Santander Holdings USA, Inc. - Quarter Report: 2017 June (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 June 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 July 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 June 30, 2017 and December 31, 2016	4

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

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

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

Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 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	93

Item 3. Quantitative and Qualitative Disclosures About Market Risk	145

Item 4. Controls and Procedures	145

PART II. OTHER INFORMATION	150

Item 1. Legal Proceedings	150

Item 1A. Risk Factors	150

Item 2. Unregistered Sales of Equity Securities and use of Proceeds	150

Item 3. Defaults upon Senior Securities	150

Item 4. Mine Safety Disclosures	150

Item 5. Other Information	150

Item 6. Exhibits	151

SIGNATURES	153


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

Table of Contents

FORWARD-LOOKING STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

This Quarterly Report on Form 10-Q of Santander Holdings USA, Inc. (“SHUSA” or the “Company”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and future performance of the Company. Words such as “may,” “could,” “should,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” “anticipate,” “estimate,” “intend,” “plan,” “assume," "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”), including changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, the failure to adhere to which could subject SHUSA to formal or informal regulatory compliance and enforcement actions;


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


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


•	inflation, interest rate, market and monetary fluctuations, which may, among other things, reduce net interest margins, impact funding sources and affect 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 manage changes in the value and quality of its assets, changing market conditions that may force management to alter the implementation or continuation of cost savings or revenue enhancement strategies and the possibility that revenue enhancement initiatives may not be successful in the marketplace or may result in unintended costs;


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


•	SHUSA’s ability to 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;


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


•	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 and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;


•	the risk of a disruption of SHUSA's operational systems, including a breach of SHUSA's security systems or infrastructure or those of SHUSA's third-party vendors or other service providers, including as a result of cyber attacks, technological failure, human error, fraud or malice;

•

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

•

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


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


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


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


•	the costs and effects of regulatory or judicial proceedings;


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


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


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

Table of Contents

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

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		DCF: Discounted cash flow
ACL: Allowance for credit losses		DDFS: Dundon DFS LLC
ALLL: Allowance for loan and lease losses		Deka Lawsuit: Purported securities class action lawsuit filed against SC on August 26, 2014
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation		DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
AOD: Assurance of Discontinuance		DOJ: Department of Justice
APR: Annual percentage rate		DTI: Debt-to-income
ASC: Accounting Standards Codification		ECOA: Equal Credit Opportunity Act
ASU: Accounting Standards Update		EPS: Enhanced Prudential Standards
ATM: Automated teller machine		ETR: Effective tax rate
Bank: Santander Bank, National Association		Exchange Act: Securities Exchange Act of 1934, as amended
BHC: Bank holding company		FASB: Financial Accounting Standards Board
BOLI: Bank-owned life insurance		FBO: Foreign banking organization
BSI: Banco Santander International		FCA: Fiat Chrysler Automobiles US LLC
CBP: Citizens Bank of Pennsylvania		FDIC: Federal Deposit Insurance Corporation
CCAR: Comprehensive Capital Analysis and Review		Federal Reserve: Board of Governors of the Federal Reserve System
CD: Certificate(s) of deposit		FHLB: Federal Home Loan Bank
CEVF: Commercial equipment vehicle financing		FHLMC: Federal Home Loan Mortgage Corporation
CET1: Common equity Tier 1		FICO^®: Fair Isaac Corporation credit scoring model
CFPB: Consumer Financial Protection Bureau		Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
Change in Control: First quarter 2014 change in control and consolidation of SC		FNMA: Federal National Mortgage Association
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC		FRB: Federal Reserve Bank
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement		FTP: Funds transfer pricing
CLTV: Combined loan-to-value		FVO: Fair value option
CMO: Collateralized mortgage obligation		GAAP: Accounting principles generally accepted in the United States of America
CMP: Civil monetary penalty		GCB: Global Corporate Banking
CODM: Chief Operating Decision Maker		HQLA: High-quality liquid assets
Company: Santander Holdings USA, Inc.		IHC: U.S. intermediate holding company
Consent Order: Consent order signed by the Bank with the CFPB on July 14, 2016 regarding the Bank’s overdraft coverage practices for ATM and one-time debit card transactions		IPO: Initial public offering
Covered Fund: hedge fund or a private equity fund under the Volcker Rule		IRS: Internal Revenue Service
CPR: Changes in anticipated loan prepayment rates		ISDA: International Swaps and Derivatives Association, Inc.
CRA: Community Reinvestment Act		IT: Information technology

Table of Contents



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

Table of Contents

PART I

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	June 30, 2017			December 31, 2016
	(in thousands)
ASSETS
Cash and cash equivalents	$	7,539,679		$	10,035,859
Investment securities:
Available-for-sale at fair value	18,399,590			17,024,225
Held-to-maturity (fair value of $1,549,011 and $1,635,413 as of June 30, 2017 and December 31, 2016, respectively)	1,575,037			1,658,644
Trading securities	10,245			1,630
Other investments	723,201			730,831
Loans held-for-investment ^{(1) (5)}	82,956,779			85,819,785
Allowance for loan and lease losses ⁽⁵⁾	(3,953,608		)	(3,814,464		)
Net loans held-for-investment	79,003,171			82,005,321
Loans held-for-sale ⁽²⁾	2,503,811			2,586,308
Premises and equipment, net ⁽³⁾	909,227			996,498
Operating lease assets, net ⁽⁵⁾⁽⁶⁾	9,914,860			9,747,223
Accrued interest receivable ⁽⁵⁾	551,425			599,321
Equity method investments	231,997			255,344
Goodwill	4,454,925			4,454,925
Intangible assets, net	566,329			597,244
Bank-owned life insurance	1,783,348			1,767,101
Restricted cash ⁽⁵⁾	3,280,999			3,016,948
Other assets ^{(4) (5)}	3,307,851			2,882,868
TOTAL ASSETS	$	134,755,695		$	138,360,290
LIABILITIES
Accrued expenses and payables	$	3,046,733		$	2,821,712
Deposits and other customer accounts	62,956,555			67,240,690
Borrowings and other debt obligations ⁽⁵⁾	43,379,055			43,524,445
Advance payments by borrowers for taxes and insurance	177,538			163,498
Deferred tax liabilities, net	1,553,283			1,420,315
Other liabilities ⁽⁵⁾	745,277			810,872
TOTAL LIABILITIES	111,858,441			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 June 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 June 30, 2017 and December 31, 2016)	16,581,877			16,599,497
Accumulated other comprehensive loss	(151,813		)	(193,208		)
Retained earnings	3,315,083			3,020,149
TOTAL SHUSA STOCKHOLDER'S EQUITY	19,940,592			19,621,883
Noncontrolling interest	2,956,662			2,756,875
TOTAL STOCKHOLDER'S EQUITY	22,897,254			22,378,758
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	134,755,695		$	138,360,290

(1) Loans held-for-investment ("LHFI") includes $207.2 million and $217.2 million of loans recorded at fair value at June 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 $1.3 billion and $1.2 billion at June 30, 2017 and December 31, 2016, respectively.

