossession and collection activities during the period between January 2008 and February 2013 violated the Servicemen’s Civil Relief Act ("SCRA"). The consent order requires SC to pay a civil fine in the amount of $55,000, as well as at least $9.4 million to affected servicemembers consisting of $10,000 per servicemember plus compensation for any lost equity (with interest) for each repossession by SC, and $5,000 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. The consent order also provides for monitoring by the DOJ of the Company’s SCRA compliance for a period of five years 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, based on the referral from the CFPB, it has initiated an investigation under the ECOA of SC's pricing of automobile loans.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

IHC Matters

Periodically, 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, 2017, SSLLC had received 270 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 statements of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There were 181 arbitration cases that remained pending as of September 30, 2017.

As a result of the recent hurricane impacting the Puerto Rico market including declines in Puerto Rico bond and closed-end fund ("CEF") prices, it is possible that additional arbitration claims and/or increased claim amounts may be asserted in future periods.

Puerto Rico Closed-End Funds Shareholder Derivative and Class Action

On September 12, 2016, customers of certain Puerto Rico 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 Santander, Santander BanCorp, Banco Santander Puerto Rico, SSLLC, 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 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. The case was removed to U.S. District Court, District of Puerto Rico. Plaintiffs moved to remand the action back to state court, Plaintiffs' motion is pending.

On October 13, 2017, a putative class action was filed in Puerto federal court against SSLLC alleging federal securities and common law claims relating to the solicitation and purchase of more than $180 million of Puerto Rico bonds and $101 million of CEFs during the period from December 2012 to October 2013. The case is captioned Jorge Ponsa-Rabell, et. Al. v. SSLLC, Civ. No. 3:17-cv-02243 (D.PR. 2017). The complaint alleges that SSLLC defrauded purchasers by instructing its financial consultants to omit material facts to the purchasers or concealing material facts from the financial consultants to prevent disclosures to the purchasers regarding changes in the Puerto Rico market. SSLLC has not yet been served with the complaint.

SHUSA does not believe that there are any other 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 11 to the Condensed Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2016. 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 March 28, 2017, SHUSA received a $9.0 million capital contribution from Santander.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. RELATED PARTY TRANSACTIONS (continued)

On March 29, 2017, SC entered into a Master Securities Purchase Agreement with Santander, whereby it has the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform, for a term ending in December 2018. SC will provide servicing on all loans originated under this arrangement. For the nine months ended September 30, 2017, SC sold $1.2 billion of loans under this arrangement. Under a separate securities purchase agreement, SC sold $1.3 billion of prime loans to Santander during the three months ended September 30, 2017. A total loss of $6.8 million and $13.0 million was recognized for the three and nine-months period ended September 30, 2017, which is included in Miscellaneous income, net in the Condensed Consolidated Statement of Operations. SC had $14.1 million of collections due to Santander as of September 30, 2017.

During the third quarter of 2017, SBNA sold $372.1 million of commercial loans to Santander. The sale resulted in $2.4 million of net gain for the nine-month period ended September 30, 2017, which is included in Miscellaneous Income, net in the Condensed Consolidated Statement of Operations.

Employment and Related Agreements

On July 2, 2015, SC announced the departure of Mr. Dundon from his roles as Chairman of the Board and CEO of SC, effective as of the close of business on July 2, 2015. In connection with Mr. Dundon's departure, and subject to the terms and conditions of his employment agreement, including Mr. Dundon's execution of a release of claims against SC, he became entitled to receive certain payments and benefits under his employment agreement. The separation agreement also provided for the modification of terms for certain other equity-based awards. Certain of the payments, agreements to make payments and benefits may be effective only upon receipt of certain required regulatory approvals.

As of September 30, 2017, SC has not made any payments to Mr. Dundon, nor recorded any liability or obligation arising from or pursuant to the terms of the separation agreement. If all applicable conditions are satisfied, including receipt of required regulatory approvals and satisfaction of any conditions thereto, SC will be obligated to make a cash payment to Mr. Dundon of up to $115.1 million. This amount would be recorded as compensation expense in its Consolidated Statement of Income and Comprehensive Income.

The Company also entered into an agreement with Mr. Dundon, Dundon DFS LLC ("DDFS"), and Santander related to Mr. Dundon's departure from SC. 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 an Amended and Restated Loan Agreement dated as of July 16, 2014 between DDFS and Santander. In the event the Call Transaction were to be completed after the Call End Date, interest would accrue on the price 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 were ultimately sold in the Call Transaction. The Amended and Restated Loan Agreement provides for a $300.0 million revolving loan from Santander to DDFS which, as of September 30, 2017 and December 31, 2016, had an UPB of approximately $290.0 million. On April 17, 2017, the loan agreement matured and became due and payable. 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. The Shareholders Agreement further provides that Santander may, at its option, become the direct beneficiary of the Call Option, and Santander has exercised this option. If consummated in full, DDFS LLC would receive $928.3 million plus interest that has accrued since the Call End Date. To date, the Call Transaction has not been consummated.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. RELATED PARTY TRANSACTIONS (continued)

Pursuant to the loan agreement, if at any time the value of SC Common Stock pledged under the Pledge Agreement is less than 150% of the aggregate principal amount outstanding under the loan agreement, DDFS has an obligation to either (a) repay a portion of the outstanding principal amount, such that the value of the pledged collateral is equal to at least 200% of the outstanding principal amount, or (b) pledge additional shares of SC Common Stock such that the value of the additional shares of SC Common Stock, together with the 29,598,506 shares already pledged under the Pledge Agreement, is equal to at least 200% of the outstanding principal amount. The value of the pledged collateral is less than 150% of aggregate principal amount outstanding under the loan agreement, and DDFS has not taken any of the collateral posting actions described in clauses (a) or (b) above. Moreover, as noted above, on April 17, 2017, the loan agreement matured and became due and payable on that date. If Santander declares the borrower’s obligations under the loan agreement due and payable as a result of an event of default (including with respect to the collateral posting obligations described above), under the terms of the loan agreement and the Pledge Agreement, Santander’s ability to rely upon the shares of SC Common Stock subject to the Pledge Agreement is, subject to certain exceptions, limited to the right to consummate the Call Transaction at the price specified in the Shareholders Agreement. Because the borrower failed to pay obligations under the loan agreement on April 17, 2017, the borrower is in default and is currently being charged the default rate of interest provided for in the loan agreement. The loan agreement generally defines the default interest rate as the base rate plus 2%. The base rate under the loan agreement is the higher of (1) the federal funds rate plus ½ of 1% or (2) the prime rate, which is the annual rate of interest publicly announced by Santander's New York branch ("Santander NY") from time to time. As of April 21, 2017, the prime rate as announced by Santander NY was 4%.

In connection with, and pursuant to, the separation agreement, on July 2, 2015, DDFS LLC and Santander entered into amendments to the loan agreement and the Pledge Agreement that provide, among other things, the outstanding balance under the loan agreement will become due and payable upon the consummation of the Call Transaction and that the amount otherwise payable to DDFS under the Call Transaction will be reduced by the amount outstanding under the loan agreement, including principal, interest and fees, and further that any net cash proceeds received by DDFS on account of sales of SC Common Stock after the Call End Date are applied to the outstanding balance under the loan agreement.

The parties continue in discussions on these matters. Completion of the transactions with Mr. Dundon is subject to receipt of applicable regulatory approvals.

NOTE 16. FAIR VALUE

General

A portion of the Company’s assets and liabilities are carried at fair value, including AFS investment securities and derivative instruments. In addition, the Company elects to account for its residential mortgages held for sale and a portion of its MSRs at fair value. Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include impairments for certain loans and foreclosed assets.

As of September 30, 2017, $18.2 billion of the Company’s total assets consisted of financial instruments measured at fair value on a recurring basis, including financial instruments for which the Company elected the FVO. Approximately $179.5 million of these financial assets were measured using quoted market prices for identical instruments, or Level 1 inputs. Approximately $17.3 billion of these financial assets were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $721.0 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 4.0% of total assets measured at fair value and approximately 0.5% 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:

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE (continued)

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

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

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

The Bank's Market Risk Department is responsible for determining and approving the fair values of all assets and liabilities valued at fair value, including 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 nine-month periods ended September 30, 2017 and 2016 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

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, 2017 and December 31, 2016.



	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, 2017
	(in thousands)
Financial assets:
U.S. Treasury securities	$	179,473	$	1,488,634	$	—	$	1,668,107
Corporate debt	—		43,895		—		43,895
ABS	—		165,649		370,184		535,833
Equity securities⁽¹⁾	—		—		—		—
State and municipal securities	—		25		—		25
MBS	—		14,974,359		—		14,974,359
Total investment securities AFS⁽¹⁾	179,473		16,672,562		370,184		17,222,219
Trading securities	1		9,097		—		9,098
RICs held-for-investment	—		—		204,694		204,694
LHFS ⁽²⁾	—		198,254		—		198,254
MSRs ⁽³⁾	—		—		143,524		143,524
Derivatives:
Cash flow	—		40,640		—		40,640
Mortgage banking interest rate lock commitments	—		—		2,564		2,564
Mortgage banking forward sell commitments	—		577		9		586
Customer related	—		196,020		—		196,020
Foreign exchange	—		33,767		—		33,767
Mortgage servicing	—		3,334		—		3,334
Interest rate swap agreements	—		8,801		—		8,801
Interest rate cap agreements	—		142,950		—		142,950
Other	—		9,307		—		9,307
Total financial assets	$	179,474	$	17,315,309	$	720,975	$	18,215,758
Financial liabilities:
Derivatives:
Cash flow	$	—	$	56,812	$	—	$	56,812
Customer related	—		131,240		—		131,240
Foreign exchange	—		35,550		—		35,550
Mortgage servicing	—		605		—		605
Interest rate swaps	—		1,884		—		1,884
Interest rate cap agreements	—		26,255		—		26,255
Option for interest rate cap	—		116,563		—		116,563
Total return settlement	—		—		—		—
Other	—		13,597		695		14,292
Total financial liabilities	$	—	$	382,506	$	695	$	383,201

(1) Investment securities AFS disclosed on the Condensed Consolidated Balance Sheet at September 30, 2017 included $10.8 million of equity securities valued using net asset value as a practical expedient that are not presented within this table.

(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.

(3) The Company has total MSRs of $147.0 million as of September 30, 2017. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using 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

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, 2016
	(in thousands)
Financial assets:
U.S. Treasury securities	$	224,506	$	1,632,351	$	—	$	1,856,857
ABS	—		396,157		814,567		1,210,724
Equity securities⁽¹⁾	544		—		—		544
State and municipal securities	—		30		—		30
MBS	—		13,945,463		—		13,945,463
Total investment securities AFS⁽¹⁾	225,050		15,974,001		814,567		17,013,618
Trading securities	214		1,416		—		1,630
RICs held-for-investment	—		—		217,170		217,170
LHFS ⁽²⁾	—		453,293		—		453,293
MSRs ⁽³⁾	—		—		146,589		146,589
Derivatives:
Cash flow	—		45,681		—		45,681
Mortgage banking interest rate lock commitments	—		—		2,316		2,316
Mortgage banking forward sell commitments	—		8,575		2		8,577
Customer related	—		216,421		—		216,421
Foreign exchange	—		56,742		—		56,742
Mortgage servicing	—		838		—		838
Interest rate swap agreements	—		2,075		—		2,075
Interest rate cap agreements	—		76,387		—		76,387
Other	—		12,293		—		12,293
Total financial assets	$	225,264	$	16,847,722	$	1,180,644	$	18,253,630
Financial liabilities:
Derivatives:
Cash flow	$	—	$	59,812	$	—	$	59,812
Customer related	—		149,390		—		149,390
Foreign exchange	—		46,430		—		46,430
Mortgage servicing	—		1,635		—		1,635
Interest rate swaps	—		2,647		—		2,647
Option for interest rate cap	—		76,281		—		76,281
Total return settlement	—		—		30,618		30,618
Other	—		15,625		700		16,325
Total financial liabilities	$	—	$	351,820	$	31,318	$	383,138

(1) Investment securities AFS disclosed on the Condensed Consolidated Balance Sheet at December 31, 2016 included $10.6 million of equity securities valued using net asset value as a practical expedient that are not presented within this table.

(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.

(3) The Company had total MSRs of $150.3 million as of December 31, 2016. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using 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

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, 2017
Impaired LHFI	$	—	$	201,030	$	303,996	$	505,026
Foreclosed assets	—		21,875		117,124		138,999
Vehicle inventory	—		206,076		—		206,076
LHFS⁽¹⁾	—		—		1,789,860		1,789,860
Auto loans impaired due to bankruptcy	—		101,990		—		101,990
MSRs	—		—		9,276		9,276

December 31, 2016
Impaired LHFI	$	13,147	$	244,986	$	265,664	$	523,797
Foreclosed assets	—		30,792		79,721		110,513
Vehicle inventory	—		257,659		—		257,659
LHFS⁽¹⁾	—		—		2,133,040		2,133,040
MSRs	—		—		10,287		10,287

(1) These amounts include $929.5 million and $1.1 billion of personal loans held for sale that are impaired as of September 30, 2017 and December 31, 2016, respectively.

Valuation Processes and Techniques

Impaired LHFI in the table above represents the recorded investment of impaired commercial loans for which the Company measures impairment during the period 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 net carrying value of these loans was $460.8 million and $449.5 million at September 30, 2017 and December 31, 2016, respectively. Loans previously impaired which were not marked to fair value during the periods presented are excluded from this table.

Foreclosed assets represent the recorded investment in assets taken during the period presented 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

NOTE 16. FAIR VALUE (continued)

The Company's LHFS portfolios that are measured at fair value on a nonrecurring basis primarily consist of personal, commercial, and RICs LHFS. The estimated fair value for these 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 lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.

For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices.

A portion of the Company's MSRs are measured at fair value on a nonrecurring basis. These MSRs are priced internally using a DCF model. The DCF model incorporates assumptions that market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, these MSRs are classified as Level 3.

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,
		2017			2016			2017			2016
		(in thousands)
Impaired loans held-for-investment	Provision for credit losses	$	617		$	(14,033	)	$	(26,070	)	$	(127,144	)
Foreclosed assets	Miscellaneous income⁽¹⁾	(777		)	(1,604		)	(5,448		)	(6,346		)
LHFS	Provision for credit losses	—			—			(13,200		)	—
LHFS	Miscellaneous income⁽¹⁾	(84,840		)	(107,526		)	(246,882		)	(266,506		)
Auto loans impaired due to bankruptcy	Provision for credit losses	(17,471		)	—			(65,584		)	—
MSRs	Mortgage banking income, net	123			301			320			962
		$	(102,348	)	$	(122,862	)	$	(356,864	)	$	(399,034	)

(1) These amounts reduce Miscellaneous income.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017 and 2016, respectively, for those assets and liabilities measured at fair value on a recurring basis.



Three-Month Period Ended September 30, 2017
	Investments AFS			RICs Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, June 30, 2017	$	587,571		$	207,216		$	146,091		$	(29,020	)	$	911,858
Losses in other comprehensive income	(1,506		)	—			—			—			(1,506		)
Gains/(losses) in earnings	—			27,759			(1,578		)	(324		)	25,857
Additions/Issuances	—			—			4,099			—			4,099
Settlements⁽¹⁾	(215,881		)	(30,281		)	(5,088		)	31,222			(220,028		)
Balance, September 30, 2017	$	370,184		$	204,694		$	143,524		$	1,878		$	720,280
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2017	$	—		$	27,759		$	(1,578	)	$	8		$	26,189

Nine-Month Period Ended September 30, 2017
	Investments AFS			RICs Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, December 31, 2016	$	814,567		$	217,170		$	146,589		$	(29,000	)	$	1,149,326
Losses in other comprehensive income	(4,184		)	—			—			—			(4,184		)
Gains/(losses) in earnings	—			49,392			(1,315		)	(539		)	47,538
Additions/Issuances	—			19,727			12,696			—			32,423
Settlements⁽¹⁾	(440,199		)	(81,595		)	(14,446		)	31,417			(504,823		)
Balance, September 30, 2017	$	370,184		$	204,694		$	143,524		$	1,878		$	720,280
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2017	$	—		$	49,392		$	(1,315	)	$	(787	)	$	47,290


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE (continued)



Three-Month Period Ended September 30, 2016
	Investments AFS			RICs 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 AFS			RICs 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.

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 UPB of the previously charged-off RIC portfolio was approximately $3.0 billion.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 AFS and Trading Securities

Securities accounted for at fair value include both AFS 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 values. Trading securities and certain of the Company's U.S. Treasury securities are valued utilizing observable market quotes. The Company obtains vendor trading platform data (actual prices) from a number of live data sources, including active market makers and interdealer brokers. These certain investment securities are, therefore, classified as Level 1.

Actively traded quoted market prices for the majority of the 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.

Equity securities of $10.8 million, 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 GAAP, these equity securities are not presented within the fair value hierarchy. The remainder of the Company's equity securities are valued at quoted market prices and are, therefore, classified as Level 1.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE (continued)

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.

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 $4.8 million and $9.3 million, respectively, at September 30, 2017.


•	A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $4.8 million and $9.4 million, respectively, at September 30, 2017.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE (continued)

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.