(4) Includes mortgage servicing rights ("MSRs") of $146.1 million and $146.6 million at June 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 $2.8 billion and $2.8 billion at June 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 June 30,					Six-Month Period Ended June 30,
	2017		2016			2017		2016
	(in thousands)
INTEREST INCOME:
Loans	$	1,868,918	$	1,925,269		$	3,707,856	$	3,866,116
Interest-earning deposits	20,476		14,473			38,910		28,507
Investment securities:
Available-for-sale	95,015		81,268			176,441		174,973
Held-to-maturity	10,011		—			20,643		—
Other investments	5,025		8,399			11,188		17,583
TOTAL INTEREST INCOME	1,999,445		2,029,409			3,955,038		4,087,179
INTEREST EXPENSE:
Deposits and other customer accounts	58,824		73,354			120,818		148,847
Borrowings and other debt obligations	298,872		291,169			589,907		577,642
TOTAL INTEREST EXPENSE	357,696		364,523			710,725		726,489
NET INTEREST INCOME	1,641,749		1,664,886			3,244,313		3,360,690
Provision for credit losses	604,768		613,767			1,340,214		1,512,229
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	1,036,981		1,051,119			1,904,099		1,848,461
NON-INTEREST INCOME:
Consumer and Commercial fees	162,334		180,320			316,702		360,997
Mortgage banking income, net	15,092		11,546			28,266		27,896
Bank-owned life insurance	14,052		16,437			31,351		30,165
Lease income	489,043		456,946			985,087		877,802
Miscellaneous income, net	39,377		24,528			86,415		62,844
TOTAL FEES AND OTHER INCOME	719,898		689,777			1,447,821		1,359,704
Other-than-temporary impairment recognized in earnings	—		(34		)	—		(44		)
Net gain on sale of investment securities	9,049		30,798			9,569		58,058
Net gain recognized in earnings	9,049		30,764			9,569		58,014
TOTAL NON-INTEREST INCOME	728,947		720,541			1,457,390		1,417,718
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits	455,616		420,319			907,857		855,951
Occupancy and equipment expenses	163,553		151,453			326,264		297,284
Technology expense	66,502		71,370			122,275		126,589
Outside services	59,003		68,618			107,278		145,011
Marketing expense	36,754		21,564			68,218		42,042
Loan expense	95,872		104,261			194,217		206,891
Lease expense	369,240		322,159			728,032		614,993
Other administrative expenses	95,096		105,128			197,334		201,493
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES	1,341,636		1,264,872			2,651,475		2,490,254
OTHER EXPENSES:
Amortization of intangibles	15,424		17,754			30,915		35,686
Deposit insurance premiums and other expenses	17,596		13,505			35,426		39,017
Loss on debt extinguishment	3,991		45,573			10,740		78,445
Other miscellaneous expenses	7,535		1,286			10,541		5,563
TOTAL OTHER EXPENSES	44,546		78,118			87,622		158,711
INCOME BEFORE INCOME TAX PROVISION	379,746		428,670			622,392		617,214
Income tax provision	91,983		153,256			170,920		232,117
NET INCOME INCLUDING NONCONTROLLING INTEREST	287,763		275,414			451,472		385,097
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	104,724		108,472			155,352		179,747
NET INCOME ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC.	$	183,039	$	166,942		$	296,120	$	205,350

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three-Month Period Ended June 30,					Six-Month Period Ended June 30,
	2017		2016			2017		2016
	(in thousands)
NET INCOME INCLUDING NONCONTROLLING INTEREST	$	287,763	$	275,414		$	451,472	$	385,097
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments, net of tax ⁽¹⁾	6,523		(14,772		)	4,036		(47,300		)
Net unrealized gains on available-for-sale investment securities, net of tax	15,349		33,675			36,318		179,204
Pension and post-retirement actuarial gains, net of tax	556		565			1,041		1,130
TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX	22,428		19,468			41,395		133,034
COMPREHENSIVE INCOME	310,191		294,882			492,867		518,131
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	104,724		108,472			155,352		179,747
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA	$	205,467	$	186,410		$	337,515	$	338,384

(1) Excludes $3.2 million and $0.2 million of other comprehensive loss attributable to non-controlling interest ("NCI") for the three-month and six-month periods ended June 30, 2017, respectively, compared to $6.0 million and $21.7 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 SIX-MONTH PERIODS ENDED JUNE 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.	—	—			—		133,034			205,350			—			338,384
Other comprehensive loss attributable to noncontrolling interest	—	—			—		—			—			(21,726		)	(21,726		)
Net income attributable to noncontrolling interest	—	—			—		—			—			179,747			179,747
Impact of Santander Consumer USA Holdings Inc. stock option activity	—	—			69		—			—			10,572			10,641
Redemption of Preferred Stock		(75,000		)	—		—			—			—			(75,000		)
Capital contribution from Shareholder	—	—			100		—			—			—			100
Stock issued in connection with employee benefit and incentive compensation plans	—	—			395		—			—			—			395
Dividends paid on preferred stock	—	—			—		—			(7,829		)	—			(7,829		)
Balance, June 30, 2016	530,391	$	195,445		$	16,630,386	$	(37,496	)	$	2,869,914		$	2,613,563		$	22,271,812



	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.	—	—		—			41,395			296,120			—			337,515
Other comprehensive loss attributable to noncontrolling interest	—	—		—			—			—			(166		)	(166		)
Net income attributable to noncontrolling interest	—	—		—			—			—			155,352			155,352
Impact of Santander Consumer USA Holdings Inc. stock option activity	—	—		—			—			—			7,200			7,200
Capital contribution from Shareholder	—	—		9,000			—			—			—			9,000
Stock issued in connection with employee benefit and incentive compensation plans	—	—		(164		)	—			—			—			(164		)
Dividends declared not yet paid on common stock	—	—		—			—			(5,000		)	—			(5,000		)
Dividends declared not yet paid on preferred stock	—	—		—			—			(3,650		)	—			(3,650		)
Dividends paid on preferred stock	—	—		—			—			(7,300		)	—			(7,300		)
Balance, June 30, 2017	530,391	$	195,445	$	16,581,877		$	(151,813	)	$	3,315,083		$	2,956,662		$	22,897,254

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six-Month Period Ended June 30,
	2017			2016

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interest	$	451,472		$	385,097
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	1,340,214			1,512,229
Deferred tax expense	162,613			177,801
Depreciation, amortization and accretion	436,025			452,321
Net loss on sale of loans	169,072			175,329
Net gain on sale of investment securities	(9,569		)	(58,058		)
Net gain on sale of operating leases	(100		)	(399		)
Other-than-temporary impairment ("OTTI") recognized in earnings	—			44
Loss on debt extinguishment	10,740			78,445
Net (gain)/loss on real estate owned and premises and equipment	(4,910		)	4,639
Stock-based compensation	(736		)	9,408
Equity loss on equity method investments	1,506			5,140
Originations of loans held-for-sale, net of repayments	(2,438,217		)	(3,383,263		)
Purchases of loans held-for-sale	(3,217		)	(2,912		)
Proceeds from sales of loans held-for-sale	2,462,255			2,434,399
Purchases of trading securities	(10,331		)	(335,950		)
Proceeds from sales of trading securities	13,640			349,755
Net change in:
Revolving personal loans	(78,697		)	(310,103		)
Other assets and bank-owned life insurance	(240,130		)	(219,456		)
Other liabilities	(29,872		)	241,570
NET CASH PROVIDED BY OPERATING ACTIVITIES	2,231,758			1,516,036

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale investment securities	997,306			6,755,299
Proceeds from prepayments and maturities of available-for-sale investment securities	2,552,576			3,652,101
Purchases of available-for-sale investment securities	(5,144,019		)	(8,683,528		)
Proceeds from repayments and maturities of held to maturity investment securities	78,696			—
Proceeds from sales of other investments	117,081			290,449
Purchases of other investments	(88,987		)	(94,461		)
Net change in restricted cash	(278,509		)	(649,992		)
Proceeds from sales of LHFI	288,805			1,137,359
Proceeds from the sales of equity method investments	17,717			—
Distributions from equity method investments	4,305			2,918
Contributions to equity method and other investments	(35,673		)	(14,261		)
Purchases of LHFI	(136,550		)	(96,491		)
Net change in loans other than purchases and sales	1,684,297			(2,011,658		)
Purchases and originations of operating leases	(3,055,983		)	(3,323,553		)
Proceeds from the sale and termination of operating leases	2,133,433			1,128,297
Manufacturer incentives	551,100			786,760
Proceeds from sales of real estate owned and premises and equipment	63,485			37,539
Purchases of premises and equipment	(58,404		)	(165,840		)
NET CASH USED IN INVESTING ACTIVITIES	(309,324		)	(1,249,062		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	(4,284,135		)	615,980
Net change in short-term borrowings	1,677,414			(114,038		)
Net proceeds from long-term borrowings	26,834,482			27,502,180
Repayments of long-term borrowings	(26,815,449		)	(24,933,677		)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)	1,000,000			3,050,000
Repayments of FHLB advances (with terms greater than 3 months)	(2,850,000		)	(7,913,445		)
Net change in advance payments by borrowers for taxes and insurance	14,040			21,790
Cash dividends paid to preferred stockholders	(7,300		)	(7,829		)
Proceeds from the issuance of common stock	3,334			1,654
Capital contribution from shareholder	9,000			—
Redemption of preferred stock	—			(75,000		)
NET CASH USED IN FINANCING ACTIVITIES	(4,418,614		)	(1,852,385		)