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

NOTE 16. FAIR VALUE (continued)

Level 3 Inputs - Significant Recurring Fair Value 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, 2017		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	(in thousands)
Financial Assets:
ABS
Financing bonds	$	323,583	DCF	Discount Rate ⁽¹⁾	1.52% - 2.37% (2.01% )
Sale-leaseback securities	$	46,601	Consensus Pricing ⁽²⁾	Offered quotes ⁽³⁾	123.03	%
RICs held for investment	$	204,694	DCF	Prepayment rate (CPR) ⁽⁴⁾	6.66	%
				Discount Rate ⁽⁵⁾	9.5% - 14.5% (10.75% )
				Recovery Rate ⁽⁶⁾	25% - 43% (36.65% )
MSRs	$	143,524	DCF	Prepayment rate (CPR) ⁽⁷⁾	[0.20% - 55.47%] (9.63% )
				Discount Rate ⁽⁸⁾	9.90	%
Mortgage banking interest rate lock commitments	$	2,564	DCF	Pull through percentage ⁽⁹⁾	77.00	%
				MSR value ⁽¹⁰⁾	[0.733% - 1.032]% (0.97%)

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

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

(3) Based on the nature of the input, a range or weighted average does not exist. For sale-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

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, 2017
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	7,909,625	$	7,909,625	$	7,909,625	$	—	$	—
AFS investment securities⁽¹⁾	17,222,219		17,222,219		179,473		16,672,562		370,184
Held to maturity investment securities	1,560,850		1,542,093		—		1,542,093		—
Trading securities	9,098		9,098		1		9,097		—
LHFI, net	77,592,554		78,414,389		—		111,030		78,303,359
LHFS	1,988,097		1,988,114		—		198,254		1,789,860
Restricted cash	3,033,587		3,033,587		3,033,587		—		—
MSRs⁽²⁾	146,958		152,800		—		—		152,800
Derivatives	437,969		437,969		—		435,396		2,573

Financial liabilities:
Deposits	61,877,808		61,856,395		56,143,166		5,713,229		—
Borrowings and other debt obligations	41,351,374		41,630,193		579		26,969,565		14,660,049
Derivatives	383,201		383,201		—		382,506		695



	December 31, 2016
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	10,035,859	$	10,035,859	$	10,035,859	$	—	$	—
AFS investment securities⁽¹⁾	17,013,618		17,013,618		225,050		15,974,001		814,567
Held to maturity investment securities	1,658,644		1,635,413		—		1,635,413		—
Trading securities	1,630		1,630		214		1,416		—
LHFI, net	82,005,321		81,955,122		13,147		244,986		81,696,989
LHFS	2,586,308		2,586,333		—		453,293		2,133,040
Restricted cash	3,016,948		3,016,948		3,016,948		—		—
MSRs⁽²⁾	150,343		156,876		—		—		156,876
Derivatives	421,330		421,330		—		419,012		2,318

Financial liabilities:
Deposits	67,240,690		67,141,041		58,067,792		9,073,249		—
Borrowings and other debt obligations	43,524,445		43,770,267		830		26,132,197		17,637,240
Derivatives	383,138		383,138		—		351,820		31,318

(1) Investment securities available-for-sale disclosed on the Condensed Consolidated Balance Sheet at September 30, 2017 and December 31, 2016 included $10.8 million and $10.6 million, respectively, of equity securities valued using net asset value as a practical expedient that are not presented within these tables.

(2) The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Sheets:

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, 2017 and December 31, 2016, the Company had $3.0 billion and $3.0 billion, respectively, of restricted cash. Restricted cash is related to cash restricted for investment purposes, cash posted for collateral purposes, cash advanced for loan purchases, and lockbox collections. Cash and cash equivalents, including restricted cash, have maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.

Held-to-maturity investment securities

Investment securities held to maturity are recorded at amortized cost and 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.

LHFI, 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE (continued)

Deposits

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

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 those of 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE (continued)

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 UPB of $2.6 billion with a fair value of $1.9 billion at that date.

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of September 30, 2017.



	Fair Value		Aggregate Unpaid Principal Balance		Difference
	(in thousands)
September 30, 2017
LHFS⁽¹⁾	$	198,254	$	194,099	$	4,155
RICs held-for-investment	204,694		233,734		(29,040		)
Nonaccrual loans	17,686		23,476		(5,790		)

(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. There were no nonaccrual loans related to the LHFS measured using the FVO.

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 RICs held for investment.

Residential MSRs

The Company elected to account for the majority of its existing portfolio of MSRs at fair value. This election created greater flexibility with regard to risk management of the asset by aligning the accounting for the MSRs with the accounting for risk management instruments, which are also generally carried at fair value. The remainder of the MSRs are accounted for using the lower of cost or fair value and are presented above in the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis."

The Company's residential MSRs that are accounted for at fair value had an aggregate fair value of $143.5 million at September 30, 2017. Changes in fair value totaling a loss of $1.6 million and a gain of $1.3 million were recorded in Mortgage banking income, net in the Condensed Consolidated Statements of Operations during the three-month and nine-month periods ended September 30, 2017.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. BUSINESS SEGMENT INFORMATION

Business Segment Products and Services

The Company’s reportable segments are focused principally around the customers the Company serves. The Company has identified the following reportable segments:

•

The Consumer and Business Banking segment (formerly known as the Retail Banking segment) includes the products and services provided to Bank customers through the Bank's branch locations, including consumer deposit, business banking, residential mortgage, unsecured lending and investment services. The branch locations offer a wide range of products and services to consumers and business banking customers, including demand and interest-bearing demand deposit accounts, money market and savings accounts, CDs and retirement savings products. The branch locations also offer lending products such as credit cards, home equity loans and lines of credit, and business loans such as commercial lines of credit and business credit cards. In addition, the Bank provides investment services to its retail customers, including annuities, mutual funds, and insurance products. Santander Universities, which provides grants and scholarships to universities and colleges as a way to foster education through research, innovation and entrepreneurship, is the last component of this 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 equipment and commercial vehicles. 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 serves the needs of global commercial and institutional customers by leveraging the international footprint of Santander 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, BSPR, SIS, SSLLC, and SFS, the unallocated 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 entities that have become part of the IHC, 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

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 Chief Operating Decision Maker ("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. The adjustments column includes adjustments to reconcile SC's GAAP results to SHUSA's consolidated results.

There were no changes to the Company's reportable segments during the three-month and nine-month periods ended September 30, 2017. The results of segments for the three-month and nine-month periods ended September 30, 2016 have been recast to the current composition of the Company's reportable segments.

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, 2017	Consumer & Business Banking		Commercial Banking		Commercial Real Estate			GCB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	324,539	$	87,176	$	72,870		$	35,494		$	27,665		$	989,140	$	31,731		$	5,445		$	1,574,060
Total non-interest income	100,583		15,837		2,855			23,205			181,047			496,728		(13,779		)	(11,754		)	794,722
Provision for credit losses	20,716		5,857		(2,824		)	11,599			48,812			536,447		31,513			—			652,120
Total expenses	379,299		51,677		17,530			24,615			234,270			671,648		10,946			(3,798		)	1,386,187
Income/(loss) before income taxes	25,107		45,479		61,019			22,485			(74,370		)	277,773		(24,507		)	(2,511		)	330,475
Intersegment revenue/(expense)⁽¹⁾	3,076		1,619		500			(1,823		)	(3,372		)	—		—			—			—
Total assets	19,716,199		11,606,759		14,073,894			6,109,131			41,714,577			38,765,557		—			—			131,986,117


(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 entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the 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

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)



For the Nine-Month Period Ended	SHUSA Reportable Segments
September 30, 2017	Consumer & Business Banking			Commercial Banking		Commercial Real Estate			GCB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	945,102		$	259,502	$	220,580		$	119,968		$	62,738		$	3,085,739	$	103,132		$	21,612		$	4,818,373
Total non-interest income	282,360			45,729		8,121			48,808			548,945			1,363,948		(12,044		)	(33,756		)	2,252,111
Provision for credit losses	64,577			16,115		(8,784		)	23,871			80,472			1,692,015		124,068			—			1,992,334
Total expenses	1,169,247			154,587		57,162			75,945			739,912			1,910,365		34,326			(16,261		)	4,125,283
Income/(loss) before income taxes	(6,362		)	134,529		180,323			68,960			(208,701		)	847,307		(67,306		)	4,117			952,867
Intersegment revenue/(expense)⁽¹⁾	9,226			4,553		1,997			(5,867		)	(9,909		)	—		—			—			—
Total assets	19,716,199			11,606,759		14,073,894			6,109,131			41,714,577			38,765,557		—			—			131,986,117


(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 entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the 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, 2016	Consumer & Business Banking			Commercial Banking			Commercial Real Estate		GCB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	297,952		$	91,259		$	74,992	$	60,436		$	(45,680	)	$	1,095,060	$	42,566		$	4,545		$	1,621,130
Total non-interest income	104,736			16,947			5,124		26,319			189,825			389,375		9,071			(13,824		)	727,573
Provision for credit losses	19,872			(20,162		)	2,945		(2,487		)	4,426			610,398		72,920			—			687,912
Total expenses	395,759			51,156			20,556		26,830			260,723			570,017		13,956			(12,172		)	1,326,825
Income/(loss) before income taxes	(12,943		)	77,212			56,615		62,412			(121,004		)	304,020		(35,239		)	2,893			333,966
Intersegment revenue/(expense)⁽¹⁾	9,656			3,616			2,523		(702		)	(15,093		)	—		—			—			—
Total assets	19,735,459			12,174,784			15,005,335		10,551,939			43,782,904			38,771,636		—			—			140,022,057


(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 entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the 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

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		GCB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	793,345		$	257,421	$	212,035	$	182,024		$	(8,180	)	$	3,388,276	$	146,419		$	10,477		$	4,981,817
Total non-interest income	297,311			51,094		16,445		65,818			608,810			1,109,894		38,340			(38,897		)	2,148,815
Provision for credit losses	40,215			32,686		23,905		28,889			31,247			1,782,489		260,723			—			2,200,154
Total expenses	1,162,090			157,672		66,819		89,952			852,990			1,645,156		42,585			(37,497		)	3,979,767
Income/(loss) before income taxes	(111,649		)	118,157		137,756		129,001			(283,607		)	1,070,525		(118,549		)	9,077			950,711
Intersegment revenue/(expense)⁽¹⁾	34,111			12,927		9,940		(780		)	(56,198		)	—		—			—			—
Total assets	19,735,459			12,174,784		15,005,335		10,551,939			43,782,904			38,771,636		—			—			140,022,057


(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 entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the 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.

NOTE 18. IHC

The Federal Reserve issued the Final Rule to strengthen regulatory oversight of 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 IHC. Due to its U.S. non-branch total consolidated asset size, Santander is 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 and SSLLC, as well as 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 represented 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.

On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. ("SFS"), a finance company located in Puerto Rico, was transferred to the Company. Refer to Note 1 for additional details.

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"). SHUSA is also the parent company of Santander BanCorp (together with its subsidiaries, “Santander BanCorp”), a 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 headquartered in Boston; Banco Santander International (“BSI”), a financial services company located in Miami that 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 providing services in investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed-income securities; and several other subsidiaries.

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 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 and securitization of retail installment contracts ("RICs"), principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime retail consumers. Further information about SC’s business is provided below in the “Chrysler Capital” section.

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.

In 2014, an initial public offering ("IPO") of shares of SC's 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. SC Common Stock is now listed for trading on the New York Stock Exchange under the trading symbol “SC”.

Immediately following the IPO, the Company owned approximately 61% of the shares of SC Common Stock. The IPO resulted in a 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).

Chrysler Capital

SC 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 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

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. The targeted and actual penetration rates under the terms of the Chrysler Agreement are as follows:



	Program Year (a)
	1	2	3	4	5-10
Retail	20%	30%	40%	50%	50%
Lease	11%	14%	14%	14%	15%
Total	31%	44%	54%	64%	65%

Actual Penetration (b)	30%	29%	26%	19%	21%

(a) Each program year runs from May 1 to April 30. Retail and lease penetration is based on a percentage of FCA retail sales.

(b) Actual penetration rates shown for program year 1, 2, 3 and 4 are as of April 30, 2014, 2015, 2016 and 2017, respectively, the end date of each of those Program Years. Actual penetration rate shown for program year 5, which ends April 30, 2018, is as of September 30, 2017.

The target penetration rate as of as of April 30, 2018 is 65%. SC's actual penetration rate for the three-months ended September 30, 2017 was 21%. The penetration rate has been constrained due to the competitive landscape and low interest rates, causing SC's subvented loan offers not to be materially more attractive than other lenders' offers. While SC has not achieved the targeted penetration rates to date, Chrysler Capital continues to be a focal point of its strategy, SC continues to work with FCA to improve penetration rates, and SC remains committed to the Chrysler Agreement.

SC has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. SC has partnered with FCA to roll out two new pilot programs, including a dealer rewards program and a nonprime subvention program. During the nine months ended September 30, 2017, SC originated $5.2 billion in Chrysler Capital loans, which represented 46% of total RIC originations, with an approximately even share between prime and non-prime, as well as more than $4.7 billion in Chrysler Capital leases. Since its May 1, 2013 launch, Chrysler Capital has originated $43.7 billion in retail loans and $22.3 billion in leases, and facilitated the origination of $3.0 billion in leases and dealer loans for the Bank. As of September 30, 2017, SC's auto RIC portfolio consisted of $6.9 billion of Chrysler Capital loans, which represents 31% of SC's auto RIC portfolio.

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 has provided personal loans, private-label credit cards and other consumer finance products. In October 2015, SC announced its planned exit from the personal lending business.

SC has dedicated financing facilities in place for its Chrysler Capital business. SC periodically sells consumer RICs through these flow agreements and, when market conditions are favorable, it accesses the asset-backed securities ("ABS") market through securitizations of consumer RICs. SC also periodically enters into bulk sales of consumer vehicle leases with a third party. SC typically retains servicing of loans and leases sold or securitized, and may also retain some residual risk in sales of leases. SC has also entered into an agreement with a third party whereby SC will periodically sell charged-off loans.

ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the third quarter of 2017, unemployment declined, while market results improved and the preliminary gross domestic product ("GDP") growth rate rose from the prior quarter.

The unemployment rate at September 30, 2017 decreased to 4.2% compared to 4.4% at June 30, 2017 and 5.0% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose in health care, transportation and warehousing jobs, but declined in food services.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The Bureau of Economic Analysis ("BEA") advance estimate indicates that real GDP grew at an annualized rate of 3.0% for the third quarter of 2017, compared to 2.6% in the second quarter of 2017. According to the BEA, the change was positively affected by changes in personal consumption expenditures, non-residential fixed investment, exports, and federal government spending, and negatively affected by changes in residential fixed investment and state and local government spending.

Market year-to-date returns for the following indices based on closing prices at September 30, 2017 were:



		September 30, 2017
Dow Jones Industrial Average		13.4%
S&P 500		12.5%
NASDAQ Composite		20.7%

At its September 2017 meeting, the Federal Open Market Committee decided to maintain the federal funds rate target at 1-1.25% , indicating that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Inflation remains below the targeted rate of 2.0%.

The 10-year Treasury bond rate at September 30, 2017 was 2.33%, down from 2.45% at December 31, 2016. Over the past twelve months, however, the 10-year Treasury bond rate increased 72 basis points. Within the industry, this metric is often considered to correspond to 15-year and 30-year mortgage rates.

At the time of filing this Form 10-Q, current quarter 2017 information was not available; however, for the second quarter of 2017, mortgage originations increased approximately 1.73% over the prior quarter, but decreased 25.99% year-over-year. Similarly, refinancing activity showed an increase of approximately 2.72% over the prior quarter, but a decrease of 54.49% year-over- year.

After reaching its peak in 2009, the ratio of nonperforming loans ("NPLs") to total gross loans for U.S. banks declined for six consecutive years, to just under 1.5% in 2015. NPL trends have remained relatively flat since that time. NPLs for U.S. commercial banks were approximately 1.20% of loans using data for the second quarter of 2017, compared to 1.31 for the prior quarter.

Changing market conditions are considered a significant risk factor to the Company. The interest rate environment can present 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.

Credit Rating Actions

The following table presents Moody's and Standard & Poor's ("S&P") credit ratings for the Bank, and Banco Santander Puerto Rico ("BSPR"), SHUSA, Santander, and the Kingdom of Spain, as of September 30, 2017:

BANK

BSPR⁽¹⁾

SHUSA

SANTANDER

SPAIN

Moody's

S&P

Moody's

S&P

Moody's

S&P

Moody's

S&P

Moody's

S&P

Long-Term

Baa2

BBB+

Baa2

N/A

Baa3

BBB+

A-

Baa2

BBB+

Short-Term

P-1

A-2

P-1/P-2

N/A

n/a

A-2

P-2

A-2

P-2

A-2

Outlook

Stable

N/A

Stable

Positive

(1) P-1 Short Term Deposit Rating; P-2 Short Term Debt Rating.

February 9, 2017 Standard and Poor’s raised its outlook on Santander’s credit rating to “positive” from “stable” reflecting Santander’s issuance of debt to meet total loss absorbing capital ("TLAC") requirements.

On March 31, 2017, Standard & Poor's raised its outlook on Spain's sovereign credit rating to "positive" from "stable", saying it believed the country's strong economic performance would continue over the next two years.

On June 6, 2017 Standard and Poor's revised its outlook on Santander to stable from positive, saying its stable outlook reflects limited prospects for ratings upside until it sees evidence that the integration of Banco Popular is proceeding smoothly and not facing meaningful business or financial setbacks.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

On August 1, 2017 Standard & Poor’s affirmed SHUSA’s and SBNA’s ratings at A-2/BBB+/Stable.

On September 27, 2017 Moody’s placed SBNA’s long term rating on review for possible upgrade. Moody's affirmed SBNA’s short term rating and outlook at P-1/Stable. Also on September 27, 2017 Moody’s affirmed SHUSA’s long-term rating and outlook at Baa3/Stable.

On October 10, 2017 Moody's affirmed the short-term deposit rating for BSPR following Hurricane Maria.

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.

Puerto Rico Economy

On May 3, 2017, the Financial Oversight and Management Board for Puerto Rico (“FOB”) submitted a request to the Federal District Court of Puerto Rico to apply Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) to the Commonwealth of Puerto Rico. Title III of PROMESA allows the Commonwealth of Puerto Rico to enter into a debt restructuring process notwithstanding that Puerto Rico is barred from traditional bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code.

On July 2, 2017, the Puerto Rican Electric Power Authority ("PREPA") submitted a request to the Federal District Court of Puerto Rico to apply Title III of PROMESA to PREPA.

As of September 30, 2017, SHUSA did not have material direct credit exposure to the Commonwealth of Puerto Rico, and its exposure to Puerto Rico municipalities in total was approximately $300 million. As of September 30, 2017, municipalities had not been designated “covered” territorial instrumentalities subject to the requirements of PROMESA, and the municipalities were current on their debt obligations to SHUSA. Under PROMESA, the FOB has sole discretion to designate territorial instrumentalities such as municipalities as covered entities subject to PROMESA’s requirements. If the FOB determines to designate municipalities as covered entities under PROMESA, the FOB could initiate debt restructuring of municipalities that have debt obligations to SHUSA, if deemed necessary.

Impact from Hurricanes

Our footprint was impacted by three significant hurricanes during the third quarter of 2017, Hurricane Harvey, which struck the State of Texas and surrounding region, Hurricane Irma, which primarily struck the State of Florida, and Hurricane Maria, which struck the island of Puerto Rico. Each of these hurricanes resulted in widespread flooding, power outages and associated damage to real and personal property in the affected areas. Our SC subsidiary headquartered in Dallas, Texas, our BSI subsidiary headquartered in Miami, Florida, and our Santander BanCorp, BSPR and SSLLC subsidiaries in Puerto Rico were most directly affected by these hurricanes. In Puerto Rico, there was significant damage to the infrastructure and the power grid in the entire island, which resulted in extended delays in BSPR returning to normal operations.

The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions and has increased its allowance for loan losses by approximately $95 million in the third quarter 2017. However, for credit exposures in Puerto Rico, given the current state in the region, the Company has had limited information with which to estimate probable credit losses. As of September 30, 2017, the Company has approximately $3.6 billion of loan exposures in Puerto Rico consisting of $1.7 billion in consumer loans, $1.6 billion in commercial loans, and $300 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses and may establish additional reserves for losses in future periods.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

REGULATORY MATTERS

The activities of the Company and its subsidiaries, including the Bank and SC, are subject to regulation under various U.S. federal laws and regulatory agencies which impose regulations, supervise and conduct examinations, and may affect the operations and management of the Company and its ability to take certain actions, including making distributions to our parent and shareholders.

The Company is regulated on a consolidated basis by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), including the Federal Reserve Bank of Boston (the "FRB"), and the Consumer Financial Protection Bureau (the "CFPB"). The Company's banking subsidiaries are further supervised by the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the “OCC”). As a subsidiary of the Company, SC is also subject to regulatory oversight by the Federal Reserve as well as the CFPB.

Refer to the Annual Report on Form 10-K for the year ended December 31, 2016, which includes additional disclosures and discussion of laws and regulations affecting the Company, including, the Dodd-Frank Act Wall Street Reform and Consumer Protection (the "DFA"), the FDIC Improvement Act, and other regulatory matters.

Payment of Dividends

The Parent Company is the parent holding company of SBNA and other consolidated subsidiaries, and is a legal entity separate and distinct from its subsidiaries. In addition to those arising as a result of the Comprehensive Capital Analysis and Review (“CCAR”) process described under the caption “Stress Tests and Capital Adequacy” below, SHUSA and SBNA are subject to various regulatory restrictions relating to the payment of dividends, including regulatory capital minimums and the requirement to remain "well-capitalized" under prompt corrective action regulations. As a consolidated subsidiary of the Company, SC is included in various regulatory restrictions relating to payment of dividends as described in the “Stress Tests and Capital Adequacy” discussion in this section.

During the three-month and nine-month periods ended September 30, 2017 the Company paid dividends of $5.0 million to its sole shareholder, Santander.

In addition, the following regulatory matters are in the process of being phased in or evaluated by the Company.

Foreign Banking Organizations ("FBOs")

On February 18, 2014, the Federal Reserve issued the final rule to strengthen regulatory oversight of FBOs (the “FBO Final Rule”). Under the FBO 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 FBO Final Rule requires U.S. bank holding companies ("BHCs") and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to enhanced prudential standards ("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 FBO 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 ("BSI"); Santander Investment Securities, Inc., a broker-dealer located in New York ("SIS"); and Santander Securities LLC, a Puerto Rico broker-dealer ("SSLLC"). A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a result, as discussed in Note 18, on July 1, 2017, Santander also transferred ownership of an additional entity, Santander Financial Services, Inc. ("SFS"), to the Company. Other standards of the FBO Final Rule will be phased in through January 1, 2019.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Third Basel Accord ("Basel III")

Basel III Regulatory Capital Rule Implementation

The U.S. Basel III regulatory capital rules include deductions from and adjustments to common equity Tier 1 ("CET1"). Implementation of the deductions and other adjustments to CET1 for the Company and the Bank began on January 1, 2015 and are being phased in over three years. Phased-in changes 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.

As of September 30, 2017, the Bank's and the Company's CET1 ratios under the transitional provisions provided under Basel III, were 18.08% and 15.66%, respectively. Under Basel III, on a fully phased-in basis under the standardized approach (non-GAAP), the Bank`s and the Company`s CET1 ratios were 17.71% and 15.18%, 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 and the CET1 ratio. The Company believes that, as of September 30, 2017, 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.

Basel III Capital Conservation Buffer

A capital conservation buffer of 2.5% above these minimum ratios is being phased in over three years, which began in 2016 at 0.625% and increases 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, and failure to maintain the capital conservation buffer can lead to restrictions on the ability to make capital distributions, including paying dividends.

Basel III Liquidity Framework

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 November 13, 2015, the Federal Reserve published a revised final LCR rule. Under this revision, the Company was required to calculate the modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016. The Company will be required to publicly disclose its US LCR results starting October 1, 2018. Based on management's interpretation of the final rule, the Company's LCR was in excess of the regulatory minimum of 100% on January 1, 2017.

In May 2016, the Federal Reserve issued a proposed rule for NSFR applicable to U.S. financial institutions. If finalized as proposed, the proposed rule will become a minimum standard on January 1, 2018. The Company is currently evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.

Stress Tests and Capital Adequacy

Under the terms of a written agreement the Company entered into with Federal Reserve Bank ("FRB") of Boston on July 2, 2015, 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The Company previously was subject to an additional written agreement with the FRB of Boston regarding stress testing and capital adequacy. That written agreement was entered into on September 15, 2014, and was terminated on August 17, 2017.

The Company also is subject to the capital plan rule, which requires the Company and the Bank 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. As a consolidated subsidiary of the Company, SC is included in the Company's stress tests and capital plans.

Under the capital plan rule, the Federal Reserve may object to the Company’s capital plan if the Federal Reserve determines that the Company has not demonstrated an ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the planning horizon. The Company is considered a large and non-complex BHC under the capital rule plan, and as a result is no longer subject to the qualitative assessment of the capital plan rule by the Federal Reserve.

In June 2017, the Company announced that the Federal Reserve, as part of its Comprehensive Capital Analysis and Review ("CCAR") process, did not object to the capital plan submitted by the Company as part of the CCAR process and the capital distributions included in the plan. That capital plan included planned capital distributions across the following categories: (1) common stock dividends from SHUSA to Santander, (2) common stock dividends from SC, (3) redemption of the remaining balance of SHUSA's 7.908% trust preferred securities, and (4) dividends on the Company's preferred stock and payments on its trust preferred securities. On June 28, 2017, SHUSA's Board of Directors approved the following capital distributions for the third quarter of 2017: (1) a dividend payment of $0.45625 per share on the Company's preferred stock, (2) a common stock dividend payment to Santander of $5.0 million, and (3) redemption of the remaining balance of the Company's trust preferred securities.

TLAC

The Federal Reserve adopted a rule in December 2016 that will require certain U.S. organizations to maintain a minimum amount of loss-absorbing instruments, including a minimum amount of unsecured long-term debt (the “TLAC Rule”). The TLAC Rule, which amends Regulation YY, applies to U.S. global systemically important banks and to IHCs with $50 billion or more in U.S. non-branch assets that are controlled by a global systemically important FBOs. The Company is such an IHC.

Under the TLAC Rule, companies are required to maintain a minimum amount of TLAC, which consists of a minimum amount of long-term debt (“LTD”) and Tier 1 capital. As a result, SHUSA will need to hold the higher of 18% of its risk-weighted assets ("RWAs") or 9% of its total consolidated assets in the form of TLAC. SHUSA must maintain a TLAC buffer composed solely of CET1 capital and will be subject to restrictions on capital distributions and discretionary bonus payments based on the size of the TLAC buffer it maintains. In addition to TLAC, the rule requires SHUSA to hold LTD in an amount no less than the greater of 6% of its RWAs or 3.5% of its total consolidated assets. The final rule is effective January 1, 2019.

Transactions with Affiliates

Depository institutions must remain in compliance with Sections 23A and 23B of the Federal Reserve Act and FRB Regulation W ("Reg. W"), which governs the activities of the Company and its banking subsidiaries with affiliated companies and individuals. Section 23A places limits on certain specified “covered transactions,” which include loans, lines, and letters of credit to affiliated companies or individuals, investments in affiliated companies, and certain other transactions with affiliated companies and individuals. The aggregate of all covered transactions is limited to 10% of a bank’s capital and surplus for any one affiliate and 20% for all affiliates. Certain covered transactions also must meet collateral requirements that range from 100% to 130% depending on the type of transaction.

Section 23B of the Federal Reserve Act prohibits an institution from engaging in certain transactions with affiliates unless the transactions are considered arm`s-length. To meet the definition of arms-length, the terms of the transaction must be the same, or at least as favorable, as those for similar transactions with non-affiliated companies.

As a U.S. domiciled subsidiary of a global parent with significant non-bank affiliates, the Company faces elevated compliance risk in this area.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Regulation AB II

In August 2014, the SEC unanimously voted to adopt final rules known as Regulation AB II that, among other things, expanded disclosure requirements and modified the offering and shelf registration process for asset-backed securities (“ABS”). All offerings of publicly registered ABS and all reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for outstanding publicly-registered ABS were required to comply with the new rules and disclosures on and after November 23, 2015, except for asset-level disclosures. Compliance with the new rules regarding asset-level disclosures was required for all offerings of publicly registered ABS on and after November 23, 2016. SC must comply with these rules, which affects the SC's public securitization platform.

Community Reinvestment Act ("CRA")

SBNA and Banco Santander Puerto Rico are subject to the CRA, which requires the appropriate Federal financial supervisory agency to assess an institution's record of helping to meet the credit needs of the local communities in which it is located. Banco Santander Puerto Rico’s current CRA rating is “Outstanding.” The Bank’s most recent public CRA report of examination rated the Bank as “Needs to Improve” for the January 1, 2011 through December 31, 2013 evaluation period. The Bank’s rating based solely on the applicable CRA lending, service and investment tests would have been “Satisfactory.” However, the overall rating was lowered to “Needs to Improve” due to previously disclosed instances of non-compliance by the Bank that are being remediated. The OCC takes into account the Bank’s CRA rating in considering certain regulatory applications the Bank makes, including applications related to establishing and relocating branches, and the Federal Reserve does the same with respect to certain regulatory applications the Company makes. In addition, there may be some negative impacts on aspects of the Bank’s business as a result of the downgrade. For example, certain categories of depositors are restricted from making deposits in banks with a “Needs to Improve” rating.

Other Regulatory Matters

On March 23, 2017, the Company and SC entered into a written agreement with the FRB of Boston. Under the terms of this written agreement, SC is required to enhance its compliance risk management program, SC’s Board and management are required to enhance their oversight of SC’s risk management program, and the Company is required to enhance, among other matters, its Board oversight of SC’s management and operations.

On February 25, 2015, we entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, which resolves the DOJ’s claims against the Company that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the SCRA. The consent order requires us to pay a civil fine in the amount of $55,000, as well as at least $9.4 million to affected servicemembers, consisting of $10,000 per servicemember plus compensation for any lost equity (with interest) for each repossession by us and $5,000 per servicemember for each instance where we sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder. The consent order also requires us to undertake additional remedial measures. The consent order also subjects us to monitoring by the DOJ for compliance with SCRA for a period of five years.

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 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

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

During the period covered by this report:

•

Santander UK plc ("Santander UK") holds two savings accounts and one current account for two customers resident in the UK who are currently designated by the U.S. under the Specially Designated Global Terrorist ("SDGT") sanctions program. Revenues and profits generated by Santander UK on these accounts in the three-month and nine-month periods ended September 30, 2017 were negligible relative to the overall profits of Santander.

•

Santander UK holds two frozen current accounts for two UK nationals who are designated by the U.S. under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and remained frozen through the three-month and nine-month periods ended September 30, 2017. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by the Santander UK Collections and Recoveries Department. No revenues or profits were generated by Santander UK on this account in the three-month and nine-month periods ended September 30, 2017.

Santander also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (standby 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.

In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the three-month and nine-month periods ended September 30, 2017 which were negligible relative to the overall revenues and profits of Santander. Santander 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 or issuing export letters of credit, except for the legacy transactions described above. The Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). Accordingly, Santander 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.

100

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

RESULTS OF OPERATIONS

On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. 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. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company and accounted for prospectively. Refer to Note 1 for additional information.

RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					YTD Change
	2017			2016			2017			2016			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)												(dollars in thousands)
Net interest income	$	1,574,060		$	1,621,130		$	4,818,373		$	4,981,817		$	(47,070	)	(2.9	)%	$	(163,444	)	(3.3	)%
Provision for credit losses	(652,120		)	(687,912		)	(1,992,334		)	(2,200,154		)	(35,792		)	(5.2	)%	(207,820		)	(9.4	)%
Total non-interest income	794,722			727,573			2,252,111			2,148,815			67,149			9.2	%	103,296			4.8	%
General and administrative expenses	(1,343,545		)	(1,281,275		)	(3,995,019		)	(3,775,490		)	62,270			4.9	%	219,529			5.8	%
Other expenses	(42,642		)	(45,550		)	(130,264		)	(204,277		)	(2,908		)	(6.4	)%	(74,013		)	(36.2	)%
Income before income taxes	330,475			333,966			952,867			950,711			(3,491		)	(1.0	)%	2,156			0.2	%
Income tax provision	(93,448		)	(108,320		)	(264,368		)	(339,968		)	(14,872		)	(13.7	)%	(75,600		)	(22.2	)%
Net income⁽¹⁾	$	237,027		$	225,646		$	688,499		$	610,743		$	11,381		5.0	%	$	77,756		12.7	%

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

The Company reported pre-tax income of $330.5 million and $952.9 million for the three-month and nine-month periods ended September 30, 2017, compared to pre-tax income of $334.0 million and $950.7 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:


•	Net interest income decreased $47.1 million and $163.4 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These decreases were primarily due to a decrease in interest income earned on loans due to declining yields on consumer loans.

•

The provision for credit losses decreased $35.8 million and $207.8 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These decreases were primarily due to activity in the RIC and auto loan portfolio and the related provisions for these portfolios, the decrease in the Corporate Banking provision and personal unsecured loans and credit cards as well as a decrease in the total average loans held by SHUSA.

•

Total non-interest income increased $67.1 million and $103.3 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods of 2016. These increases were primarily in lease income associated with the continued growth of the lease portfolio, and increases in miscellaneous income. These were offset by a decrease in consumer loan fees due to a reduction of loans serviced by the Company for the three-month and nine-month periods ended September 30, 2017.

•

Total general and administrative expenses increased $62.3 million and $219.5 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These increases were primarily due to an increase in lease expense due to the growth of the Company's leased vehicle portfolio and an increase in compensation expense due to employee headcount, offset by a decrease in consulting fees.

101

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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


•	Other expenses decreased $2.9 million and $74.0 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding period in 2016. These were primarily due to a decrease in expenses associated with loss on debt repurchases.


•	The income tax provision decreased $14.9 million and $75.6 million for the three-month and nine-month periods ended September 30, 2017, compared to the corresponding periods in 2016. These decreases were predominantly due to the undistributed net earnings of a Puerto Rico subsidiary that will be indefinitely reinvested outside the U.S.

102

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, 2017 AND 2016
	2017 ⁽¹⁾							2016 ⁽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	$	26,528,717		$	131,516	1.98	%	$	23,417,007		$	81,885	1.39	%	$	49,631		$	11,832		$	37,799
LOANS⁽³⁾:
Commercial loans	32,319,061			307,933		3.81	%	37,164,361			332,340		3.56	%	(24,407		)	(52,902		)	28,495
Multifamily	8,220,959			76,413		3.72	%	9,110,535			82,610		3.61	%	(6,197		)	(9,008		)	2,811
Total commercial loans	40,540,020			384,346		3.79	%	46,274,896			414,950		3.57	%	(30,604		)	(61,910		)	31,306
Consumer loans:
Residential mortgages	8,540,609			85,956		4.03	%	7,888,262			62,882		3.17	%	23,074			5,390			17,684
Home equity loans and lines of credit	5,881,885			60,736		4.13	%	6,055,344			54,888		3.61	%	5,848			(1,451		)	7,299
Total consumer loans secured by real estate	14,422,494			146,692		4.07	%	13,943,606			117,770		3.36	%	28,922			3,939			24,983
RICs and auto loans	27,381,594			1,126,517		16.46	%	26,922,199			1,198,698		17.71	%	(72,181		)	23,011			(95,192		)
Personal unsecured	2,355,848			150,951		25.63	%	2,179,968			137,764		25.14	%	13,187			10,621			2,566
Other consumer⁽⁴⁾	670,318			13,878		8.28	%	879,136			19,895		9.00	%	(6,017		)	(4,501		)	(1,516		)
Total consumer	44,830,254			1,438,038		12.83	%	43,924,909			1,474,127		13.35	%	(36,089		)	33,070			(69,159		)
Total loans	85,370,274			1,822,384		8.54	%	90,199,805			1,889,077		8.33	%	(66,693		)	(28,840		)	(37,853		)
Allowance for loan and lease losses ⁽⁵⁾	(3,971,133		)	—		—	%	(3,784,242		)	—		—	%
NET LOANS	81,399,141			1,822,384		8.96	%	86,415,563			1,889,077		8.70	%	(66,693		)	(28,840		)	(37,853		)
Intercompany investments	9,531			133		5.58	%	14,640			226		6.14	%	(93		)	(74		)	(19		)
TOTAL EARNING ASSETS	107,937,389			1,954,033		7.24	%	109,847,210			1,971,188		7.14	%	(17,155		)	(17,082		)	(73		)
Other assets⁽⁶⁾	26,566,056							29,935,299
TOTAL ASSETS	$	134,503,445						$	139,782,509
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	9,851,544		$	6,227	0.25	%	$	10,977,842		$	6,384	0.23	%	$	(157	)	$	(1,030	)	$	873
Savings	5,967,134			2,531		0.17	%	6,001,890			3,299		0.22	%	(768		)	(19		)	(749		)
Money market	24,718,439			31,977		0.52	%	25,199,241			31,383		0.50	%	594			(542		)	1,136
Certificates of deposit ("CDs")	5,744,488			15,972		1.11	%	9,515,447			23,222		0.97	%	(7,250		)	(11,403		)	4,153
TOTAL INTEREST-BEARING DEPOSITS	46,281,605			56,707		0.49	%	51,694,420			64,288		0.49	%	(7,581		)	(12,994		)	5,413
BORROWED FUNDS:
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements	4,868,414			18,973		1.56	%	7,633,696			24,783		1.29	%	(5,810		)	(13,761		)	7,951
Other borrowings	38,570,714			304,160		3.15	%	38,314,163			260,761		2.71	%	43,399			1,719			41,680
TOTAL BORROWED FUNDS ⁽⁷⁾	43,439,128			323,133		2.98	%	45,947,859			285,544		2.47	%	37,589			(12,042		)	49,631
TOTAL INTEREST-BEARING FUNDING LIABILITIES	89,720,733			379,840		1.69	%	97,642,279			349,832		1.43	%	30,008			(25,036		)	55,044
Noninterest bearing demand deposits	15,862,813							15,107,001
Other liabilities⁽⁸⁾	5,339,995							4,614,098
TOTAL LIABILITIES	110,923,541							117,363,378
STOCKHOLDER’S EQUITY	23,579,904							22,419,131
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	134,503,445						$	139,782,509

NET INTEREST SPREAD ⁽⁹⁾						5.55	%						5.71	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.83	%						5.87	%
NET INTEREST INCOME				$	1,574,060						$	1,621,130


(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.