NET DECREASE IN CASH AND CASH EQUIVALENTS	(2,496,180		)	(1,585,411		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	10,035,859			9,447,007
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	7,539,679		$	7,861,596


NON-CASH TRANSACTIONS
Loans transferred to other real estate owned	9,048			35,873
Loans transferred from held-for-investment to held-for-sale, net	30,135			1,068,447
Unsettled purchases of investment securities	289,569			—
Unsettled sales of investment securities	308,819			—
Residential loan securitizations	13,641			13,691
Unsettled clean-up calls	(74,405		)	—

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 June 30, 2017, SC was owned approximately 58.7% by SHUSA and 41.3% by noncontrolling 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")

On February 18, 2014, the Board of Governors of the Federal Reserve System (the "Federal Reserve") issued the final rule implementing certain of the enhanced prudential standards mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA")(the “Final Rule") to strengthen regulatory oversight of foreign banking organizations ("FBOs"). Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an 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. Additionally, effective July 1, 2017, Santander transferred Santander Financial Services, Inc. ("SFS") to the IHC. Refer to Note 18 for additional details of this transfer.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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. However, 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 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 December 31, 2016 Annual Report on Form 10-K.

As of June 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Recently Adopted Accounting Policies

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

•

ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This new guidance clarifies that a change in the counterparties to a derivative contract (i.e., a novation), in and of itself does not require the de-designation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. The adoption of this ASU did not have an impact on the Company's financial position or results of operations.

•

ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The Company adopted this ASU on a modified retrospective basis. This new guidance clarifies that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis of hybrid financial instruments. In other words, a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. However, as required under existing guidance, companies will still need to evaluate other relevant embedded derivative guidance, such as whether the payoff from the contingent put or call option is adjusted based on changes in an index other than interest rates or credit risk, and whether the debt involves a substantial premium or discount. The adoption of this ASU did not have an impact on the Company's financial position or results of operations.

•

ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323). This new guidance eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead, the equity method of accounting should be applied prospectively from the date significant influence is obtained. Investors should add the cost of acquiring the additional interest in the investee (if any) to the current basis of their previously held interest. The new standard also provides specific guidance for available-for-sale securities that become eligible for the equity method of accounting. In those cases, any unrealized gain or loss recorded within accumulated other comprehensive income should be recognized in earnings at the date the investment initially qualifies for the use of the equity method of accounting. The adoption of this ASU did not have an impact on the Company’s financial position or results of operations.

•

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 six-month periods ended June 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 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

•

ASU 2016-17, Consolidation (Topic 810), Interest Held Through Related Parties That Are Under Common Control. This ASU amends the guidance in generally accepted accounting principles in the U.S. ("GAAP") on related parties that are under common control. Specifically, the new ASU requires that a single decision maker consider indirect interests held by related parties under common control on a proportionate basis in a manner consistent with its evaluation of indirect interests held through other related parties. The adoption of this ASU did not have an impact on the Company's financial position or results of operations.

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), superseding the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In August 2015, the FASB issued ASU 2015-14, which formalized the deferral of the effective date of the amendment for a period of one year from the original effective date. Following the issuance of ASU 2015-14, the amendment will be effective for the Company for the first annual period beginning after December 15, 2017. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which revises the structure of the indicators to determine whether the entity is the principal or agent in a revenue transaction, and eliminated two of the indicators (“the entity’s consideration is in the form of a commission” and “the entity is not exposed to credit risk”) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract. In April 2016, the FASB also issued ASU 2016-10, which clarifies the implementation guidance on identifying promised goods or services and on determining whether an entity's promise to grant a license with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU 2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB issued ASU 2016-20, a separate update for technical corrections and improvements to Topic 606 and other Topics amended by Update 2014-09, to increase stakeholders’ awareness of the proposals and to expedite improvements to Update 2014-09. The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption.

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). 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’s ongoing implementation efforts include the identification of other revenue streams that are within the scope of the new guidance and reviewing related contracts with customers to determine whether any accounting changes will be required. The timing and classification of certain contract costs presented in the Consolidated Statements of Operations is under evaluation and could change upon adoption. Finally, the Company is evaluating changes that will be required to applicable disclosures.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this update supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases. The new guidance requires lessees to evaluate whether a lease is a finance lease using criteria 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 for sales-type, direct financing leases and operating leases. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. 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.

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, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. 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 is in the process of evaluating the impacts of the adoption of this ASU.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)


•	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

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:



	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
U.S. Treasury securities	$	1,678,867	$	927	$	(2,368	)	$	1,677,426
Corporate debt securities	196,721		300		—			197,021
Asset-backed securities (“ABS”)	751,225		13,996		(1,417		)	763,804
Equity securities	11,879		—		(547		)	11,332
State and municipal securities	27		—		—			27
Mortgage-backed securities (“MBS”):
U.S. government agencies - Residential	5,477,266		6,894		(52,051		)	5,432,109
U.S. government agencies - Commercial	1,296,178		2,734		(7,129		)	1,291,783
Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association ("FNMA") - Residential debt securities	9,115,809		12,835		(125,420		)	9,003,224
FHLMC and FNMA - Commercial debt securities	23,320		—		(458		)	22,862
Non-agency securities	2		—		—			2
Total investment securities available-for-sale	$	18,551,294	$	37,686	$	(189,390	)	$	18,399,590

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 available-for-sale	$	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:



	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(in thousands)
MBS:
U.S. government agencies - Residential	$	1,575,037	$	1,193	$	(27,219	)	$	1,549,011
Total investment securities held-to-maturity	$	1,575,037	$	1,193	$	(27,219	)	$	1,549,011



	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 June 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"); $2.4 billion and $3.0 billion, respectively, were pledged to secure public fund deposits; $102.2 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; $622.1 million and $622.0 million, respectively, were pledged to deposits with clearing organizations; and $332.0 million and $271.2 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At June 30, 2017 and December 31, 2016, the Company had $48.2 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. INVESTMENT SECURITIES (continued)

Contractual Maturity of Debt Securities

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



	Amortized Cost		Fair Value
	(in thousands)
Due within one year	$	1,223,057	$	1,222,961
Due after 1 year but within 5 years	1,253,062		1,265,742
Due after 5 years but within 10 years	228,059		226,979
Due after 10 years	15,835,237		15,672,576
Total	$	18,539,415	$	18,388,258

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



	Amortized Cost		Fair Value
	(in thousands)
Due after 10 years	$	1,575,037	$	1,549,011
Total	$	1,575,037	$	1,549,011

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 June 30, 2017 and December 31, 2016 on securities in the Company’s available-for-sale investment portfolios classified according to the amount of time those securities have been in a continuous loss position:



	June 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	$	1,108,481	$	(2,368	)	$	—	$	—		$	1,108,481	$	(2,368	)
ABS	182,988		(614		)	111,071		(803		)	294,059		(1,417		)
Equity securities	769		(14		)	9,839		(533		)	10,608		(547		)
MBS:
U.S. government agencies - Residential	3,380,422		(42,644		)	824,169		(9,407		)	4,204,591		(52,051		)
U.S. government agencies - Commercial	603,981		(3,528		)	88,151		(3,601		)	692,132		(7,129		)
FHLMC and FNMA - Residential debt securities	4,951,101		(41,745		)	1,816,126		(83,675		)	6,767,227		(125,420		)
FHLMC and FNMA - Commercial debt securities	22,405		(448		)	457		(10		)	22,862		(458		)
Total investment securities available-for-sale	$	10,250,147	$	(91,361	)	$	2,849,813	$	(98,029	)	$	13,099,960	$	(189,390	)

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 available-for-sale	$	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 June 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:



	June 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	$	1,274,846	$	(27,219	)	$	—	$	—	$	1,274,846	$	(27,219	)
Total investment securities held-to-maturity	$	1,274,846	$	(27,219	)	$	—	$	—	$	1,274,846	$	(27,219	)



	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 six-month periods ended June 30, 2017 and recognized $34 thousand and $44 thousand OTTI for the three-month and six-month periods ended June 30, 2016.

Management has concluded that the unrealized losses on its debt and equity securities for which it has not recognized OTTI (which were comprised of 560 individual securities at June 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 June 30,					Six-Month Period Ended June 30,
	2017		2016			2017		2016
	(in thousands)					(in thousands)
Proceeds from the sales of available-for-sale securities	$	1,306,125	$	3,319,455		$	1,306,125	$	6,755,299

Gross realized gains	$	11,125	$	33,622		$	11,125	$	60,328
Gross realized losses	—		(2,283		)	—		(2,558		)
OTTI	—		(34		)	—		(44		)
Net realized gains ⁽¹⁾	$	11,125	$	31,305		$	11,125	$	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 $11.1 million for the three-month and six-month periods ended June 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 and six-month periods ended June 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 $555.6 million for a gain of $9.3 million.

The Company recognized $31.3 million and $57.7 million for the three-month and six-month periods ended June 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 three-month period ended June 30, 2016 was primarily comprised of the sale of U.S. Treasury securities with a book value of $344.4 million for a gain of $0.3 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's, including FHLMC residential debt securities and CMO's, with a book value of $1.3 billion for a gain of $24.7 million. The net gain realized for the six-month period ended June 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 CMO's, 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 $10.2 million of trading securities as of June 30, 2017, compared to $1.6 million held at December 31, 2016. Gains and losses on trading securities are recorded within Net gain 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 $653.2 million and $680.5 million as of June 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 six-month periods ended June 30, 2017, the Company purchased $75.6 million and $88.8 million of FHLB stock at par, respectively, and redeemed $52.6 million and $117.1 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the three-month and six-month periods ended June 30, 2017, the Company did not purchase any FRB stock. Other investments also include $70.0 million and $50.4 million of low-income housing tax credit ("LIHTC") investments as of June 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 $52.2 billion at June 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 June 30, 2017 was $2.5 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 credit loss allowance 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 June 30, 2017, the carrying value of the personal unsecured held-for-sale portfolio was $971.9 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 June 30, 2017 and December 31, 2016, accrued interest receivable on the Company's loans was $503.2 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:



	June 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial LHFI:
Commercial real estate loans	$	9,799,724	11.8	%	$	10,112,043	11.8	%
Commercial and industrial loans	16,129,649		19.4	%	18,812,002		21.9	%
Multifamily loans	8,240,516		9.9	%	8,683,680		10.1	%
Other commercial⁽²⁾	6,902,989		8.4	%	6,832,403		8.0	%
Total commercial LHFI	41,072,878		49.5	%	44,440,128		51.8	%
Consumer loans secured by real estate:
Residential mortgages	8,040,363		9.7	%	7,775,272		9.1	%
Home equity loans and lines of credit	5,903,913		7.1	%	6,001,192		7.0	%
Total consumer loans secured by real estate	13,944,276		16.8	%	13,776,464		16.1	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	23,466,768		28.3	%	22,104,918		25.8	%
RICs and auto loans - purchased	2,554,220		3.1	%	3,468,803		4.0	%
Personal unsecured loans	1,229,497		1.5	%	1,234,094		1.4	%
Other consumer⁽³⁾	689,140		0.8	%	795,378		0.9	%
Total consumer loans	41,883,901		50.5	%	41,379,657		48.2	%
Total LHFI⁽¹⁾	$	82,956,779	100.0	%	$	85,819,785	100.0	%
Total LHFI:
Fixed rate	$	50,623,536	61.0	%	$	51,752,761	60.3	%
Variable rate	32,333,243		39.0	%	34,067,024		39.7	%
Total LHFI⁽¹⁾	$	82,956,779	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 $1.1 billion and $845.8 million as of June 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 June 30, 2017 and December 31, 2016, respectively:



Commercial Portfolio Segment⁽²⁾
Major Loan Classifications⁽¹⁾	June 30, 2017		December 31, 2016
	(in thousands)
Commercial LHFI:
Commercial real estate:
Corporate Banking	$	3,499,075	$	3,693,109
Middle Market Real Estate	5,171,464		5,180,572
Santander Real Estate Capital	1,129,185		1,238,362
Total commercial real estate	9,799,724		10,112,043
Commercial and industrial ⁽³⁾	16,129,649		18,812,002
Multifamily	8,240,516		8,683,680
Other commercial	6,902,989		6,832,403
Total commercial LHFI	$	41,072,878	$	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 $160.3 million of LHFS at June 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⁾	June 30, 2017		December 31, 2016
	(in thousands)
Consumer loans secured by real estate:
Residential mortgages⁽³⁾	$	8,040,363	$	7,775,272
Home equity loans and lines of credit	5,903,913		6,001,192
Total consumer loans secured by real estate	13,944,276		13,776,464
Consumer loans not secured by real estate:
RICs and auto loans - originated ⁽⁴⁾	23,466,768		22,104,918
RICs and auto loans - purchased ⁽⁴⁾	2,554,220		3,468,803
Personal unsecured loans⁽⁵⁾	1,229,497		1,234,094
Other consumer	689,140		795,378
Total consumer LHFI	$	41,883,901	$	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 $318.0 million and $462.9 million of LHFS at June 30, 2017 and December 31, 2016, respectively.


(4)	RIC and auto loans exclude $1.1 billion and $924.7 million of LHFS at June 30, 2017 and December 31, 2016, respectively.


(5)	Personal unsecured loans exclude $971.9 million and $1.1 billion of LHFS at June 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:



	June 30, 2017			December 31, 2016
	(in thousands)
RICs - Purchased:
Unpaid principal balance ("UPB") ⁽¹⁾	$	2,721,653		$	3,765,714
UPB - FVO ⁽²⁾	38,851			29,481
Total UPB	2,760,504			3,795,195
Purchase marks ⁽³⁾	(206,284		)	(326,392		)
Total RICs - Purchased	2,554,220			3,468,803

RICs - Originated:
UPB ⁽¹⁾	23,808,638			22,527,753
Net discount	(360,355		)	(441,131		)
Total RICs - Originated	23,448,283			22,086,622
SBNA auto loans	18,485			18,296
Total RICs - originated post change in control	23,466,768			22,104,918
Total RICs and auto loans	$	26,020,988		$	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 $8.6 million and $6.7 million related to purchase loan portfolios on which we elected to apply the FVO at June 30, 2017 and December 31, 2016, respectively.