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


(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 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.


(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.

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




CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016
	2017 ⁽¹⁾							2016 ⁽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	$	27,141,702		$	378,698	1.86	%	$	25,581,579		$	302,965	1.58	%	$	75,733		$	19,388		$	56,345
LOANS⁽³⁾:
Commercial loans	33,400,685			913,332		3.65	%	37,472,514			993,965		3.54	%	(80,633		)	(112,927		)	32,294
Multifamily	8,367,176			234,418		3.74	%	9,223,167			250,375		3.63	%	(15,957		)	(23,693		)	7,736
Total commercial loans	41,767,861			1,147,750		3.66	%	46,695,681			1,244,340		3.56	%	(96,590		)	(136,620		)	40,030
Consumer loans:
Residential mortgages	8,341,638			248,210		3.97	%	7,816,089			187,430		3.20	%	60,780			13,274			47,506
Home equity loans and lines of credit	5,926,996			172,634		3.88	%	6,095,190			165,639		3.63	%	6,995			(4,676		)	11,671
Total consumer loans secured by real estate	14,268,634			420,844		3.93	%	13,911,279			353,069		3.39	%	67,775			8,598			59,177
RICs and auto loans	27,100,719			3,444,811		16.95	%	26,597,271			3,657,493		18.37	%	(212,682		)	68,973			(281,655		)
Personal unsecured	2,570,206			469,517		24.36	%	2,341,387			436,724		24.92	%	32,793			42,585			(9,792		)
Other consumer⁽⁴⁾	718,719			47,317		8.78	%	940,577			63,547		9.02	%	(16,230		)	(14,584		)	(1,646		)
Total consumer	44,658,278			4,382,489		13.08	%	43,790,514			4,510,833		13.76	%	(128,344		)	105,572			(233,916		)
Total loans	86,426,139			5,530,239		8.53	%	90,486,195			5,755,173		8.50	%	(224,934		)	(31,048		)	(193,886		)
Allowance for loan and lease losses ⁽⁵⁾	(3,919,362		)	—		—	%	(3,609,242		)	—		—	%
NET LOANS	82,506,777			5,530,239		8.94	%	86,876,953			5,755,173		8.85	%	(224,934		)	(31,048		)	(193,886		)
Intercompany investments	12,918			596		6.15	%	14,640			677		6.18	%	(81		)	(78		)	(3		)
TOTAL EARNING ASSETS	109,661,397			5,909,533		7.19	%	112,473,172			6,058,815		7.20	%	(149,282		)	(11,738		)	(137,544		)
Other assets⁽⁶⁾	26,432,133							30,212,877
TOTAL ASSETS	$	136,093,530						$	142,686,049
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	10,269,643		$	16,299	0.21	%	$	11,788,832		$	35,809	0.41	%	$	(19,510	)	$	(4,078	)	$	(15,432	)
Savings	5,998,369			8,250		0.18	%	6,012,640			9,425		0.21	%	(1,175		)	(19		)	(1,156		)
Money market	25,488,561			96,061		0.50	%	24,836,343			95,377		0.51	%	684			2,700			(2,016		)
Certificates of deposit ("CDs")	7,040,527			56,914		1.08	%	9,875,505			72,524		0.98	%	(15,610		)	(24,219		)	8,609
TOTAL INTEREST-BEARING DEPOSITS	48,797,100			177,524		0.49	%	52,513,320			213,135		0.54	%	(35,611		)	(25,616		)	(9,995		)
BORROWED FUNDS:
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements	4,761,700			53,028		1.48	%	10,517,500			108,061		1.37	%	(55,033		)	(64,493		)	9,460
Other borrowings	38,389,955			860,012		2.99	%	38,193,757			755,125		2.64	%	104,887			3,912			100,975
TOTAL BORROWED FUNDS ⁽⁷⁾	43,151,655			913,040		2.82	%	48,711,257			863,186		2.37	%	49,854			(60,581		)	110,435
TOTAL INTEREST-BEARING FUNDING LIABILITIES	91,948,755			1,090,564		1.58	%	101,224,577			1,076,321		1.42	%	14,243			(86,197		)	100,440
Noninterest bearing demand deposits	15,625,300							13,899,407
Other liabilities⁽⁸⁾	5,207,748							5,408,527
TOTAL LIABILITIES	112,781,803							120,532,511
STOCKHOLDER’S EQUITY	23,311,727							22,153,538
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	136,093,530						$	142,686,049

NET INTEREST SPREAD ⁽⁹⁾						5.61	%						5.78	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.86	%						5.92	%
NET INTEREST INCOME				$	4,818,373						$	4,981,817


(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.

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


(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 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.


(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
	2017		2016		2017		2016		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)								(dollars in thousands)
INTEREST INCOME:
Interest-earning deposits	$	24,370	$	13,400	$	63,279	$	41,890	$	10,970		81.9	%	$	21,389		51.1	%
Investments available-for-sale	93,599		60,844		270,041		235,851		32,755			53.8	%	34,190			14.5	%
Investments held-to-maturity	8,859		—		29,502		—		8,859			100%		29,502			100%
Other investments	4,688		7,641		15,876		25,224		(2,953		)	(38.6	)%	(9,348		)	(37.1	)%
Total interest income on investment securities and interest-earning deposits	131,516		81,885		378,698		302,965		49,631			60.6	%	75,733			25.0	%
Interest on loans	1,822,384		1,889,077		5,530,239		5,755,173		(66,693		)	(3.5	)%	(224,934		)	(3.9	)%
Total Interest Income	1,953,900		1,970,962		5,908,937		6,058,138		(17,062		)	(0.9	)%	(149,201		)	(2.5	)%
INTEREST EXPENSE:
Deposits and customer accounts	56,707		64,288		177,524		213,135		(7,581		)	(11.8	)%	(35,611		)	(16.7	)%
Borrowings and other debt obligations	323,133		285,544		913,040		863,186		37,589			13.2	%	49,854			5.8	%
Total Interest Expense	379,840		349,832		1,090,564		1,076,321		30,008			8.6	%	14,243			1.3	%
NET INTEREST INCOME	$	1,574,060	$	1,621,130	$	4,818,373	$	4,981,817	$	(47,070	)	(2.9	)%	$	(163,444	)	(3.3	)%

Net interest income decreased $47.1 million and $163.4 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These overall decreases were primarily due to a decrease in interest income earned on loans as well as increased interest expense on borrowings.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $49.6 million and $75.7 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. The average balance of investment securities and interest-earning deposits for the nine-month period ended September 30, 2017 was $27.1 billion with an average yield of 1.86%, compared to an average balance of $25.6 billion with an average yield of 1.58% for the corresponding period in 2016. The increase in interest income on investment securities and interest-earning deposits for the three-month and nine-month periods ended September 30, 2017 was primarily attributable to an increase of $8.9 million and $29.5 million in interest income on investments held-to-maturity due to increased volume and an increase of $32.8 million and $34.2 million in interest income on investments available-for-sale.

106

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Interest Income on Loans

Interest income on loans decreased $66.7 million and $224.9 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016, primarily due to a decline in the balance of total loans. The average balance of total loans was $86.4 billion with an average yield of 8.53% for the nine-month period ended September 30, 2017, compared to $90.5 billion with an average yield of 8.50% for the corresponding period in 2016. The decrease in the average balance of total loans of $4.1 billion was primarily due to a decline in the balance of the commercial loan portfolio. The average balance of commercial loans was $41.8 billion with an average yield of 3.66% for the nine-month period ended September 30, 2017, compared to $46.7 billion with an average yield of 3.56% for the corresponding period in 2016.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts decreased $7.6 million and $35.6 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016, primarily due to a decrease in interest-bearing deposits. The average balance of total interest-bearing deposits was $48.8 billion with an average cost of 0.49% for the nine-month period ended September 30, 2017, compared to an average balance of $52.5 billion with an average cost of 0.54% for the corresponding period in 2016.

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $37.6 million and $49.9 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The increase in interest expense on borrowed funds was due to an increase in the interest rate paid for the three-month and nine-month periods ended September 30, 2017. The average balance of total borrowings was $43.4 billion and $43.2 billion with an average cost of 2.98% and 2.82% for the three-month and nine-month periods ended September 30, 2017, respectively, compared to an average balance of $45.9 billion and $48.7 billion with an average cost of 2.47% and 2.37% for the corresponding periods in 2016. The average balance of borrowed funds decreased from September 30, 2016 to September 30, 2017, primarily due to the decrease in FHLB advances as a result of maturities and terminations. The increase in interest expense on borrowed funds is due to the Company issuing $3.5 billion of long-term debt at higher fixed rates in 2017 to increase liquidity and meet the FRB's TLAC requirement.

107

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, 2017 was $652.1 million and $2.0 billion, respectively, compared to $687.9 million and $2.2 billion for the corresponding periods in 2016. The decrease for the nine-month period ended September 30, 2017 was primarily related to the buildup of the ALLL coverage ratio throughout 2016, 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,
	2017			2016			2017			2016
	(in thousands)
ALLL, beginning of period	$	3,953,607		$	3,765,887		$	3,814,464		$	3,246,145
Charge-offs:
Commercial	(30,576		)	(41,660		)	(117,263		)	(118,273		)
Consumer	(1,224,296		)	(1,249,370		)	(3,590,495		)	(3,424,199		)
Total charge-offs	(1,254,872		)	(1,291,030		)	(3,707,758		)	(3,542,472		)
Recoveries:
Commercial	9,635			21,359			29,266			68,640
Consumer	594,959			608,915			1,818,335			1,828,621
Total recoveries	604,594			630,274			1,847,601			1,897,261
Charge-offs, net of recoveries	(650,278		)	(660,756		)	(1,860,157		)	(1,645,211		)
Provision for loan and lease losses ⁽¹⁾	647,177			709,151			1,996,199			2,213,348
Other⁽²⁾:
Commercial	356			—			356			—
Consumer	5,283			—			5,283			—
ALLL, end of period	$	3,956,145		$	3,814,282		$	3,956,145		$	3,814,282
Reserve for unfunded lending commitments, beginning of period	$	111,811		$	156,898		$	122,419		$	149,021
Provision for unfunded lending commitments ⁽¹⁾	4,943			(21,239		)	(3,865		)	(13,194		)
Loss on unfunded lending commitments	(668		)	(1,094		)	(2,468		)	(1,262		)
Reserve for unfunded lending commitments, end of period	116,086			134,565			116,086			134,565
Total allowance for credit losses ("ACL"), end of period	$	4,072,231		$	3,948,847		$	4,072,231		$	3,948,847

(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) Includes transfers in for the period ending September 30, 2017.

The Company's net charge-offs decreased $10.5 million for the three-month period ended September 30, 2017, and increased $214.9 million for the nine-month period ended September 30, 2017 compared to the corresponding periods in 2016.

Consumer charge-offs decreased $25.1 million and increased $166.3 million for the three-month and nine-month periods ended September 30, 2017, respectively compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $21.5 million decrease in consumer auto loan charge-offs, and the nine-month increase was due to a $173.5 million increase in consumer auto loan charge-offs which were primarily attributable to portfolio aging and mix shift, lower realized recovery rates, and less benefit from bankruptcy sales.

Consumer recoveries decreased $14.0 million and decreased $10.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $13.7 million decrease in consumer auto recoveries and the nine-month decrease was primarily due to a $6.0 million decrease in consumer auto loan recoveries, a $1.6 million decrease in home equity recoveries, and a $3.2 million decrease in other consumer recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 1.4% and 4.0% for the three-month and nine-month periods ended September 30, 2017, respectively, compared to 1.5% and 3.6% for the corresponding periods in 2016.

108

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

Commercial charge-offs decreased $11.1 million and $1.0 million for the three-month and nine-month periods ended September 30, 2017, respectively compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $10.4 million decrease in Commercial real estate charge-offs, and the nine-month decrease was primarily due to a $22.6 million decrease in Commercial Fleet charge-offs, offset by a $10.6 million increase in Commercial Banking charge-offs and a $10.8 million increase in Commercial charge-offs to commercial loans held in Puerto Rico.

Commercial recoveries decreased $11.7 million and $39.4 million for the three-month and nine-month periods ended September 30, 2017, respectively compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $9.2 million decrease in commercial real estate recoveries, and a $2.5 million decrease in commercial fleet recoveries.

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, were 0.05% and 0.21% for the three-month and nine-month periods ended September 30, 2017, respectively.

NON-INTEREST INCOME



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,				QTD Change					YTD Change
	2017		2016			2017		2016		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)									(dollars in thousands)
Consumer fees	$	105,624	$	120,956		$	337,738	$	381,943	$	(15,332	)	(12.7	)%	$	(44,205	)	(11.6	)%
Commercial fees	46,282		50,728			130,871		153,640		(4,446		)	(8.8	)%	(22,769		)	(14.8	)%
Mortgage banking income, net	14,783		22,537			43,049		50,005		(7,754		)	(34.4	)%	(6,956		)	(13.9	)%
Bank-owned life insurance	17,807		14,150			49,159		44,315		3,657			25.8	%	4,844			10.9	%
Lease income	509,714		483,929			1,494,801		1,365,519		25,785			5.3	%	129,282			9.5	%
Miscellaneous income	93,805		35,637			180,217		94,842		58,168			163.2	%	85,375			90.0	%
Net gains recognized in earnings	6,707		(364		)	16,276		58,551		7,071			(1,942.6	)%	(42,275		)	(72.2	)%
Total non-interest income	$	794,722	$	727,573		$	2,252,111	$	2,148,815	$	67,149		9.2	%	$	103,296		4.8	%

Total non-interest income increased $67.1 million and $103.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The increases for the three-month and nine-month periods ended September 30, 2017 were primarily due to increase in lease income associated with the continued growth of the lease portfolio and increases in miscellaneous income. These increases were offset by decreases in consumer loan fees due to the reduction of loans serviced by the Company three-month and nine-month periods ended September 30, 2017.

Consumer Fees

Consumer fees decreased $15.3 million and $44.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The decrease in consumer fees for the three-month and nine-month periods ended September 30, 2017 was primarily due to $24.7 million and $73.3 million decrease in loan fee income, which was attributable to the reduction of loans serviced by the Company due to loan sales and payoffs and lower reserve recourse releases in 2017. This was partially offset by an increase of $3.9 million and $12.3 million in consumer deposit fees for the three-month and nine-month periods ended September 30, 2017.

Commercial Fees

Commercial fees consists of deposit overdraft fees, deposit automated teller machine ("ATM") fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $4.4 million and $22.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016, primarily due to lower capital markets income.

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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
	2017			2016			2017			2016			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(dollars in thousands)
Mortgage and multifamily servicing fees	$	10,244		$	10,772		$	31,320		$	32,387		$	(528	)	(4.9	)%	$	(1,067	)	(3.3	)%
Net gains on sales of residential mortgage loans and related securities	13,582			8,049			19,258			18,127			5,533			68.7	%	1,131			6.2	%
Net gains on sales of multifamily mortgage loans	1,000			1,097			2,200			2,397			(97		)	(8.8	)%	(197		)	(8.2	)%
Net gains (losses) on hedging activities	(3,134		)	655			6,812			33,624			(3,789		)	(578.5	)%	(26,812		)	(79.7	)%
Net gains/(losses) from changes in MSR fair value	(1,578		)	7,711			(1,315		)	(18,113		)	(9,289		)	(120.5	)%	16,798			(92.7	)%
MSR principal reductions	(5,331		)	(5,747		)	(15,226		)	(18,417		)	416			(7.2	)%	3,191			(17.3	)%
Total mortgage banking income, net	$	14,783		$	22,537		$	43,049		$	50,005		$	(7,754	)	(34.4	)%	$	(6,956	)	(13.9	)%

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 mortgage-backed securities ("MBS"). Gains or losses on mortgage banking derivative and hedging transactions are also included in Mortgage banking income.

Mortgage banking revenue decreased $7.8 million and $7.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The decrease for the three-month period ended September 30, 2017 was primarily attributable to $9.3 million of net losses from changes in MSR fair value, and $3.8 million of change due to net losses on hedging activities, offset by $5.5 million of higher net gains on sales of residential mortgage loans and related securities. The decrease for the nine-month period ended September 30, 2017 was attributable to $26.8 million of lower net gains on hedging activities, offset by $16.8 million of higher net gain from changes in MSR fair value.

Since 2015, 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
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	%
December 31, 2016	4.38	%	3.63	%
March 31, 2017	4.25	%	3.50	%
June 30, 2017	4.13	%	3.38	%
September 30, 2017	4.13	%	3.75	%

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

Mortgage and multifamily loan servicing fees decreased $0.5 million and $1.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. At September 30, 2017 and 2016, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $294.9 million and $688.8 million, respectively. The decrease in loans serviced for others is primarily due to pay-downs received during 2017.

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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 $5.5 million and $1.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. For the three-month and nine-month periods ended September 30, 2017, the Company sold $454.2 million and $1.4 billion of mortgage loans for gains of $13.6 million and $19.3 million, compared to $639.8 million and $1.5 billion of loans sold for gains of $8.0 million and $18.1 million for the corresponding periods in 2016.

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

The net gains on sales of multifamily mortgage loans for the three-month and nine-month periods ended September 30, 2017 changed by an immaterial amount when compared to the corresponding periods in 2016. These changes were primarily due to a $1.0 million and $2.2 million release in the FNMA recourse reserve for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $1.1 million and $2.4 million releases for the corresponding periods in 2016.

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, 2017, the Company serviced loans with a principal balance of $152.6 million for FNMA compared to $341.7 million at December 31, 2016. These loans had a credit loss exposure of $34.4 million as of both September 30, 2017 and December 31, 2016. 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, 2017 and December 31, 2016, the Company had a liability of $1.6 million and $3.8 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA under this program.

Net gains on hedging activities decreased $3.8 million and $26.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The variances for the three-month and nine-month periods ended September 30, 2017 were primarily due to the decrease in the value of mortgage loan pipeline and the Company's hedging strategy in the current mortgage rate environment.

Net gains/losses from changes in MSR fair value were a loss of $1.6 million and a loss of $1.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, as compared to a net gain of $7.7 million and a net loss of $18.1 million for the corresponding period in 2016. The value of the related MSRs carried at fair value at September 30, 2017 and December 31, 2016 was $143.5 million and $146.6 million, respectively. The MSR asset fair value changes for the three-month and nine-month periods ended September 30, 2017 were the result of fluctuations in interest rates.

The Company recognized $5.3 million and $15.2 million of principal reductions for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $5.7 million and $18.4 million for the corresponding periods in 2016. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing.

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

Bank Owned Life Insurance ("BOLI")

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI increased $3.7 million and $4.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016 as a result of an increase in death benefits received.

Lease income

Lease income increased $25.8 million and $129.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These increases were the result of the growth of the Company's lease portfolio with an average balance of $10.1 billion for the nine-month period ended September 30, 2017, and $9.2 billion for the same periods in 2016.

Miscellaneous Income

Miscellaneous income increased $58.2 million and $85.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The miscellaneous income increased for the three-month period ended September 30, 2017 was primarily due a decrease in the lower of cost or market adjustments required to a loan portfolio that is held for sale of $60.8 million and an increase of $20.1 million on gain on sale of fixed assets, offset by a decrease of $37.4 million due to change in fair value of loan portfolio and $10.3 million in capital markets revenue, respectively, compared to the corresponding period in 2016. The increased for the nine-month period ended September 30, 2017 was primarily due to a gain on sale of operating lease of $49.9 million, an increase in gain on sale of fixed assets of $30.6 million, offset by a decrease in other income of $20.0 million, respectively, compared to the corresponding periods in 2016. For further discussion, see Note 16 to the Condensed Consolidated Financial Statements.

Net gains recognized in earnings

The Company recognized $6.7 million and $16.3 million for the three-month and nine-month periods ended September 30, 2017, in net gains on the sale of AFS investment securities as a result of overall balance sheet management and in order to reposition the investment portfolio with securities that decreased the Company's risk weighted assets. The net gain realized for the three-month period ended September 30, 2017 was primarily comprised of the sale of MBS's, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a book value of $558.6 million for a gain of $7.0 million. The net gain realized for the nine-month period ended September 30, 2017 was primarily comprised of the sale of U.S. Treasury securities with a book value of $739.4 million for a gain of $1.8 million, and the sale of MBS's, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a book value of $1.1 billion for a gain of $16.3 million.

The Company recognized $58.6 million for the nine-month period ended September 30, 2016, in net gains on the sale of AFS 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 state and municipal securities with a book value of $748.0 million for a gain of $19.9 million, the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, corporate debt securities sold with a book value of $1.4 billion for a gain of $5.9 million, and 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.

112

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

GENERAL AND ADMINISTRATIVE EXPENSES



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
	2017		2016		2017		2016		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(dollars in thousands)
Compensation and benefits	$	452,587	$	426,162	$	1,360,444	$	1,282,094	$	26,425		6.2	%	$	78,350		6.1	%
Occupancy and equipment expenses	165,201		156,611		491,465		453,687		8,590			5.5	%	37,778			8.3	%
Technology expense	59,056		56,449		181,331		183,039		2,607			4.6	%	(1,708		)	(0.9	)%
Outside services	46,994		57,742		154,272		207,472		(10,748		)	(18.6	)%	(53,200		)	(25.6	)%
Marketing expense	23,424		35,944		91,641		77,986		(12,520		)	(34.8	)%	13,655			17.5	%
Loan expense	91,147		101,101		285,364		307,992		(9,954		)	(9.8	)%	(22,628		)	(7.3	)%
Lease expense	409,424		338,077		1,137,456		953,142		71,347			21.1	%	184,314			19.3	%
Other administrative expenses	95,712		109,189		293,046		310,078		(13,477		)	(12.3	)%	(17,032		)	(5.5	)%
Total general and administrative expenses	$	1,343,545	$	1,281,275	$	3,995,019	$	3,775,490	$	62,270		4.9	%	$	219,529		5.8	%

Total general and administrative expenses increased $62.3 million and $219.5 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. Factors contributing to this increase were as follows:

•

Compensation and benefits expense increased $26.4 million and $78.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The primary driver of these increases was the Company's salary expense which resulted in a $15.2 million and $37.6 million increase for the three-month and nine-month periods ended September 30, 2017, respectively. Commission expense increased $6.1 million and $11.7 million for the three-month and nine-month periods ended September 30, 2017, respectively. Additionally, other compensation and benefit expense increased $5.3 million and $24.0 million for the three-month and nine-month periods ended September 30, 2017, respectively. These increases were offset by decreases in bonus expense of $4.6 million and $9.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.

•

Occupancy and equipment expenses increased $8.6 million and $37.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. This was primarily due to an increase in depreciation expense of $6.2 million and $18.0 million for the three-month and nine-month periods ended September 30, 2017, respectively. These increases were primarily due to more assets being placed in service and an increase in depreciation for assets that were moved to held for sale and sold during the periods. There were also $1.2 million and $10.2 million increases in maintenance and repair expense and other occupancy and equipment expenses for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.

•

Outside services decreased $10.7 million and $53.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. This was primarily due to a decrease in consulting service fees of $8.9 million and $42.4 million, respectively, which related to regulatory initiatives, including preparation for meeting the requirements of the IHC during 2016.


•	Marketing expense decreased $12.5 million and increased $13.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding period in 2016. These variances were primarily due to expenses such as direct mail, advertising and outside marketing associated with corporate marketing campaigns.


•	Loan expense decreased $10.0 million and $22.6 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These decreases were primarily due to decreases of $12.0 million and $14.2 million in loan collection expenses.

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


•	Lease expense increased $71.3 million and $184.3 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These increases were primarily due to the continued growth of the Company's leased vehicle portfolio and accumulation of depreciation associated with that portfolio.

•

Other administrative expenses decreased $13.5 million and $17.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These decreases were primarily attributable to lower operational risk expenses and other non income tax expenses, offset by increased in miscellaneous expenses for three-month and nine-month periods ended September 30, 2017.

OTHER EXPENSES



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
	2017		2016		2017		2016		Dollar (decrease)/increase			Percentage		Dollar (decrease)/increase			Percentage
	(dollars in thousands)
Amortization of intangibles	$	15,288	$	17,174	$	46,204	$	52,860	$	(1,886	)	(11.0	)%	$	(6,656	)	(12.6	)%
Deposit insurance premiums and other expenses	19,792		17,950		55,218		56,966		1,842			10.3	%	(1,748		)	(3.1	)%
Loss on debt extinguishment	5,582		10,228		16,321		88,672		(4,646		)	(45.4	)%	(72,351		)	(81.6	)%
Other miscellaneous expenses	1,980		198		12,521		5,779		1,782			900.0	%	6,742			116.7	%
Total other expenses	$	42,642	$	45,550	$	130,264	$	204,277	$	(2,908	)	(6.4	)%	$	(74,013	)	(36.2	)%

Total other expenses decreased $2.9 million and $74.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The primary factors contributing to these decreases were:


•	Amortization of intangibles decreased $1.9 million and $6.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These decreases were primarily due to a portion of the Company's core deposit intangibles becoming fully amortized in the second quarter of 2016, thereby reducing intangibles in 2017.

•

Deposit insurance premiums and other expenses increased $1.8 million and decreased $1.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The expense for the three-month and nine-month periods ended September 30, 2016 included a higher contingent loss on the transfer of unfunded credit facilities to Santander, which did not recur in 2017. This decrease in cost was offset by increases in other expenses and FDIC insurance premium.

•

Losses on debt extinguishment decreased $4.6 million and $72.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These expenses were primarily related to early termination fees incurred by the Company in association with the termination of FHLB advances in 2016. During the three-month and nine-month periods ended September 30, 2016, the Bank terminated $1.3 billion and $2.8 billion of FHLB advances, respectively, incurring costs of $32.9 million and $78.4 million. The Bank also terminated $750.0 million and $3.5 billion of FHLB advances during the three-month and nine-month periods ended September 30, 2016. During the three-month period ended September 30, 2017, a $5.1 million expense on tender offer was incurred. Additionally, for the nine-month period ended September 30, 2017, a $4.0 million charge on the buyback of REIT preferred stock, and a tender offer on Bank debt resulted in a charge of $6.7 million.


•	Other miscellaneous expenses increased $1.8 million and $6.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These increases were primarily due to the impairment of capitalized software of $1.5 million and $8.0 million in the three-month and nine-month periods ended September 30, 2017.

114

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

INCOME TAX PROVISION

An income tax provision of $93.4 million and $264.4 million was recorded for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $108.3 million and $340.0 million for the corresponding periods in 2016. This resulted in effective tax rates ("ETR") of 28.3% and 27.7% for the three-month and nine-month periods ended September 30, 2017, respectively, compared to 32.4% and 35.8% for the corresponding periods in 2016.

The Company's ETR 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.

LINE OF BUSINESS RESULTS

General

The Company's segments at September 30, 2017 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



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,						QTD Change					YTD Change
	2017		2016			2017			2016			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)											(dollars in thousands)
Net interest income	$	324,539	$	297,952		$	945,102		$	793,345		$	26,587		8.9	%	$	151,757		19.1	%
Total non-interest income	100,583		104,736			282,360			297,311			(4,153		)	(4.0	)%	(14,951		)	(5.0	)%
Provision for credit losses	20,716		19,872			64,577			40,215			844			4.2	%	24,362			60.6	%
Total expenses	379,299		395,759			1,169,247			1,162,090			(16,460		)	(4.2	)%	7,157			0.6	%
Income/(loss) before income taxes	25,107		(12,943		)	(6,362		)	(111,649		)	38,050			294.0	%	105,287			94.3	%
Intersegment revenue/(expense)⁽¹⁾	3,076		9,656			9,226			34,111			(6,580		)	(68.1	)%	(24,885		)	(73.0	)%
Total assets	19,716,199		19,735,459			19,716,199			19,735,459			(19,260		)	(0.1	)%	(19,260		)	(0.1	)%

Consumer and Business Banking reported income before income taxes of $25.1 million and a loss before income taxes of $6.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to losses before income taxes of $12.9 million and $111.6 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:


•	Net interest income increased $26.6 million and $151.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These increases were primarily driven by deposit product margin where despite rising interest rates, costs have been managed down.

115

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


•	Total non-interest income decreased $4.2 million and $15.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.


•	The provision for credit losses increased by $24.4 million for the nine-month period ended September 30, 2017 compared to the corresponding period in 2016 due to increased consumer loan delinquencies in 2017 compared to the corresponding periods in 2016.


•	Total expenses decreased $16.5 million and increased $7.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016, driven mainly by increased marketing expenses in 2017 that were partially offset by lower overhead costs.

Commercial Banking



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,				QTD Change					YTD Change
	2017		2016			2017		2016		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)									(dollars in thousands)
Net interest income	$	87,176	$	91,259		$	259,502	$	257,421	$	(4,083	)	(4.5	)%	$	2,081		0.8	%
Total non-interest income	15,837		16,947			45,729		51,094		(1,110		)	(6.5	)%	(5,365		)	(10.5	)%
Provision for credit losses	5,857		(20,162		)	16,115		32,686		26,019			129.0	%	(16,571		)	(50.7	)%
Total expenses	51,677		51,156			154,587		157,672		521			1.0	%	(3,085		)	(2.0	)%
Income/(loss) before income taxes	45,479		77,212			134,529		118,157		(31,733		)	(41.1	)%	16,372			13.9	%
Intersegment revenue/(expense)⁽¹⁾	1,619		3,616			4,553		12,927		(1,997		)	(55.2	)%	(8,374		)	(64.8	)%
Total assets	11,606,759		12,174,784			11,606,759		12,174,784		(568,025		)	(4.7	)%	(568,025		)	(4.7	)%

Commercial Banking reported income before income taxes of $45.5 million and $134.5 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to income before income taxes of $77.2 million and $118.2 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:

•

Net interest income decreased $4.1 million and increased $2.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. Total average gross loans were $11.6 billion and $11.6 billion for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $12.2 billion and $11.9 billion for the corresponding periods in 2016. The decline in average gross loans is primarily related to a decrease in the Middle Market portfolio.


•	Total non-interest income decreased $1.1 million and $5.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.

•

The provision for credit losses increased $26.0 million and decreased $16.6 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The increase in provision during the three-month period ended September 30, 2017 compared to the corresponding period in 2016 is driven by increased reserves within the Middle Market portfolio. The decrease in provision for the nine-month period ended September 30, 2017 is due to increased provisions required for the Energy Finance portfolio in the prior year that did not recur in 2017.


•	Total expenses increased $0.5 million and decreased $3.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.

116

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

Commercial Real Estate



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,					QTD Change					YTD Change
	2017			2016		2017			2016		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)										(dollars in thousands)
Net interest income	$	72,870		$	74,992	$	220,580		$	212,035	$	(2,122	)	(2.8	)%	$	8,545		4.0	%
Total non-interest income	2,855			5,124		8,121			16,445		(2,269		)	(44.3	)%	(8,324		)	(50.6	)%
Provision for credit losses	(2,824		)	2,945		(8,784		)	23,905		(5,769		)	(195.9	)%	(32,689		)	(136.7	)%
Total expenses	17,530			20,556		57,162			66,819		(3,026		)	(14.7	)%	(9,657		)	(14.5	)%
Income/(loss) before income taxes	61,019			56,615		180,323			137,756		4,404			7.8	%	42,567			30.9	%
Intersegment revenue/(expense)⁽¹⁾	500			2,523		1,997			9,940		(2,023		)	(80.2	)%	(7,943		)	(79.9	)%
Total assets	$	14,073,894		$	15,005,335	$	14,073,894		$	15,005,335	$	(931,441	)	(6.2	)%	$	(931,441	)	(6.2	)%

Commercial Real Estate reported income before income taxes of $61.0 million and $180.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to income before income taxes of $56.6 million and $137.8 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:

•

Net interest income decreased $2.1 million and increased $8.5 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The average balance of this segment's gross loans decreased to $14.1 billion and $14.3 billion for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $15.2 billion and $15.3 billion for the corresponding periods in 2016. The balance decline is driven by higher runoff in the Multi-Family portfolio outpacing originations. The average balance of deposits was $778.4 million and $867.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $817.2 million and $788.1 million for the corresponding periods in 2016.


•	Total non-interest income decreased $2.3 million and $8.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.


•	The provision for credit losses decreased $5.8 million and $32.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared the corresponding periods in 2016. The decrease in provisions is primarily related to a provision release in the real estate construction portfolio.


•	Total expenses decreased $3.0 million and $9.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. Total assets were $14.1 billion as of September 30, 2017, compared to $15.0 billion as of September 30, 2016.

GCB



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					YTD Change
	2017			2016			2017			2016			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)												(dollars in thousands)
Net interest income	$	35,494		$	60,436		$	119,968		$	182,024		$	(24,942	)	(41.3	)%	$	(62,056	)	(34.1	)%
Total non-interest income	23,205			26,319			48,808			65,818			(3,114		)	(11.8	)%	(17,010		)	(25.8	)%
Provision for credit losses	11,599			(2,487		)	23,871			28,889			14,086			566.4	%	(5,018		)	(17.4	)%
Total expenses	24,615			26,830			75,945			89,952			(2,215		)	(8.3	)%	(14,007		)	(15.6	)%
Income/(loss) before income taxes	22,485			62,412			68,960			129,001			(39,927		)	(64.0	)%	(60,041		)	(46.5	)%
Intersegment revenue/(expense)⁽¹⁾	(1,823		)	(702		)	(5,867		)	(780		)	(1,121		)	(159.7	)%	(5,087		)	(652.2	)%
Total assets	$	6,109,131		$	10,551,939		$	6,109,131		$	10,551,939		$	(4,442,808	)	(42.1	)%	$	(4,442,808	)	(42.1	)%

117

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

GCB reported income before income taxes of $22.5 million and $69.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to income before income taxes of $62.4 million and $129.0 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:

•

Net interest income decreased $24.9 million and $62.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The average balance of this segment's gross loans were $5.5 billion and $6.3 billion for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $8.8 billion and $9.5 billion for the corresponding periods in 2016. The average balance of deposits was $2.1 billion and $2.2 billion for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $2.4 billion and $2.1 billion for the corresponding periods in 2016. The decrease in loan balances is attributed to the strategic goal of building a less capital intensive US franchise, which was attained by transferring assets to Santander by pro-actively reducing exposures for weaker credit clients related to the Commodities and Oil & Gas sectors.


•	Total non-interest income decreased $3.1 million and $17.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.

•

The provision for credit losses increased $14.1 million and decreased $5.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The provision for the three-month period ended September 30, 2017 is higher reserves required to Oil & Gas clients, while the provisions for the nine-month period ended September 30, 2017 is lower due to an overall lower need for an allowance related related to the Oil & Gas portfolio compared to the same period in 2016.


•	Total expenses decreased $2.2 million and $14.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.

Other



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					YTD Change
	2017			2016			2017			2016			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)												(dollars in thousands)
Net interest income	$	27,665		$	(45,680	)	$	62,738		$	(8,180	)	$	73,345		160.6	%	$	70,918		867.0	%
Total non-interest income	181,047			189,825			548,945			608,810			(8,778		)	(4.6	)%	(59,865		)	(9.8	)%
Provision for credit losses	48,812			4,426			80,472			31,247			44,386			1,002.8	%	49,225			157.5	%
Total expenses	234,270			260,723			739,912			852,990			(26,453		)	(10.1	)%	(113,078		)	(13.3	)%
Income/(loss) before income taxes	(74,370		)	(121,004		)	(208,701		)	(283,607		)	46,634			38.5	%	74,906			26.4	%
Intersegment revenue/(expense)⁽¹⁾	(3,372		)	(15,093		)	(9,909		)	(56,198		)	11,721			77.7	%	46,289			82.4	%
Total assets	$	41,714,577		$	43,782,904		$	41,714,577		$	43,782,904		$	(2,068,327	)	(4.7	)%	$	(2,068,327	)	(4.7	)%

The Other category reported losses before income taxes of $74.4 million and $208.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to losses before income taxes of $121.0 million and $283.6 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:


•	Net interest income increased $73.3 million and $70.9 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.


•	Total non-interest income decreased $8.8 million and $59.9 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.


•	The provision for credit losses increased $44.4 million and $49.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.


•	Total expenses decreased $26.5 million and $113.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.