During the six months ended June 30, 2017 and 2016, the Company originated $3.4 billion and $4.6 billion, respectively, in Chrysler Capital loans, which represented 43% and 52%, respectively, of total RIC originations. As of June 30, 2017 and December 31, 2016, SC's auto RIC portfolio consisted of $7.2 billion and $7.4 billion, respectively, of Chrysler Capital loans which represented 31% and 32%, respectively, of SC'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 six-month periods ended June 30, 2017 and 2016 was as follows:



	Three-Month Period Ended June 30, 2017
	Commercial			Consumer			Unallocated		Total
	(in thousands)
ALLL, beginning of period	$	453,019		$	3,422,821		$	47,023	$	3,922,863
Provision for loan and lease losses	26,687			584,998			—		611,685
Charge-offs	(60,514		)	(1,128,919		)	—		(1,189,433		)
Recoveries	9,056			599,437			—		608,493
Charge-offs, net of recoveries	(51,458		)	(529,482		)	—		(580,940		)
ALLL, end of period	$	428,248		$	3,478,337		$	47,023	$	3,953,608

Reserve for unfunded lending commitments, beginning of period	$	119,620		$	776		$	—	$	120,396
Release of reserve for unfunded lending commitments	(6,937		)	20			—		(6,917		)
Loss on unfunded lending commitments	(1,668		)	—			—		(1,668		)
Reserve for unfunded lending commitments, end of period	111,015			796			—		111,811
Total ACL, end of period	$	539,263		$	3,479,133		$	47,023	$	4,065,419

	Six-Month Period Ended June 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	45,465			1,303,556			—		1,349,021
Charge-offs	(86,687		)	(2,366,199		)	—		(2,452,886		)
Recoveries	19,635			1,223,374			—		1,243,009
Charge-offs, net of recoveries	(67,052		)	(1,142,825		)	—		(1,209,877		)
ALLL, end of period	$	428,248		$	3,478,337		$	47,023	$	3,953,608
Reserve for unfunded lending commitments, beginning of period	$	121,613		$	806		$	—	$	122,419
Release of reserve for unfunded lending commitments	(8,797		)	(10		)	—		(8,807		)
Loss on unfunded lending commitments	(1,801		)	—			—		(1,801		)
Reserve for unfunded lending commitments, end of period	111,015			796			—		111,811
Total ACL, end of period	$	539,263		$	3,479,133		$	47,023	$	4,065,419
Ending balance, individually evaluated for impairment⁽¹⁾	$	73,946		$	1,636,770				$	1,710,716
Ending balance, collectively evaluated for impairment	354,302			1,841,567			47,023		2,242,892

Financing receivables:
Ending balance	$	41,233,130		$	44,227,460		$	—	$	85,460,590
Ending balance, evaluated under the FVO or lower of cost or fair value	160,252			2,377,177			—		2,537,429
Ending balance, individually evaluated for impairment⁽¹⁾	640,255			6,202,430			—		6,842,685
Ending balance, collectively evaluated for impairment	40,432,623			35,647,853			—		76,080,476

(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)



	Three-Month Period Ended June 30, 2016
	Commercial			Consumer			Unallocated		Total
	(in thousands)
ALLL, beginning of period	$	557,643		$	2,962,976		$	47,245	$	3,567,864
(Release of) / Provision for loan and lease losses	(16,555		)	646,828			—		630,273
Charge-offs	(33,604		)	(1,032,129		)	—		(1,065,733		)
Recoveries	21,373			612,110			—		633,483
Charge-offs, net of recoveries	(12,231		)	(420,019		)	—		(432,250		)
ALLL, end of period	$	528,857		$	3,189,785		$	47,245	$	3,765,887

Reserve for unfunded lending commitments, beginning of period	$	172,828		$	740		$	—	$	173,568
(Release of) / Provision for unfunded lending commitments	(16,509		)	3			—		(16,506		)
Loss on unfunded lending commitments	(166		)	—			—		(166		)
Reserve for unfunded lending commitments, end of period	156,153			743			—		156,896
Total ACL, end of period	$	685,010		$	3,190,528		$	47,245	$	3,922,783

	Six-Month Period Ended June 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	101,378			1,402,810			—		1,504,188
Charge-offs	(76,613		)	(2,174,289		)	—		(2,250,902		)
Recoveries	47,280			1,219,176			—		1,266,456
Charge-offs, net of recoveries	(29,333		)	(955,113		)	—		(984,446		)
ALLL, end of period	$	528,857		$	3,189,785		$	47,245	$	3,765,887

Reserve for unfunded lending commitments, beginning of period	$	148,206		$	814		$	—	$	149,020
Provision for / (Release of) unfunded lending commitments	8,112			(71		)	—		8,041
Loss on unfunded lending commitments	(165		)	—			—		(165		)
Reserve for unfunded lending commitments, end of period	156,153			743			—		156,896
Total ACL, end of period	$	685,010		$	3,190,528		$	47,245	$	3,922,783
Ending balance, individually evaluated for impairment⁽¹⁾	$	146,427		$	1,242,254		$	—	$	1,388,681
Ending balance, collectively evaluated for impairment	382,430			1,947,531			47,245		2,377,206

Financing receivables:
Ending balance	$	47,236,185		$	44,028,656		$	—	$	91,264,841
Ending balance, evaluated under the fair value option or lower of cost or fair value⁽¹⁾	464,265			3,048,680			—		3,512,945
Ending balance, individually evaluated for impairment⁽¹⁾	784,627			5,081,761			—		5,866,388
Ending balance, collectively evaluated for impairment	45,987,293			35,898,215			—		81,885,508


(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									Six-Month Period Ended
	June 30, 2017									June 30, 2017
	Purchased			Originated			Total			Purchased			Originated			Total
	(in thousands)
ALLL, beginning of period	$	495,221		$	2,707,884		$	3,203,105		$	559,092		$	2,538,127		$	3,097,219
Provision for loan and lease losses	55,141			502,256			557,397			81,266			1,162,779			1,244,045
Charge-offs	(150,143		)	(939,328		)	(1,089,471		)	(338,829		)	(1,947,381		)	(2,286,210		)
Recoveries	68,452			521,854			590,306			167,142			1,039,141			1,206,283
Charge-offs, net of recoveries	(81,691		)	(417,474		)	(499,165		)	(171,687		)	(908,240		)	(1,079,927		)
ALLL, end of period	$	468,671		$	2,792,666		$	3,261,337		$	468,671		$	2,792,666		$	3,261,337



	Three-Month Period Ended									Six-Month Period Ended
	June 30, 2016									June 30, 2016
	Purchased			Originated			Total			Purchased			Originated			Total
	(in thousands)
ALLL, beginning of period	$	589,107		$	2,137,270		$	2,726,377		$	590,807		$	1,891,989		$	2,482,796
Provision for loan and lease losses	47,617			572,145			619,762			121,252			1,246,565			1,367,817
Charge-offs	(194,169		)	(789,788		)	(983,957		)	(458,961		)	(1,614,868		)	(2,073,829		)
Recoveries	173,068			422,813			595,881			362,525			818,754			1,181,279
Charge-offs, net of recoveries	(21,101		)	(366,975		)	(388,076		)	(96,436		)	(796,114		)	(892,550		)
ALLL, end of period	$	615,623		$	2,342,440		$	2,958,063		$	615,623		$	2,342,440		$	2,958,063

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:



	June 30, 2017		December 31, 2016
	(in thousands)
Non-accrual loans:
Commercial:
Commercial real estate:
Corporate banking	$	80,015	$	104,879
Middle market commercial real estate	45,926		71,264
Santander real estate capital	416		3,077
Commercial and industrial	264,165		182,368
Multifamily	6,212		8,196
Other commercial	22,564		11,097
Total commercial loans	419,298		380,881
Consumer:
Residential mortgages	265,454		287,140
Home equity loans and lines of credit	118,860		120,065
RICs and auto loans - originated	1,284,957		1,045,587
RICs - purchased	260,759		284,486
Personal unsecured loans	4,923		5,201
Other consumer	11,081		12,694
Total consumer loans	1,946,034		1,755,173
Total non-accrual loans	2,365,332		2,136,054