118

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



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
	2017		2016		2017		2016		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)								(dollars in thousands)
Net interest income	$	989,140	$	1,095,060	$	3,085,739	$	3,388,276	$	(105,920	)	(9.7	)%	$	(302,537	)	(8.9	)%
Total non-interest income	496,728		389,375		1,363,948		1,109,894		107,353			27.6	%	254,054			22.9	%
Provision for credit losses	536,447		610,398		1,692,015		1,782,489		(73,951		)	(12.1	)%	(90,474		)	(5.1	)%
Total expenses	671,648		570,017		1,910,365		1,645,156		101,631			17.8	%	265,209			16.1	%
Income/(loss) before income taxes	277,773		304,020		847,307		1,070,525		(26,247		)	(8.6	)%	(223,218		)	(20.9	)%
Intersegment revenue/(expense)⁽¹⁾	—		—		—		—		—			0%		—			0%
Total assets	$	38,765,557	$	38,771,636	$	38,765,557	$	38,771,636	$	(6,079	)	—	%	$	(6,079	)	—	%

SC reported income before income taxes of $277.8 million and $847.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to income before income taxes of $304.0 million and $1.1 billion for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:


•	Net interest income decreased $105.9 million and $302.5 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The decrease was primarily related to an increase in interest expense during the period. SC's cost of funds increased during 2017 due to higher market rates and increased spreads.


•	Total non-interest income increased $107.4 million and $254.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016 due to the continual growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.


•	The provision for credit losses decreased $74.0 million and $90.5 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016 primarily due to a lower build of the ACL as a result of the decline in originations during the nine-months ended September 30, 2017, compared to the corresponding period in 2016.


•	Total expenses increased $101.6 million and $265.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016, primarily due to the continual growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

119

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's LHFI portfolioconsisted of the following at the dates indicated:



	September 30, 2017				December 31, 2016				September 30, 2016
	Amount		Percent		Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial LHFI:
Commercial real estate loans	$	9,690,850	11.9	%	$	10,112,043	11.8	%	$	10,165,990	11.7	%
Commercial and industrial loans and other commercial	22,073,060		27.1	%	25,644,405		29.9	%	26,400,792		30.4	%
Multifamily	8,293,232		10.1	%	8,683,680		10.1	%	9,021,275		10.4	%
Total Commercial Loans ⁽¹⁾	40,057,142		49.1	%	44,440,128		51.8	%	45,588,057		52.5	%
Consumer loans secured by real estate:
Residential mortgages	8,476,935		10.4	%	7,775,272		9.1	%	7,588,663		8.7	%
Home equity loans and lines of credit	5,855,086		7.2	%	6,001,192		7.0	%	6,041,629		7.0	%
Total consumer loans secured by real estate	14,332,021		17.6	%	13,776,464		16.1	%	13,630,292		15.7	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	23,074,936		28.3	%	22,104,918		25.8	%	21,602,717		24.9	%
RICs and auto loans - purchased	2,162,540		2.7	%	3,468,803		4.0	%	4,005,079		4.6	%
Personal unsecured loans	1,262,591		1.5	%	1,234,094		1.4	%	1,219,942		1.4	%
Other consumer	659,469		0.8	%	795,378		0.9	%	848,252		0.9	%
Total consumer loans	41,491,557		50.9	%	41,379,657		48.2	%	41,306,282		47.5	%
Total LHFI	$	81,548,699	100.0	%	$	85,819,785	100.0	%	$	86,894,339	100.0	%
Total LHFI with:
Fixed	$	49,274,614	60.4	%	$	51,752,761	60.3	%	$	53,357,078	61.4	%
Variable	32,274,085		39.6	%	34,067,024		39.7	%	33,537,261		38.6	%
Total LHFI	$	81,548,699	100.0	%	$	85,819,785	100.0	%	$	86,894,339	100.0	%

(1)As of September 30, 2017, the Company had $240.3 million of loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans decreased approximately $4.4 billion, or 9.9%, from December 31, 2016 to September 30, 2017, and decreased $5.5 billion, or 12.1%, from September 30, 2016 to September 30, 2017. The decrease from December 31, 2016 to September 30, 2017 was primarily due to a decrease in commercial and industrial loans of $3.6 billion, which included payoffs to approximately 1,050 loans totaling $1.2 billion. Additionally, there was a decrease in multifamily loans of $390.4 million as the Company switches its focus to commercial real estate banking. Commercial real estate loans decreased $421.2 million.



	At September 30, 2017, Maturing
	In One Year Or Less		One to Five Years		After Five Years		Total⁽¹⁾
	(in thousands)
Commercial real estate loans	$	2,374,562	$	5,734,318	$	1,581,970	$	9,690,850
Commercial and industrial loans and other	8,971,086		11,299,673		1,885,580		22,156,339
Multi-family loans	869,308		6,358,473		1,065,451		8,293,232
Total	$	12,214,956	$	23,392,464	$	4,533,001	$	40,140,421
Loans with:
Fixed rates	$	3,750,183	$	10,359,663	$	1,638,295	$	15,748,141
Variable rates	8,464,773		13,032,801		2,894,706		24,392,280
Total	$	12,214,956	$	23,392,464	$	4,533,001	$	40,140,421

(1) Includes LHFS.

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

Consumer Loans Secured By Real Estate

Consumer loans secured by real estate increased $555.6 million, or 4.0%, from December 31, 2016 to September 30, 2017, and increased $701.7 million, or 5.1%, from September 30, 2016 to September 30, 2017. The increase from December 31, 2016 to September 30, 2017 was comprised of an increase in the residential mortgage portfolio of $701.7 million due to an increase in new loan originations, offset by a decrease in the home equity loans and lines of credit portfolio of $146.1 million.

The increase from September 30, 2016 to September 30, 2017 was due to an increase in the residential mortgage portfolio of $888.3 million, offset by a decrease in the home equity and lines of credit portfolio of $186.5 million.

Consumer Loans Not Secured By Real Estate

The consumer loan portfolio not secured by real estate decreased $443.7 million, or 1.6%, from December 31, 2016 to September 30, 2017, and decreased $516.5 million, or 1.9%, from September 30, 2016 to September 30, 2017. These decreases in the RIC and auto loan portfolio were primarily due to a decrease in the RIC and auto loan portfolio - purchased portfolio of $1.3 billion which was offset by a $1.0 billion increase in new originations. This decrease is due to run-off of the portfolio from normal paydown and chargeoff activity.

The decrease from September 30, 2016 to September 30, 2017 was primarily due to a decrease in the RICs and auto loans - purchased portfolio of $1.8 billion, offset by an increase in new originations of $1.5 billion.

As of September 30, 2017, 70.2% 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.



	September 30, 2017				December 31, 2016
Credit Score Range⁽²⁾	RICs and auto loans⁽³⁾				RICs and auto loans⁽³⁾
	Standard file⁽⁴⁾		Non-Standard file⁽⁵⁾		Standard file⁽⁴⁾		Non-Standard file⁽⁵⁾

No FICO⁽¹⁾	5.0	%	59.6	%	5.5	%	61.7	%
<600	61.4	%	20.5	%	60.1	%	20.6	%
600-639	19.0	%	9.5	%	19.4	%	7.9	%
>=640	14.6	%	10.4	%	15.0	%	9.8	%
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 $762.6 million and $924.7 million of LHFS at September 30, 2017 and December 31, 2016, 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.

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

At September 30, 2017, a typical RIC was originated with an average annual percentage rate of 16.1% and was purchased from the dealer at a discount of 1.2%. 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, 2017, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.

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. On April 14, 2017, SC sold the remaining portfolio, comprised of personal installment loans, to a third-party buyer.

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. The Bluestem loan portfolio is carried as held for sale in our Condensed Consolidated Financial Statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on this portfolio, 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 credit quality, authority to approve loans are executed in accordance with the Company’s credit and governance standards consistent with its Enterprise Risk Management Framework. 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.

122

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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 LTV ("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 the 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 RICs acquired 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 robust 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 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.

123

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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, 2017			December 31, 2016
	(dollars in thousands)
Non-accrual loans:
Commercial:
Commercial real estate	$	146,916		$	179,220
Commercial and industrial loans and other commercial	204,856			193,465
Multifamily	10,715			8,196
Total commercial loans	362,487			380,881
Consumer:
Residential mortgages	284,415			287,140
Consumer loans secured by real estate	116,482			120,065
RICs and auto loans - originated	1,553,954			1,045,587
RICs - purchased	274,374			284,486
Personal unsecured and other consumer	15,805			17,895
Total consumer loans	2,245,030			1,755,173
Total non-accrual loans	2,607,517			2,136,054

Other real estate owned	146,362			116,705
Repossessed vehicles	157,757			173,754
Other repossessed assets	1,711			3,838
Total other real estate owned and other repossessed assets	305,830			294,297
Total non-performing assets	$	2,913,347		$	2,430,351

Past due 90 days or more as to interest or principal and accruing interest	$	96,256		$	93,846
Annualized net loan charge-offs to average loans ⁽¹⁾	2.9		%	2.7		%
Non-performing assets as a percentage of total assets	2.2		%	1.8		%
Non-performing loans ("NPLs") as a percentage of total loans	3.1		%	2.4		%
ALLL as a percentage of total NPLs	151.7		%	178.6		%

(1) 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, 2017.

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 $242.1 million and $120.7 million at September 30, 2017 and December 31, 2016, respectively. Potential problem consumer loans amounted to $4.4 billion and $4.3 billion at September 30, 2017 and December 31, 2016, 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 $2.9 billion, or 2.2% of total assets, at September 30, 2017, compared to $2.4 billion, or 1.8% of total assets, at December 31, 2016, primarily attributable to an increase in NPLs in the commercial and industrial and RIC 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 decreased $18.4 million from December 31, 2016 to September 30, 2017. At both September 30, 2017 and December 31, 2016, commercial NPLs accounted for 0.9% of commercial LHFI. The decrease in commercial NPLs was comprised of a $32.3 million in the commercial real estate portfolio, offset by a $11.4 million increase in commercial and industrial NPLs.

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, 2017 and December 31, 2016, respectively:



	September 30, 2017						December 31, 2016
	Residential mortgages			Home equity loans and lines of credit			Residential mortgages			Home equity loans and lines of credit
	(dollars in thousands)
NPLs	$	284,415		$	116,482		$	287,140		$	120,065
Total LHFI	8,476,935			5,855,086			7,775,272			6,001,192
NPLs as a percentage of total LHFI	3.4		%	2.0		%	3.7		%	2.0		%
NPLs in foreclosure status	50.8		%	32.9		%	58.6		%	38.4		%

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.

Interest is accrued when earned in accordance with the terms of the RIC. For certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90% of the scheduled payment, regardless of through which origination channel the receivable was originated. The Company aggregates partial payments in determining whether a full payment has been missed in computing past due status.

NPLs in the RIC and auto loan portfolio increased $498.3 million from December 31, 2016 to September 30, 2017. The increase was comprised of a $508.4 million increase in RICs and auto loans-originated offset by a $10.1 million decrease in RICs - purchased. At September 30, 2017, non-performing RICs and auto loans accounted for 7.2% of total RIC and auto LHFI, compared to 5.2% of total RICs and auto loans at December 31, 2016. NPLs in the unsecured and other consumer loan portfolio decreased $2.1 million from December 31, 2016 to September 30, 2017. At September 30, 2017 and December 31, 2016, non-performing personal unsecured and other consumer loans accounted for 0.8% and 0.9% of total unsecured and other consumer loans, respectively.

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

Foreclosure Activity

The percentage of NPLs in foreclosure status decreased from 58.6% at December 31, 2016 to 50.8% at September 30, 2017 for residential mortgages and from 38.4% at December 31, 2016 to 32.9% at September 30, 2017 for Home Equity loans.

The dollar value of NPLs in foreclosure status decreased from $168.2 million at December 31, 2016 to $144.4 million at September 30, 2017 for residential mortgages and from $46.2 million at December 31, 2016 to $38.3 million at September 30, 2017 for home equity loans.

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.

In recent years, select states within the Bank’s footprint have experienced delays in the foreclosure process and therefore, impact NPL volume. Counties in New Jersey have historically displayed significant delays in foreclosure sale timelines and New York has been experiencing similar court delays which impacts foreclosure inventory outflow.

Puerto Rico’s economy remains in an economic and fiscal crisis that has already extended for 11 years. The island’s economy continues experiencing adjustments related to the aftermath of the housing market crisis, the banking industry consolidation in 2010 and multiple rounds of austerity measures implemented in recent years in an attempt to stabilize the public sector fiscal crisis. These circumstances have eroded confidence and prolonged the contraction in economic activity. Refer to the Economic and Business Environment section of MD&A for additional information on the impact of Hurricane Maria on Puerto Rico.

The following table represents the concentration of foreclosures by state and U.S territory for the Company as a percentage of total foreclosures at September 30, 2017 and December 31, 2016, respectively:



	September 30, 2017	December 31, 2016

Puerto Rico	60.6%	60.0%
New York	6.7%	10.7%
Massachusetts	3.4%	7.0%
All other states⁽¹⁾	29.3%	22.3%

⁽¹⁾States included in this category individually represent less than 10% of total foreclosures.

The foreclosure closings issue has a greater impact on the residential mortgage portfolio than the consumer real estate secured portfolio due to the larger volume of loans in first lien position in that portfolio which have equity upon which to foreclose. Exclusive of Chapter 7 bankruptcy NPL accounts, approximately 98.8% of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only 54.4% of the 90+ day delinquent loan balances in the consumer real estate secured portfolio are secured by a first lien. Consumer real estate secured NPLs may get charged off more quickly due to the lack of equity to foreclose from a second lien position.

Alt-A Loans

The Alt-A segment consists of loans with limited documentation requirements and a portion of which were originated through independent parties ("Brokers") outside the Bank's geographic footprint. At September 30, 2017 and December 31, 2016, the residential mortgage portfolio included the following Alt-A loans:



	September 30, 2017			December 31, 2016
	(dollars in thousands)

Alt-A loans	$	408,735		$	476,229
Alt-A loans as a percentage of the residential mortgage portfolio⁽¹⁾	4.7		%	5.8		%
Alt-A loans in NPL status	$	39,413		$	48,189
Alt-A loans in NPL status as a percentage of residential mortgage NPLs	13.9		%	16.8		%

(1) Includes residential mortgage held for sale

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

The performance of the Alt-A segment has remained poor, averaging a 9.6% NPL ratio in 2017. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of 1.5% per month. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the first quarter of 2009, when the portfolio was placed in run-off, compared to 13.9% at September 30, 2017. As the Alt-A segment runs off and higher quality residential mortgages are added to the portfolio, the shift in product mix is expected to lower NPL balances.

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. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. 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, 2017		December 31, 2016
	(in thousands)
Performing
Commercial	$	162,147	$	214,474
Residential mortgage	282,646		268,777
RICs and auto loans	5,385,839		4,556,770
Other consumer	128,905		129,767
Total performing	5,959,537		5,169,788
Non-performing
Commercial	137,596		148,038
Residential mortgage	124,346		139,274
RICs and auto loans	638,036		604,864
Other consumer	41,958		44,951
Total non-performing	941,936		937,127
Total	$	6,901,473	$	6,106,915

Performing TDRs totaled $6.0 billion at September 30, 2017, an increase of $789.7 million compared to December 31, 2016. Non-performing TDRs totaled $941.9 million at September 30, 2017, an increase of $4.8 million compared to December 31, 2016.

The following table provides a summary of TDR activity:



	Nine-Month Period Ended September 30, 2017						Nine-Month Period Ended September 30, 2016
	RICs and auto loans			All other loans			RICs and auto loans			All other loans⁽¹⁾
	(in thousands)
TDRs, beginning of period	$	5,161,935		$	944,981		$	3,877,660		$	923,857
New TDRs⁽¹⁾	3,175,818			209,551			2,654,582			63,137
Charged-Off TDRs	(1,538,242		)	(230,672		)	(1,167,132		)	(16,609		)
Sold TDRs	(8,092		)	(9,239		)	5,351			(7,452		)
Payments on TDRs	(767,544		)	(37,023		)	(516,270		)	(97,521		)
TDRs, end of period	$	6,023,875		$	877,598		$	4,854,191		$	865,412

(1) New TDRs includes drawdowns on lines of credit that have previously been classified as TDRs.

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

Commercial

Performing commercial TDRs were $162.1 million, or 54.1% of total commercial TDRs at September 30, 2017 compared to $214.5 million, or 59.2% of total commercial TDRs at December 31, 2016. The change in performing commercial TDRs is primarily attributable to payoffs from two significant borrowers who were current and performing. The increase in non-performing commercial TDRs can be attributed to four significant new obligors being modified during the period, comprising $75.3 million of the increase.

Residential Mortgages

Performing residential mortgage TDRs increased from $268.8 million, or 65.9% of total residential mortgage TDRs at December 31, 2016, to $282.6 million, or 69.4% of total residential TDRs at September 30, 2017.

RICs

The RIC and auto LHFI is primarily comprised of nonprime loans (70.2% at September 30, 2017), 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 20.2% of the Company’s total RIC and auto loan portfolio at December 31, 2016 and 23.2% at September 30, 2017. 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 RV 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. TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved.

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 the previously deferred account ultimately results in a charge-off. To the extent 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. For loans that are classified as TDRs, the Company generally compares the present value of expected cash flows to the outstanding recorded investment of TDRs to determine the amount of allowance and related provision for credit losses that should be recorded. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated costs to sell.

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

Other Consumer Loans

Performing other consumer loan TDRs decreased from $129.8 million, or 74.3% of total other consumer loan TDRs, at December 31, 2016, to $128.9 million, or 75.4% of total other consumer loan TDRs, at September 30, 2017. 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 compared to overall TDR activity.

Delinquencies

At September 30, 2017 and December 31, 2016, the Company's delinquencies consisted of the following:



	September 30, 2017					December 31, 2016
	Consumer Loans Secured by Real Estate	RICs and auto loans	Other Consumer Loans	Commercial Loans	Total	Consumer Loans Secured by Real Estate	RICs and auto loans	Other Consumer Loans	Commercial Loans	Total
	(dollars in thousands)
Total Delinquencies	$618,995	$4,314,809	$242,608	$383,798	$5,560,210	$568,517	$4,261,192	$245,588	$257,152	$5,332,449
Total Loans⁽¹⁾	$14,544,659	$26,000,107	$2,851,609	$40,140,421	$83,536,796	$14,239,357	$26,498,469	$3,107,074	$44,561,193	$88,406,093
Delinquencies as a % of Loans	4.3%	16.6%	8.5%	1.0%	6.7%	4.0%	16.1%	7.9%	0.6%	6.0%

(1) Includes LHFS.

Overall, total delinquencies increased by $227.8 million, or 4.3%, from December 31, 2016 to September 30, 2017. Consumer loans secured by real estate delinquencies increased $50.5 million, primarily due to a decrease in credit quality in the residential mortgage portfolio. RICs and auto loan and other consumer loan delinquencies increased $53.6 million and decreased $3.0 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 increased $126.6 million.

ALLOWANCE FOR CREDIT LOSSES ("ACL")

The ACL is maintained at levels 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 FICOscores 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.

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

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, 2017				December 31, 2016
	Amount		% of Loans to Total LHFI		Amount		% of Loans to Total LHFI
	(dollars in thousands)
Allocated allowance:
Commercial loans	$	424,791	49.1	%	$	449,837	51.8	%
Consumer loans	3,484,331		50.9	%	3,317,604		48.2	%
Unallocated allowance	47,023		n/a		47,023		n/a
Total ALLL	3,956,145		100.0	%	3,814,464		100.0	%
Reserve for unfunded lending commitments	116,086				122,418
Total ACL	$	4,072,231			$	3,936,882

General

The ACL increased $135.3 million from December 31, 2016 to September 30, 2017. The increase in the overall ACL was primarily attributable to the increased amount of TDR's within SC's RIC and auto loan portfolio, and $37.0 million of reserves booked for possible losses from Hurricane Maria.

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 LHFI 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, the Company performs a review each quarter of allowance levels and trends by major portfolio against the levels of peer banking institutions to benchmark our allowance and industry norms.

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.

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

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 discounted cash flow ("DCF") methodology.

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 $424.8 million at September 30, 2017 (1.1% of commercial LHFI) and $449.8 million at December 31, 2016 (1.0% of commercial LHFI). The primary factor resulting in the decreased ACL allocated to the commercial portfolio is, in part, due to the 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.

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

A home equity loan or line of credit not adequately secured by collateral is treated similarly to the way 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 25.9% of its 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.

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 DCF 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 the timing of unit losses and the loan balance 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.

The allowance for consumer loans was $3.5 billion and $3.3 billion at September 30, 2017 and December 31, 2016, respectively. The allowance as a percentage of held-for-investment consumer loans was 8.4% at September 30, 2017 and 8.0% at December 31, 2016. The increase in the allowance for consumer loans was 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.

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

Unallocated

Additionally, the Company reserves for certain inherent but undetected, losses that are probable within the loan 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 ALLL positions are considered in light of these factors. The unallocated ALLL was $47.0 million at September 30, 2017 and December 31, 2016.

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 $122.4 million at December 31, 2016 to $116.1 million at September 30, 2017. This change was primarily due to a reduction during 2016 in off-balance sheet lending commitments. During the three-month and nine-month periods ended September 30, 2017, SBNA transferred $6.8 billion of unfunded commitments to extend credit to an unconsolidated related party. 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 FRB. MBS consist of pass-through, collateralized mortgage obligations ("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 Investor Service at the date of issuance. The Company’s AFS 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 AFS increased $208.8 million to $17.2 billion at September 30, 2017, compared to $17.0 billion at December 31, 2016. During the nine-month period ended September 30, 2017, the composition of the Company's investment portfolio changed due to an increase in MBS, which were offset by a decrease in ABS. MBS increased by $1.0 billion primarily due to investment purchases of $4.2 billion, offset by $3.1 billion of principal paydowns and maturities. ABS decreased $674.9 million, primarily due to $447.0 million of principal paydowns. For additional information with respect to the Company’s investment securities, see Note 3 to the Condensed Consolidated Financial Statements.

Debt securities for which the Company has the positive intent and ability to hold the securities until maturity are classified as held-to-maturity securities. Held-to-maturity securities are reported at cost and adjusted for amortization of premium and accretion of discount. Total investment securities held-to-maturity were $1.6 billion at September 30, 2017. The Company had 23 investment securities classified as held-to-maturity as of September 30, 2017.

Total trading securities increased $7.5 million to $9.1 million at September 30, 2017, compared to $1.6 million at December 31, 2016.

Total gross unrealized losses decreased by $57.9 million to $175.7 million during the nine-month period ended September 30, 2017. The majority of the decrease in unrealized losses was in the MBS portfolios. The unrealized losses decreased within the MBS portfolios by $56.5 million. Refer to Note 3 to the Condensed Consolidated Financial Statements for additional details.

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

Other investments, which consists primarily of FHLB stock and FRB stock, decreased from $730.8 million at December 31, 2016 to $708.3 million at September 30, 2017, primarily due to the Company redeeming $205.4 million of FHLB stock at par, partially offset by the Company's purchase of $154.8 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the period ended September 30, 2017, the Company did not purchase any FRB stock.

The average life of the available-for-sale investment portfolio (excluding certain ABS) at September 30, 2017 was approximately 4.47 years. The average effective duration of the investment portfolio (excluding certain ABS) at September 30, 2017 was approximately 3.02 years. The actual maturities of MBS AFS will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.

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



	September 30, 2017		December 31, 2016
	(in thousands)
Investment securities AFS:
U.S. Treasury securities and government agencies	$	8,242,685	$	8,163,027
FNMA and FHLMC securities	8,399,780		7,639,823
State and municipal securities	25		30
Other securities ⁽¹⁾	590,556		1,221,345
Total investment securities AFS	17,233,046		17,024,225
Investment securities held-to-maturity:
U.S. government agencies	1,560,850		1,658,644
Total investment securities held-to-maturity ⁽²⁾	1,560,850		1,658,644
Trading securities	9,098		1,630
Other investments	708,294		730,831
Total investment portfolio	$	19,511,288	$	19,415,330

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

(2) Held-to-maturity securities are measured and presented at amortized cost.

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, 2017:



	September 30, 2017
	Amortized Cost		Fair Value
	(in thousands)
FNMA	$	4,333,536	$	4,280,822
FHLMC	4,172,562		4,118,958
Government National Mortgage Association ⁽¹⁾	8,180,180		8,116,671
Government - Treasuries	1,669,963		1,668,107
Total	$	18,356,241	$	18,184,558

(1) Includes U.S government agency MBS.

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

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, 2017, goodwill totaled $4.5 billion and represented 3.4% of total assets and 19.0% of total stockholder's equity. The following table shows goodwill by reporting units at September 30, 2017:



	Consumer and Business Banking		Commercial Real Estate		Commercial Banking		Global Corporate Banking		SC		Santander BanCorp		Total
	(in thousands)
Goodwill at September 30, 2017	$	1,880,303	$	870,411	$	542,584	$	131,130	$	1,019,960	$	10,537	$	4,454,925

The Company conducted its annual goodwill impairment tests as of October 1, 2016 using generally accepted valuation methods. After conducting an analysis of the fair value of each reporting unit as of October 1, 2016, the Company determined that no impairments of goodwill were identified as a result of the annual impairment tests.

The Company completes a quarterly review for impairment indicators over each of its reporting units, which includes consideration of economic and organizational factors that could impact the fair value of the Company's reporting units. At the completion of the third quarter review, the Company did not identify any indicators which resulted in the Company's conclusion that an interim impairment test would be required to be completed.

DEFERRED TAXES AND OTHER TAX ACTIVITY

The Company's had a net deferred tax liability balance of $684.3 million at September 30, 2017 (consisting of a deferred tax asset balance of $958.2 million and a deferred tax liability balance of $1,642.5 million), compared to a net deferred tax liability balance of $430.5 million at December 31, 2016 (consisting of a deferred tax asset balance of $989.8 million and a deferred tax liability balance of $1,420.3 million). The $253.8 million increase of net deferred liabilities for the nine-month period ended September 30, 2017 was primarily due to an increase in deferred tax liabilities related to accelerated depreciation on leasing transactions, partially offset by a decrease in deferred tax liabilities related to unremitted foreign earnings of a subsidiary of SC.

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. The IRS appealed that judgment. On December 15, 2016, the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court. Pursuant to the First Circuit's decision, the Company is not entitled to claim the foreign tax credits it claimed but will be allowed to exclude from income $132.0 million (representing half of the U.K. taxes the Company paid) and claim the interest expense deductions. The First Circuit ordered the case to be remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On March 16, 2017, the Company filed a petition requesting the U.S. Supreme Court to hear its appeal of the First Circuit Court’s decision. On June 26, 2017 the U.S. Supreme Court denied the Company’s request, and the case has now been remanded to the Federal District Court as ordered by the Court of Appeals. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

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

In response to the First Circuit's decision, at December 31, 2016 the Company used its previously established $230.1 million tax reserve to write off the deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.0 million tax reserve in relation to items that have not yet been determined by the courts, including potential penalties. The Company believes that this 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 $36.0 million to no change.

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

In April 2006, the Company’s Board of Directors authorized 8,000 shares of Series C Preferred Stock, and granted the Company authority to issue fractional shares of the Series C Preferred Stock. Dividends on each share of Series C Preferred Stock are payable quarterly, on a non-cumulative basis, at an annual rate of 7.30%, when and if declared by the Company's Board of Directors. In May 2006, the Company issued 8,000,000 depository shares of Series C Preferred Stock for net proceeds of $195.4 million. Each depository share represents 1/1000th ownership interest in a share of Series C Preferred Stock. As a holder of depository shares, the depository shareholder is entitled to all proportional rights and preferences of the Series C Preferred Stock. The Company’s Board of Directors paid cash dividends to preferred stockholders totaling $11.0 million and $11.5 million for the nine-month periods ended September 30, 2017 and 2016, respectively.

The shares of Series C Preferred Stock are redeemable in whole or in part for cash, at the Company’s option, at a redemption price of $25,000 per share (equivalent to $25 per depository share), subject to the prior approval of the FRB. As of September 30, 2017, no shares of the Series C Preferred Stock had been redeemed.

On October 3, 2017, the Company's Board of Directors declared a cash dividend on the Company's preferred stock of $0.45625 per share, which is payable on November 15, 2017 to shareholders of record as of the close of business on November 1, 2017.

In August 2010, Santander BanCorp, a subsidiary of the Company, issued 3.0 million shares of Series B preferred stock, $25 par value, designated as the 8.75% noncumulative preferred stock, to an affiliate. The shares of the Series B preferred stock were 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 other applicable regulatory authority. Dividends on the Series B preferred stock were payable when, as and if declared by the Board of Directors of Santander BanCorp.

On January 29, 2016, BSPR redeemed the outstanding $75.0 million of Series B preferred stock. In accordance with the notice of full redemption, each share of preferred stock was redeemed at the redemption price, corresponding to $25 per preference share, plus any unpaid dividends in respect of the most recent dividend period.

BANK REGULATORY CAPITAL

The Company's capital priorities are to support client growth and business investment while maintaining appropriate capital in light of economic uncertainty and the Basel III framework. The Company continues to improve its capital levels and ratios through the retention of quarterly earnings and risk-weighted asset ("RWA") 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, 2017 and December 31, 2016, based on the Bank’s capital calculations, the Bank was considered well-capitalized under the applicable capital framework. In addition, the Company's capital levels as of September 30, 2017 and December 31, 2016, based on the Company’s capital calculations, exceeded the required capital ratios for BHCs.

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

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.

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. The OCC's prior approval would be required if the Bank were notified by the OCC that it is a problem institution or in troubled condition.

Any dividend declared and paid or return of capital has the effect of reducing capital ratios.

The following schedule summarizes the actual capital balances of SHUSA and the Bank at September 30, 2017:



	SHUSA

	September 30, 2017		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽¹⁾
CET1 capital ratio	15.66	%	6.50	%	4.50	%
Tier 1 capital ratio	17.39	%	8.00	%	6.00	%
Total capital ratio	19.10	%	10.00	%	8.00	%
Leverage ratio	13.40	%	5.00	%	4.00	%

(1) As defined by Federal Reserve regulations. The Company's ratios are presented under a Basel III phasing in basis.



	BANK

	September 30, 2017		Well-capitalized Requirement⁽²⁾		Minimum Requirement⁽²⁾
CET1 capital ratio	18.08	%	6.50	%	4.50	%
Tier 1 capital ratio	18.08	%	8.00	%	6.00	%
Total capital ratio	19.20	%	10.00	%	8.00	%
Leverage ratio	13.69	%	5.00	%	4.00	%

(2) As defined by OCC regulations. The Bank's ratios are presented under a Basel III phasing in basis.

In June 2017, the Company announced that the Federal Reserve did not object to the planned capital actions described in the Company’s capital plan submitted as part of the CCAR process. That capital plan included planned capital distributions across the following categories: (1) common stock dividends from SHUSA to Santander, (2) common stock dividends from SC, (3) redemption of the remaining balance of SHUSA’s 7.908% trust preferred securities, and (4) dividends on the Company’s preferred stock and payments on its trust preferred securities. On June 28, 2017, SHUSA’s Board of Directors approved the following capital distributions for the third quarter of 2017: (1) a dividend payment of $0.45625 per share on the Company’s preferred stock, (2) a common stock dividend payment to Santander of $5.0 million, and (3) redemption of the remaining balance of the Company’s trust preferred securities.

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

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 Company'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 July 2, 2015, the Company entered into a 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.

Until recently, the Company was subject to an additional written agreement with the FRB of Boston on stress testing and capital adequacy. That written agreement was entered into on September 15, 2014, and was terminated on August 17, 2017.

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 13 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 $5.8 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the nine-month period ended September 30, 2017, SC completed on-balance sheet funding transactions totaling approximately $12.3 billion, including:


•	three securitizations on its Santander Drive Auto Receivables Trust ("SDART") platform for $3.1 billion;


•	issuance of two retained bonds on its SDART platform for $155.0 million;


•	four securitizations on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform for $4.1 billion;


•	issuance of 1 retained bond on its DRIVE platform for $113.0 million;


•	four private amortizing lease facilities for $1.6 billion; and


•	seven top-ups and two re-levers of private amortizing loan and lease facilities for $3.2 billion.

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

SC also completed $3.0 billion in asset sales, which consisted of $300.0 million of recurring monthly sales with its third-party flow partners and $2.6 billion in sales to Santander and $100.0 million in sales to SBNA.

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

IHC

SIS entered into a two-year revolving subordinated loan agreement with Santander effective June 8, 2015, not to exceed $290.0 million in the aggregate, which matured on June 8, 2017. On June 6, 2017, SIS entered into a revolving subordinated loan agreement with SHUSA not to exceed $290.0 million for a two-year term to mature in 2019. On September 13, 2017, the revolving subordinated loan agreement with SHUSA was increased to $350.0 million and on October 6, 2017, it was increased to $495.0 million.

As needed, SIS will draw down from a another subordinated loan with Santander in order to enable SIS to underwrite certain large transactions in excess of the foregoing subordinated loan. At September 30, 2017, there was no outstanding balance on the subordinated loan.

BSI's primary sources of liquidity are from customer deposits and deposits from affiliated banks.

BSPR's 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, 2017, the Bank had approximately $20.5 billion in committed liquidity from the FHLB and the FRB. Of this amount, $15.2 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At September 30, 2017 and December 31, 2016, liquid assets (cash and cash equivalents and LHFS), and securities available-for-sale exclusive of securities pledged as collateral) totaled approximately $20.0 billion and $21.1 billion, respectively. These amounts represented 32.2% and 31.4% of total deposits at September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, the Bank, BSI and BSPR had $1.1 billion, $2.8 billion, and $1.1 billion, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.

BSPR has $855.6 million in committed liquidity from the FHLB, all of which was unused as of September 30, 2017, as well as $304.3 million in liquid assets aside from cash unused as of September 30, 2017.

Cash and cash equivalents



	Nine-Month Period Ended September 30,
	2017			2016
	(in thousands)
Net cash provided by operating activities	$	4,011,727		$	3,135,457
Net cash provided by investing activities	1,367,478			2,514,922
Net cash used in financing activities	(7,505,439		)	(3,267,636		)

Cash provided by operating activities

Net cash provided by operating activities was $4.0 billion for the nine-month period ended September 30, 2017, which was primarily comprised of net income of $688.5 million, $4.3 billion in proceeds from sales of LHFS, and $758.9 million in depreciation, amortization and accretion, partially offset by $3.8 billion of originations of LHFS, net of repayments. Operating activities were adjusted for the provision for credit losses of $2.0 billion during the period.

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

Net cash provided by operating activities was $3.1 billion for the nine-month period ended September 30, 2016, which was comprised of net income of $610.7 million, $3.9 billion in proceeds from sales of LHFS, and $746.6 million in depreciation, amortization and accretion, and partially offset by $4.6 billion of originations of LHFS, net of repayments. Operating activities were adjusted for the provision for credit losses of $2.2 billion during the period.

Cash used in investing activities

For the nine-month period ended September 30, 2017, net cash provided by investing activities was $1.4 billion, primarily due to $6.1 billion of purchases of investment securities available-for-sale and $4.7 billion in operating lease purchases and originations, partially offset by $2.3 billion in normal loan activity, $5.6 billion of available-for-sale investment securities sales, maturities and prepayments, $2.9 billion in proceeds from sales and terminations of operating leases, $1.1 billion in proceeds from sales of LHFI and $778.7 million in manufacturer incentives.

For the nine-month period ended September 30, 2016, net cash provided by investing activities was $2.5 billion, primarily due to $9.4 billion of purchases of investment securities available-for-sale, $1.7 billion in normal loan activity, and $4.6 billion in operating lease purchases and originations, partially offset by $14.7 billion of available-for-sale investment securities sales, maturities and prepayments, $1.4 billion in proceeds from sales of LHFI, and $1.7 billion in proceeds from sales and terminations of operating leases.

Cash used in financing activities

For the nine-month period ended September 30, 2017, net cash used in financing activities was $7.5 billion, which was primarily due to a decrease in net borrowing activity of $2.4 billion and a $5.2 billion decrease in deposits.

Net cash used in financing activities for the nine-month period ended September 30, 2016 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.

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.

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 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 $3.9 billion for the exclusive use of supplying short-term liquidity needs to support Chrysler Capital retail financing. As of September 30, 2017 and December 31, 2016, there were outstanding balances on these facilities of $2.8 billion and $3.7 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.

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

Repurchase Facilities

SC also obtains financing through four 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 365 days. As of September 30, 2017 and December 31, 2016, there were outstanding balances of $658.5 million and $743.3 million, respectively, 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 $2.8 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, 2017 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.

The Company provides SC with $3.0 billion of committed revolving credit that can be drawn on an unsecured basis maturing in March 2019. The Company also provides SC with $2.1 billion in various term loans with maturities ranging from March 2019 to March 2022. These loans eliminate in the consolidation of SHUSA.

On October 10, 2017, the Company entered into a $400.0 million loan with SC. Interest accrues on this loan at the rate of 3.10%. The note has a maturity date of October 10, 2020. This loan will eliminate in the consolidation of SHUSA.