Other real estate owned ("OREO")	108,046		116,705
Repossessed vehicles	161,020		173,754
Foreclosed and other repossessed assets	1,834		3,838
Total OREO and other repossessed assets	270,900		294,297
Total non-performing assets	$	2,636,232	$	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:
		June 30, 2017
		30-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking		$	18,090	$	47,148	$	65,238	$	3,433,837	$	3,499,075	$	—
Middle market commercial real estate		20,233		24,266		44,499		5,126,965		5,171,464		—
Santander real estate capital		158		—		158		1,129,027		1,129,185		—
Commercial and industrial		62,088		52,334		114,422		16,175,479		16,289,901		—
Multifamily		1,267		1,686		2,953		8,237,563		8,240,516		—
Other commercial		35,317		4,234		39,551		6,863,438		6,902,989		—
Consumer:
Residential mortgages		203,439		203,993		407,432		7,950,945		8,358,377		—
Home equity loans and lines of credit		30,743		76,916		107,659		5,796,254		5,903,913		—
RICs and auto loans - originated		3,203,333		280,503		3,483,836		21,036,567		24,520,403		—
RICs and auto loans - purchased		606,352		49,076		655,428		1,898,792		2,554,220		—
Personal unsecured loans		97,850		102,811		200,661		2,000,746		2,201,407		143,984
Other consumer		21,765		16,525		38,290		650,850		689,140		—
Total		$	4,300,635	$	859,492	$	5,160,127	$	80,300,463	$	85,460,590	$	143,984


(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		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivable⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking		$	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:



	June 30, 2017
	Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	$	81,215	$	88,435	$	—	$	85,115
Middle market commercial real estate	50,054		73,141		—		55,070
Santander real estate capital	—		—		—		1,309
Commercial and industrial	57,213		61,674		—		62,674
Multifamily	2,162		3,129		—		6,266
Other commercial	34,820		34,820		—		17,929
Consumer:
Residential mortgages	163,943		212,521		—		169,507
Home equity loans and lines of credit	45,506		45,506		—		47,189
RICs and auto loans - originated	—		—		—		—
RICs and auto loans - purchased	23,343		29,925		—		28,858
Personal unsecured loans⁽²⁾	28,604		28,604		—		27,306
Other consumer	20,425		24,780		—		19,880
With an allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	70,464		81,293		15,407		75,452
Middle market commercial real estate	22,956		30,696		6,301		36,613
Santander real estate capital	8,467		8,467		1,176		8,529
Commercial and industrial	221,578		250,452		47,474		219,078
Multifamily	6,920		6,920		1,074		4,925
Other commercial	18,714		18,733		2,514		12,966
Consumer:
Residential mortgages	286,731		326,075		41,396		285,681
Home equity loans and lines of credit	50,348		62,974		1,838		50,105
RICs and auto loans - originated	4,072,892		4,131,141		1,176,416		3,672,104
RICs and auto loans - purchased	1,481,121		1,673,905		407,911		1,668,535
Personal unsecured loans	17,293		17,494		6,971		17,076
Other consumer	12,224		16,196		2,238		12,659
Total:
Commercial	$	574,563	$	657,760	$	73,946	$	585,926
Consumer	6,202,430		6,569,121		1,636,770		5,998,900
Total	$	6,776,993	$	7,226,881	$	1,710,716	$	6,584,826


(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 $437.9 million for the six-month period ended June 30, 2017 on approximately $5.6 billion of TDRs that were in performing status as of June 30, 2017.



	December 31, 2016
	Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	$	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:




June 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	$	3,112,490	$	4,925,292	$	1,093,153	$	15,134,306	$	8,096,499	$	6,837,304	$	39,199,044
Special Mention	169,613		112,465		17,406		610,067		91,930		36,966		1,038,447
Substandard	200,606		108,999		18,626		432,480		52,087		28,697		841,495
Doubtful	16,366		24,708		—		113,048		—		22		154,144
Total commercial loans	$	3,499,075	$	5,171,464	$	1,129,185	$	16,289,901	$	8,240,516	$	6,902,989	$	41,233,130


(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:



	June 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)	$	4,816,480	17.8	%	$	4,154,228	15.7	%
<600	14,119,360		52.2	%	14,100,215		53.2	%
600-639	4,498,433		16.6	%	4,597,541		17.4	%
>=640	3,640,350		13.4	%	3,646,485		13.7	%
Total	$	27,074,623	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 $1.1 billion and $924.7 million of LHFS at June 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⁾
June 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⁾	$	503,884	$	9,246	$	—	$	—	$	—	$	—	$	—	$	513,130
<600	24		244,023		63,803		44,661		26,295		3,963		4,295		387,064
600-639	82		154,066		46,606		39,583		35,936		3,490		6,522		286,285
640-679	101		302,248		98,956		84,194		92,277		4,974		7,854		590,604
680-719	116		507,565		196,166		137,355		134,964		5,947		9,113		991,226
720-759	231		862,279		391,140		156,261		165,004		5,660		11,149		1,591,724
>=760	345		2,619,796		934,785		243,077		175,350		9,109		15,882		3,998,344
Grand Total	$	504,783	$	4,699,223	$	1,731,456	$	705,131	$	629,826	$	33,143	$	54,815	$	8,358,377

(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⁾
June 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⁾	$	155,536	$	2,214	$	673	$	—	$	—	$	158,423
<600	9,606		156,005		61,736		13,209		10,123		250,679
600-639	6,507		146,336		62,370		11,778		9,779		236,770
640-679	7,922		270,143		149,274		22,791		14,178		464,308
680-719	8,474		458,583		278,428		37,942		20,350		803,777
720-759	8,372		670,095		386,346		42,000		23,534		1,130,347
>=760	18,813		1,793,254		910,447		88,570		48,525		2,859,609
Grand Total	$	215,230	$	3,496,630	$	1,849,274	$	216,290	$	126,489	$	5,903,913

(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:



	June 30, 2017		December 31, 2016
	(in thousands)
Performing	$	5,554,025	$	5,169,788
Non-performing	967,453		937,127
Total	$	6,521,478	$	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 six-month periods ended June 30, 2017 and June 30, 2016, respectively:



	Three-Month Period Ended June 30, 2017
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Rate Reduction		Principal Forbearance			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	30	$	109,343	$	(13,674	)	$	127	$	(13,482	)	$	(669	)	$	81,645
Middle market commercial real estate	1	19,979		(595		)	—		—			—			19,384
Commercial and industrial	145	4,373		(3		)	—		—			(4		)	4,366
Consumer:
Residential mortgages⁽³⁾	60	12,981		6			—		—			116			13,103
Home equity loans and lines of credit	17	1,411		—			—		—			417			1,828
RICs and auto loans - originated	45,843	797,572		(787		)	—		—			(40		)	796,745
RICs - purchased	24	101		(1		)	—		—			—			100
Personal unsecured loans	3,572	6,038		—			—		—			(68		)	5,970
Other consumer	48	1,421		—			—		—			1			1,422
Total	49,740	$	953,219	$	(15,054	)	$	127	$	(13,482	)	$	(247	)	$	924,563

	Six-Month Period Ended June 30, 2017
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Rate Reduction		Principal Forbearance			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	54	$	139,344	$	(13,676	)	$	127	$	(13,481	)	$	(329	)	$	111,985
Middle market commercial real estate	1	19,979		(595		)	—		—			—			19,384
Commercial and industrial	387	12,407		(7		)	—		—			(4		)	12,396
Consumer:
Residential mortgages⁽³⁾	149	28,974		6			133		—			(200		)	28,913
Home equity loans and lines of credit	36	2,843		—			—		—			538			3,381
RICs and auto loans - originated	96,753	1,704,171		(1,721		)	—		—			(147		)	1,702,303
RICs - purchased	79	390		(6		)			—			(2		)	382
Personal unsecured loans	7,890	13,140		—			—		—			(113		)	13,027
Other consumer	107	3,539		—			—		—			—			3,539
Total	105,456	$	1,924,787	$	(15,999	)	$	260	$	(13,481	)	$	(257	)	$	1,895,310