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. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee will be paid against each month's ending balance. The guarantee fee will be applicable only for additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by an executed counter-guaranty agreement. SC recognized guarantee fee expense of $4.6 million and $4.8 million for the nine-months ended September 30, 2017 and 2016, respectively.

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. SC has completed eleven securitizations year-to-date in 2017 and currently has 37 securitizations outstanding in the market with a cumulative ABS balance of approximately $15.0 billion.

Flow Agreements

In addition to SC's credit facilities and secured structured financings, SC has a flow agreement in place with a third party for charged-off assets. Previously, SC also had flow agreements with Bank of America and CBP. However, those agreements were terminated effective January 31 and May 1, 2017, respectively.

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.

Off-Balance Sheet Financing

Beginning in March 2017, SC has the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform. As all of the notes and residual interests in the securitization are issued to Santander, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Condensed Consolidated Balance Sheets.

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

SC also continues to periodically execute 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.

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.

SIS uses liquidity primarily to support underwriting transactions.

The primary use of liquidity for BSI is to meet customer liquidity requirements, such as loan financing, maturing deposits, investment activities, fund transfers, and payment of its operating expenses.

BSPR uses liquidity for funding loan commitments, satisfying deposit withdrawal requests, and repayments of borrowings.

Dividends and Stock Issuances

At September 30, 2017, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.

During the three-month and nine-month periods ended September 30, 2017, the Company paid dividends of $5.0 million to its sole shareholder, Santander.

As of September 30, 2017, the Company had 530,391,043 of common stock outstanding.

During the three-month and nine-month periods ended September 30, 2017 the Company paid dividends of $3.65 million and $10.95 million, respectively, on its preferred stock.

On October 3, 2017, SHUSA’s Board of Directors declared a cash dividend on the Company’s preferred stock of $0.45625 per share, which is payable on November 15, 2017 to shareholders of record as of the close of business on November 1, 2017.

On October 20, 2017, SHUSA's Board of Directors declared a cash dividend on the Company's common stock in the amount of $5 million, which is payable on November 16, 2017 to Santander.

On October 25, 2017, SC declared a cash dividend of $0.03 per share, to be paid November 17, 2017 to SC shareholders of record as of close of business November 7, 2017. SC's capital action plan also includes dividend payments for SC's stockholders of $0.05 per share in the first and second quarters of 2018.

During the third quarter of 2017, SHUSA's subsidiaries had the following dividend activity which eliminated in consolidation:


•	The Bank declared and paid a $50.0 million dividend to SHUSA;


•	BSI declared and paid a $30.0 million dividend to SHUSA; and


•	Services and Promotions, LLC declared and paid a $9.0 million dividend to SHUSA.

On November 7, 2017, BSI declared an additional $5.0 million dividend to SHUSA payable on November 28, 2017 which will eliminate in the consolidation of SHUSA.

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

CONTRACTUAL OBLIGATIONS

The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and asset/liability management 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⁾	$	4,590,010	$	4,032,940	$	557,070	$	—	$	—
Notes payable - revolving facilities	5,231,289		3,971,055		1,260,234		—		—
Notes payable - secured structured financings	23,310,484		1,619,104		5,219,206		12,065,609		4,406,565
Other debt obligations ^{(1) (2)}	11,352,184		2,971,398		4,177,059		1,939,251		2,264,476
Junior subordinated debentures due to capital trust entities ^{(1) (2)}	151,746		151,746		—		—		—
CDs ⁽¹⁾	5,865,838		2,924,011		1,902,414		1,031,681		7,732
Non-qualified pension and post-retirement benefits	128,328		12,903		26,203		25,396		63,826
Operating leases⁽³⁾	735,481		124,166		237,167		157,472		216,676
Total contractual cash obligations	$	51,365,360	$	15,807,323	$	13,379,353	$	15,219,409	$	6,959,275

(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, 2017. 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.


(1)	Includes all carrying value adjustments, such as unamortized premiums and discounts and hedge basis adjustments.


(2)	Does not include future expected sublease income.

Excluded from the above table are deposits of $56.1 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.

Lending Arrangements

SC is obligated to make purchase price holdback payments to a third-party originator of auto loans SC has purchased, when losses are lower than originally expected. SC is also obligated to make total return settlement payments to this third-party originator in 2017 if returns on the purchased loans are greater than originally expected. These obligations are accounted for as derivatives.

As a result of the strategic evaluation of its personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting the personal loan portfolios. On February 1, 2016, SC completed the sale of substantially all LendingClub loans to a third-party buyer at an immaterial premium to par value. On April 14, 2017, SC sold the remaining portfolio comprised of personal installment loans to a third-party buyer.

SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of 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. The Bluestem portfolio is carried as held for sale in SC's Condensed Consolidated Financial Statements. Accordingly, SC has recorded $238 million year-to-date in lower of cost or market adjustments on this portfolio, and there may be further such adjustments required in future periods' financial statements. SC is currently evaluating alternatives for sale of the Bluestem portfolio, which had a carrying value of $930 million at September 30, 2017.

Employment and Other Agreements

On July 2, 2015, SC announced the departure of Mr. Dundon from his roles as Chairman of the Board and Chief Executive Officer ("CEO) of SC, effective as of the close of business on July 2, 2015. In connection with Mr. Dundon's departure, and subject to the terms and conditions of his employment agreement, including Mr. Dundon's execution of a release of claims against SC, he became entitled to receive certain payments and benefits under his employment agreement. The separation agreement also provided for the modification of terms for certain other equity-based awards. Certain of the payments, agreements to make payments and benefits may be effective only upon receipt of certain required regulatory approvals.

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

As of September 30, 2017, SC has not made any payments to Mr. Dundon, nor recorded any liability or obligation, arising from or pursuant to the terms of the separation agreement. Discussions with respect to this matter are ongoing, and, if all applicable conditions are satisfied, including receipt of required regulatory approvals and satisfaction of any conditions thereto, SC will be obligated to make a cash payment to Mr. Dundon of up to $115.1 million. This amount would be recorded as compensation expense in its Consolidated Statement of Income and Comprehensive Income.

The Company entered into an agreement with Mr. Dundon, Dundon DFS LLC ("DDFS"), and Santander related to Mr. Dundon’s

departure from SC. 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 (the "Shareholders Agreement"). 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. In the event the Call Transaction were to be completed after the Call End Date, interest would accrue on the price paid per share in the Call Transaction at the overnight London Interbank Offered Rate (“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 were ultimately sold in the Call Transaction. The Amended and Restated Loan Agreement provides for a $300.0 million revolving loan, which as of September 30, 2017 and December 31, 2016 had an unpaid principal balance ("UPB") of approximately $290.0 million. Pursuant to the loan agreement, 29,598,506 shares of SC common stock owned by DDFS LLC are pledged as collateral under a related pledge agreement (the “Pledge Agreement”). The Shareholders Agreement further provides that Santander may, at its option, become the direct beneficiary of the Call Option, and Santander has exercised this option. If consummated in full, DDFS LLC would receive $928.3 million plus interest that has accrued since the Call End Date. To date, the Call Transaction has not been consummated.

Pursuant to the loan agreement, if at any time the value of SC Common Stock pledged under the pledge agreement is less than 150% of the aggregate principal amount outstanding under the loan agreement, DDFS has an obligation to either (a) repay a portion of the outstanding principal amount such that the value of the pledged collateral is equal to at least 200% of the outstanding principal amount, or (b) pledge additional shares of SC Common Stock such that the value of the additional shares of SC Common Stock, together with the 29,598,506 shares already pledged under the pledge agreement, is equal to at least 200% of the outstanding principal amount. The value of the pledged collateral is less than 150% of aggregate principal amount outstanding under the loan agreement, and DDFS has not taken any of the collateral posting actions described in clauses (a) or (b) above.

On April 17, 2017, the Loan Agreement matured and became due and payable with a UPB of approximately $290 million as of that date. Because the borrower failed to pay obligations under the loan agreement on April 17, 2017, the borrower is in default and is currently being charged the default interest rate as defined by the loan agreement. The loan agreement generally defines the default interest rate as the Base Rate plus 2%. The Base Rate as defined in the loan agreement is the higher of (i) the federal funds rate plus ½ of 1% or (ii) the prime rate, which is the annual rate of interest publicly announced by the New York Branch of Santander from time to time. As of April 21, 2017, the prime rate as announced by the New York Branch of Santander was 4%.

The parties continue in discussions on these matters. Completion of the transactions with Mr. Dundon is subject to receipt of applicable regulatory approvals.

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

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.

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, 2017 and December 31, 2016:



	The following estimated percentage increase/(decrease) to net interest income would result
If interest rates changed in parallel by the amounts below	September 30, 2017		December 31, 2016
Down 100 basis points	(2.70	)%	(2.14	)%
Up 100 basis points	2.38	%	2.36	%
Up 200 basis points	4.49	%	4.36	%

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.

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

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, 2017 and December 31, 2016.



	The following estimated percentage increase/(decrease) to MVE would result
If interest rates changed in parallel by the amounts below	September 30, 2017		December 31, 2016
Down 100 basis points	(2.39	)%	(1.23	)%
Up 100 basis points	(0.36	)%	(0.76	)%
Up 200 basis points	(2.43	)%	(2.50	)%

As of September 30, 2017, the Company’s MVE profile showed a decrease of 2.39% for downward parallel interest rate shocks of 100 basis points and a decrease of 0.36% for upward parallel interest rate shocks of 100 basis points. The asymmetrical sensitivity between up 100 and down 100 shock 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 non-maturity deposits ("NMDs")).

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, SHUSA's 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.

Prior to 2017, the Company entered into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments, which were sold in 2016.

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.

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

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.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated by reference from Part I, Item 2, MD&A of Financial Condition and Results of Operations — Asset and Liability Management above.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls

Our management, with the participation of our CEO and Chief Financial Officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under 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, 2017, we did not maintain effective disclosure controls and procedures because of the material weaknesses in internal control over financial reporting described below. Notwithstanding these material weaknesses, based on the additional analysis and other post-closing procedures performed, management believes that the Condensed Consolidated 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 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:


1.	Control Environment

The Company's financial reporting involves complex accounting matters emanating from our majority-owned subsidiary SC. We determined there was a material weakness in the design and operating effectiveness of the controls pertaining to our oversight of our SC subsidiary's accounting for transactions that are significant to the Company’s internal control over financial reporting. These deficiencies included (a) ineffective oversight to ensure accountability at SC for the performance of internal controls over financial reporting, and to ensure corrective actions, where necessary, were appropriately prioritized and implemented in a timely manner; and (b) inadequate resources and technical expertise at SHUSA to perform effective oversight of the application of accounting and financial reporting activities that are significant to the Company’s consolidated financial statements.

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We have identified the following material weaknesses emanating from SC:


2.	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, spreadsheets and completeness and accuracy of data 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 for the risk and controls self-assessment process, which contributed to a lack of clarity about 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.

3. 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 the review of key assumptions over prepayment curves, pool segmentation and presentation in financial statements either 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.

4. 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 TDRs separately from the general allowance on loans not classified as TDRs, the consideration of net discounts and the calculation of selling costs when estimating the allowance either 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 policies 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, inappropriately omitting the consideration of net discounts when estimating the allowance and recording charge-offs, and calculating appropriate selling costs for inclusion in the analysis.

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.

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5. 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.

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.

6. 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 completeness and accuracy of data, inputs and assumptions in models and spreadsheets 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.

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.

7. Identification, Governance, 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 completeness and accuracy of data, inputs, calculation and assumptions in models and spreadsheets used for estimating accretion 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.

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, provision for credit losses, miscellaneous income and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

8. 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 a prerequisite to recording the transaction and that approval had not been obtained prior to recording the transaction and therefore should have not been recorded.

This material weakness relates to the following financial statement line items: compensation and benefits expense, other liabilities, deferred tax liabilities, net, and common stock and paid-in capital and the related disclosures within Note 13 - Accumulated Other Comprehensive Income/(Loss).

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In addition to the above items emanating from SC, the following material weaknesses were identified at the SHUSA level:

9. Review of Statement of Cash Flows and Footnotes

Management identified a material weakness in internal control over the Company's process to prepare and review the 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 such information.

10. Goodwill Impairment Assessment

In connection with the annual goodwill impairment assessment, 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 GAAP. Additionally, the Company determined there was a material weakness in the operating effectiveness of the review control over data utilized in Step Two of the impairment test for the SC reporting unit.

Remediation Status of Reported Material Weaknesses

The Company is 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 Company is committed to maintaining a strong internal control environment and to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls ensuring strict compliance with GAAP.

To address the material weakness in the control environment (material weakness 1, noted above), the Company is in the process of strengthening its processes and controls as follows:


•	Established regular working group meetings, with appropriate oversight by management, to strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.


•	Appointed a Head of Internal Controls with significant public company financial reporting experience and the requisite skillsets in areas important to financial reporting.


•	Developed a plan to enhance its risk assessment processes, control procedures and documentation.


•	Established policies and procedures for the oversight of subsidiaries that includes accountability for each subsidiary for maintenance of accounting policies, evaluation of significant and unusual transactions, and regular reporting and review of changes in the control environment and related accounting processes.

To address the material weakness in SC’s control environment, risk assessment, control activities and monitoring (material weakness 2, noted above), the Company is in the process of strengthening its processes and controls as follows:


•	Appointed an additional independent director to the Audit Committee of the Board with extensive experience as a financial expert in our industry to provide further experience on the committee.


•	Established regular working group meetings, with appropriate oversight by management of both SC and SHUSA to strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.


•	Hired a Chief Accounting Officer and other key personnel with significant public company financial reporting experience and the requisite skillsets in areas important to financial reporting.


•	Developed and implemented a plan to enhance its risk assessment processes, control procedures and documentation.


•	Developed and implemented additional documentation, controls and governance for the credit loss allowance and accretion processes.


•	Reallocated additional Company resources to improve the oversight for certain financial models.


•	Increased accounting resources with qualified permanent resources to ensure sufficient staffing to conduct enhanced financial reporting procedures and to continue the remediation efforts.


•	Improved management documentation, review controls and oversight of accounting and financial reporting activities to ensure accounting practices conform to the Company’s policies and U.S. GAAP.


•	Increased accounting participation in critical governance activities to ensure an adequate assessment of risk which may impact financial reporting or the related internal controls.


•	Completed a comprehensive review and update of all accounting policies, process descriptions and control activities.

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To address the material weaknesses related to the application of effective interest method for accretion (material weakness 3, noted above) and the identification, governance and monitoring of models used to estimate accretion (material weakness 7, noted above), the Company has taken the following measures:


•	Enhanced its accounting documentation and review procedures of key assumptions to ensure the Company’s accretion methodology conforms to Company policy and GAAP.


•	Automated the process for the application of the effective interest rate method for accreting discounts, subvention payments from manufacturers and other origination costs on individually acquired RICs.


•	Implemented comprehensive review controls over data, inputs and assumptions used in the models.


•	Strengthened review controls and change management procedures over the models used to estimate accretion.


•	Developed a comprehensive accretion model documentation manual and implemented on-going performance monitoring to ensure compliance with required standards.


•	Increased accounting resources with qualified, permanent resources to ensure an adequate level of review and execution of control activities.

To address the material weaknesses related to the methodology to estimate credit loss allowance (material weakness 4, noted above), loans modified as TDRs (material weakness 5, noted above), and development, approval, and monitoring of models used to estimate the credit loss allowance (material weakness 6, noted above), the Company is in the process of strengthening its processes and controls as follows:


•	Conducted a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.


•	Enhanced its accounting documentation and review procedures relating to credit loss allowance and TDRs to demonstrate how the Company’s policies and procedures align with GAAP and produce a repeatable process.


•	Increased resources dedicated to analysis, review and documentation to ensure compliance with GAAP and the Company’s policies.


•	Implemented enhanced review controls over financial statement disclosures for the credit loss allowance and TDRs to ensure compliance with the Company’s policies and GAAP.


•	Implemented a more comprehensive monitoring plan for the credit loss allowance and TDRs with a specific focus on model inputs, changes in model assumptions and model outputs to ensure effective execution of the Company’s risk strategy.


•	Implemented a more comprehensive monitoring plan for credit loss allowance and TDRs with a specific focus on model inputs, changes in model assumptions and model outputs to ensure an effective execution of the Company’s risk strategy.


•	Conducted a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.


•	Enhanced the Company’s communication on related issues with its senior leadership team and the Board, including the Risk Committee and the Audit Committee.

To address the material weakness in the review of new, unusual or significant transactions (material weakness 8, noted above), the Company has taken the following measures:


•	Increasing the documentation, analysis and governance over new, significant and unusual transactions to ensure that these transactions are recorded in accordance with Company’s policies and GAAP.

To address the material weaknesses in the review of SCF and footnotes (material weakness 9, noted above), the Company has taken the following measures:


•	Improving the review controls over financial statements and the related disclosures to include a more comprehensive disclosure checklist and improved review procedures from certain members of the management.


•	Designed and implemented additional controls over the preparation and the review of the SCF and Notes to the Consolidated Financial Statements.


•	Strengthened the review controls, reconciliations and supporting documentation related to the classification of cash flows between operating activities and investing activities in the SCF.


•	Implemented additional reviews at a detailed level at the statement preparation and data provider levels.

To address the material weaknesses in the goodwill impairment assessment (material weakness 10, noted above), the Company has taken the following measures:


•	Improved reconciliation of carrying value to key information sources.


•	Increased management reviews of the goodwill carrying value calculation.

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•	Improved communication protocols with appropriate personnel and third-party valuation specialists to provide additional transparency for information used for valuation.


•	Improved reviews of information provided by appropriate personnel and reconciliation of valuation assumptions to information provided by the Company.

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 to 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 were not remediated at September 30, 2017.

Limitations on Effectiveness of Disclosure 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.

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 three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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PART II

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. There have been no material changes from the risk factors set forth under Part I, Item IA, Risk Factors, in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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 001-16581)

(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 001-16581)

(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 001-16581)

(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 001-16581)

(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 001-16581)

(3.5	)	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 January 3, 2017) (Commission File Number 001-16581)

(3.6	)	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 001-16581)

(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 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)

(10.4	)	Written Agreement, dated as of March 21, 2017, by and among Santander Holdings USA, Inc., Santander Consumer 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 March 23, 2017) (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)

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(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:	November 13, 2017	/s/ Madhukar Dayal
		Madhukar Dayal
		Chief Financial Officer and Senior Executive Vice President


Date:	November 13, 2017	/s/ David L. Cornish
		David L. Cornish
		Chief Accounting Officer and Executive Vice President

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