(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 June 30, 2016
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Capitalized⁽⁴⁾			Principal Forbearance			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	36	$	112,030	$	(16	)	$	—		$	(15,273	)	$	—		$	96,741
Middle market commercial real estate	3	10,453		—			—			—			—			10,453
Santander real estate capital	1	8,729		—			—			—			—			8,729
Commercial and industrial	341	10,959		(1		)	—			—			—			10,958
Consumer:
Residential mortgages⁽³⁾	88	13,374		(83		)	(143		)	—			—			13,148
Home equity loans and lines of credit	35	2,504		—			—			—			—			2,504
RICs and auto loans - originated	38,569	710,885		(164		)	—			—			—			710,721
RICs - purchased	10,501	122,739		(544		)	—			—			—			122,195
Personal unsecured loans	352	2,906		—			—			—			—			2,906
Other consumer	4	167		—			—			—			—			167
Total	49,930	$	994,746	$	(808	)	$	(143	)	$	(15,273	)	$	—		$	978,522


	Six-Month Period Ended June 30, 2016
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Capitalized⁽⁴⁾			Principal Forbearance			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	54	$	161,124	$	(32	)	$	—		$	(25,856	)	$	(454	)	$	134,782
Middle market commercial real estate	3	10,454		—			—			—			(68		)	10,386
Santander real estate capital	1	8,729		—			—			—			(18		)	8,711
Commercial and industrial	572	18,841		(2		)	—			—			(22		)	18,817
Consumer:
Residential mortgages⁽³⁾	159	25,351		(1		)	—			—			(164		)	25,186
Home equity loans and lines of credit	102	7,043		132			—			—			(286		)	6,889
RICs and auto loans - originated	66,264	1,224,951		(247		)	—			—			(111		)	1,224,593
RICs - purchased	24,845	298,707		(1,142		)				—			(41		)	297,524
Personal unsecured loans	17,508	25,629		—			—			—			(186		)	25,443
Other consumer	30	1,090		—			—			—			(179		)	911
Total	109,538	$	1,781,919	$	(1,292	)	$	—		$	(25,856	)	$	(1,529	)	$	1,753,242

(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 six-month periods ended June 30, 2017 and June 30, 2016, respectively.



	Three-Month Period Ended June 30,						Six-Month Period Ended June 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	3	217		6	4,109		5	439		11	4,662
Commercial and industrial	45	1,699		38	1,300		102	3,632		94	3,402
Consumer:
Residential mortgages	67	10,306		55	6,524		120	15,065		121	14,004
Home equity loans and lines of credit	2	37		3	155		4	210		8	496
RICs and auto loans	10,940	193,280		9,944	163,142		23,221	407,282		23,068	377,844
Unsecured loans	1,013	2,522		1,375	2,686		1,936	4,740		3,035	5,096
Other consumer	11	158		6	16		22	276		10	47
Total	12,081	$	208,219	11,427	$	177,932	25,410	$	431,644	26,347	$	405,551


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 June 30, 2017 and December 31, 2016:



	June 30, 2017			December 31, 2016
	(in thousands)
Leased vehicles	$	13,748,802		$	13,603,494
Origination fees and other costs	25,015			23,141
Manufacturer subvention payments	(1,136,325		)	(1,126,323		)
Leased vehicles, gross	12,637,492			12,500,312
Less: accumulated depreciation	(2,789,845		)	(2,811,855		)
Leased vehicles, net	9,847,647			9,688,457

Commercial equipment vehicles and aircraft, gross	79,065			65,401
Less: accumulated depreciation	(11,852		)	(6,635		)
Commercial equipment vehicles and aircraft, net	67,213			58,766

Total operating lease assets, net	$	9,914,860		$	9,747,223

Periodically, the Company executes bulk sales of leases originated under the Chrysler Capital program. During the three-month and six-month periods ended June 30, 2017 and June 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 June 30, 2017 (in thousands):




2017	$	916,891
2018	1,298,577
2019	629,872
2020	87,247
2021	1,243
Thereafter	—
Total	$	2,933,830

Lease income for the three-month and six-month periods ended June 30, 2017 was $489.0 million and $985.1 million, respectively, compared to $456.9 million and $877.8 million, respectively, for the three-month and six-month periods ended June 30, 2016.

Lease expense for the three-month and six-month periods ended June 30, 2017 was $369.2 million and $728.0 million, respectively, compared to $322.2 million and $615.0 million, respectively, for the three-month and six-month periods ended June 30, 2016.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 based upon the legal transfer of the underlying assets in order to reflect legal ownership, that can be used to settle obligations of the consolidated 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:



	June 30, 2017		December 31, 2016
	(in thousands)
Assets
Restricted cash	$	2,241,994	$	2,087,177
Loans⁽¹⁾⁽²⁾	23,923,927		23,568,066
Operating lease assets, net	9,285,718		8,564,628
Various other assets	658,016		686,253
Total Assets	$	36,109,655	$	34,906,124
Liabilities
Notes payable⁽²⁾	$	30,378,126	$	31,667,976
Various other liabilities	121,803		91,234
Total Liabilities	$	30,499,929	$	31,759,210

(1) Includes $1.1 billion and $1.0 billion of RICs held for sale at June 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 June 30, 2017 and December 31, 2016, the Company was servicing $27.7 billion and $27.4 billion, respectively, of RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. VARIABLE INTEREST ENTITIES (continued)

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



	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Assets securitized	$	4,750,103	$	6,325,637	$	12,396,728	$	9,983,592

Net proceeds from new securitizations ⁽¹⁾	$	3,485,091	$	5,118,309	$	9,061,892	$	7,820,313
Net proceeds from sale of retained bonds	157,763		128,798		273,733		128,798
Cash received for servicing fees ⁽²⁾	215,994		200,071		424,917		394,436
Net distributions from Trusts ⁽²⁾	729,557		761,480		1,407,786		1,391,206
Total cash received from Trusts	$	4,588,405	$	6,208,658	$	11,168,328	$	9,734,753

(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 six-month periods ended June 30, 2017, the Company sold $536.3 million and $1.2 billion of gross RICs to VIEs in off-balance sheet securitizations for a loss of $3.5 million and $6.2 million, respectively. The transaction was executed under the new securitization platform-SPAIN with Santander. Santander will hold eligible vertical interests in notes and certificates of not less than 5% to comply with the DFA risk retention rules. For the three-month and six-month periods ended June 30, 2016, the Company executed no off-balance sheet securitizations with VIEs in which it has continuing involvement.

As of June 30, 2017 and December 31, 2016, the Company was servicing $3.0 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:



		June 30, 2017		December 31, 2016
	(in thousands)
SPAIN		$	1,080,981	$	—
Total serviced for related parties		1,080,981		—

Chrysler Capital securitizations		1,931,324		2,472,756
Other third parties		—		268,345
Total serviced for third parties		1,931,324		2,741,101
Total serviced for other portfolio		$	3,012,305	$	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 June 30,				Six-Month Period Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Assets securitized ^(a)	$	536,309	$	—	$	1,236,331	$	—

Net proceeds from new securitizations	$	538,478	$	—	$	1,240,797	$	—
Cash received for servicing fees	11,970		13,157		13,368		28,858
Total cash received from Trusts	$	550,448	$	13,157	$	1,254,165	$	28,858

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presents activity in the Company's goodwill by its reporting units for the six-month period ended June 30, 2017:



	Consumer and Business Banking		Commercial Real Estate		Commercial Banking		Global Corporate Banking		SC		Santander BanCorp		Total
	(in thousands)
Goodwill at December 31, 2016	$	1,880,303	$	870,411	$	542,584	$	131,130	$	1,019,960	$	10,537	$	4,454,925
Disposals during the period	—		—		—		—		—		—		—
Additions during the period	—		—		—		—		—		—		—
Re-allocations during the period	—		—		—		—		—		—		—
Impairment during the period	—		—		—		—		—		—		—
Goodwill at June 30, 2017	$	1,880,303	$	870,411	$	542,584	$	131,130	$	1,019,960	$	10,537	$	4,454,925

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.

Other Intangible Assets

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



	June 30, 2017					December 31, 2016
	Net Carrying Amount		Accumulated Amortization			Net Carrying Amount		Accumulated Amortization
	(in thousands)
Intangibles subject to amortization:
Dealer networks	$	446,018	$	(133,982	)	$	465,625	$	(114,375	)
Chrysler relationship	87,500		(51,250		)	95,000		(43,750		)
Core deposit intangibles	—		—			—		(295,842		)
Trade name	16,500		(1,500		)	17,100		(900		)
Other intangibles	16,311		(53,220		)	19,519		(98,492		)
Total intangibles subject to amortization	$	566,329	$	(239,952	)	$	597,244	$	(553,359	)

At June 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 $15.4 million and $30.9 million and $17.8 million and $35.7 million for the three-month and six-month periods ended June 30, 2017 and June 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. GOODWILL AND OTHER INTANGIBLES (continued)

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	$	30,915	$	30,576
2018	60,644		—		60,644
2019	58,975		—		58,975
2020	58,642		—		58,642
2021	55,603		—		55,603
Thereafter	301,889		—		301,889

NOTE 8. OTHER ASSETS

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



	June 30, 2017		December 31, 2016
	(in thousands)
Income tax receivables	$	310,213	$	294,796
Derivative assets at fair value	406,564		413,779
Other repossessed assets	162,854		177,592
MSRs	149,645		150,343
Prepaid expenses	148,169		172,559
OREO	108,046		116,705
Deferred tax asset, net	962,839		989,767
Miscellaneous assets and receivables	1,059,521		567,327
Total other assets	$	3,307,851	$	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 June 30, 2017 and December 31, 2016, the balance of these loans serviced for others accounted for at fair value was $15.3 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 June 30, 2017 and December 31, 2016 was $146.1 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. OTHER ASSETS (continued)

For the three-month and six-month periods ended June 30, 2017, the Company recorded net changes in the fair value of MSRs due to valuation totaling $(1.2) million and $0.3 million, respectively, compared to $(11.5) million and $(25.8) 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.



	Three-Month Period Ended						Six-Month Period Ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
	(in thousands)
Fair value at beginning of period⁽¹⁾	$	149,455		$	130,742		$	146,589		$	147,233
Mortgage servicing assets recognized	2,866			4,801			8,597			8,392
Principal reductions	(5,037		)	(6,283		)	(9,358		)	(12,009		)
Change in fair value due to valuation assumptions	(1,193		)	(11,468		)	263			(25,824		)
Fair value at end of period⁽¹⁾	$	146,091		$	117,792		$	146,091		$	117,792

(1) The Company had total MSRs of $149.6 million and $150.3 million as of June 30, 2017, and December 31, 2016, respectively. The Company has elected to account for the majority of its MSR balance using the fair value option, 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 $10.5 million and $21.1 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to $10.8 million and $21.6 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 $1.3 million and $5.7 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to $7.0 million and $10.5 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 Bank's foreclosed properties.

Deferred tax assets, net

The Company recorded $962.8 million of deferred tax assets, net as of June 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 second quarter increase is due to a receivable for trade date sale of $308.4 million at SBNA, and $217.4 million related to a receivable from customers and brokers associated with unsettled security trades at SIS, offset by a decrease in subvention receivables of $55.3 million as of June 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:



	June 30, 2017				December 31, 2016
	Balance		Percent of total deposits		Balance		Percent of total deposits
	(in thousands)
Interest-bearing demand deposits	$	9,144,181	14.5	%	$	11,284,881	16.8	%
Non-interest-bearing demand deposits	15,956,655		25.3	%	15,413,609		22.9	%
Savings	5,959,727		9.5	%	5,988,852		8.9	%
Customer repurchase accounts	801,178		1.3	%	868,544		1.3	%
Money market	24,607,638		39.1	%	24,511,906		36.5	%
Certificates of deposit ("CDs")	6,487,176		10.3	%	9,172,898		13.6	%
Total Deposits ⁽¹⁾	$	62,956,555	100.0	%	$	67,240,690	100.0	%

(1) Includes foreign deposits, as defined by the FRB, of $10.0 billion and $10.7 billion at June 30, 2017 and December 31, 2016, respectively.

Deposits collateralized by investment securities, loans, and other financial instruments totaled $2.4 billion and $3.0 billion at June 30, 2017 and December 31, 2016, respectively.

Demand deposit overdrafts that have been reclassified as loan balances were $28.9 million and $42.3 million at June 30, 2017 and December 31, 2016, respectively.

NOTE 10. BORROWINGS

Total borrowings and other debt obligations at June 30, 2017 were $43.4 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.

During the second quarter of 2017, the Bank repurchased $14.2 million of its real estate investment trust ("REIT") preferred debt. 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. The Company recorded loss on debt extinguishment related to these debt repurchases and early repayments of $4.0 million and $10.7 million for the three and six-month period ended June 30, 2017, respectively. The Company did not repurchase any outstanding borrowings in the open market during the three or six-month period ended June 30, 2016.

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 to fund loans to the Company's U.S. subsidiaries.

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.

On July 10, 2017, the Company issued $1.24 billion in aggregate principal amount of its senior notes, comprised of $440.0 million of 3.7% senior notes due March 2022 and $800.0 million of 4.4% senior notes due May 2027. On July 17, 2017, the Company redeemed $255.4 million of its 3.45% senior notes due in August 2018.

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:



	June 30, 2017				December 31, 2016
	Balance		Effective Rate		Balance		Effective Rate
	(dollars in thousands)
Parent Company
Senior notes, due November 2017⁽¹⁾	$	599,626	2.80	%	$	599,206	2.67	%
3.45% senior notes, due August 2018	499,017		3.62	%	498,604		3.62	%
2.70% senior notes, due May 2019	997,773		2.82	%	997,207		2.82	%
2.65% senior notes, due April 2020	995,450		2.82	%	994,672		2.82	%
3.70% senior notes, due March 2022	993,979		3.82	%	—		—	%
4.50% senior notes, due July 2025	1,095,199		4.56	%	1,094,955		4.56	%
Junior subordinate debentures - Capital Trust VI , due June 2036	69,810		7.91	%	69,798		7.91	%
Common securities - Capital Trust VI	10,000		7.91	%	10,000		7.91	%
Junior subordinate debentures - Capital Trust IX, due July 2036	149,448		2.84	%	149,434		2.49	%
Common securities - Capital Trust IX	4,640		2.84	%	4,640		2.49	%
Senior notes, due July 2019⁽²⁾	388,499		2.25	%	—		—	%
Senior notes, due September 2019 ⁽²⁾	370,699		2.42	%	—		—	%
Other IHC Entities
Overnight Funds Purchase, due within one year, due April 2017	690		1.05	%	830		0.50	%
2.00% subordinated debt, maturing through 2042	40,689		2.00	%	40,457		2.00	%
Short-term borrowings, due within one year, due April 2017	78,000		1.13	%	54,000		0.63	%
Total due to others overnight, due within one year, due April 2017	27,000		1.13	%	17,000		0.63	%
Short-term borrowings, due within one year, April 2017	58,284		0.25	%	207,173		0.25	%
Short-term borrowings, due within one year, July 2017	3,260		0.35	%	—		—	%
Short-term borrowings, due within one year, September 2017	13,412		0.35	%	—		—	%
Temporary subordinated debt to Santander, due within one year	525,771		3.75	%	—		—	%
Total Parent Company and other subsidiaries' borrowings and other debt obligations	$	6,921,246	3.31	%	$	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) 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:



	June 30, 2017				December 31, 2016
	Balance		Effective Rate		Balance		Effective Rate
	(dollars in thousands)
2.00% senior notes, due January 2018	$	76,954	2.24	%	$	748,143	2.24	%
Senior notes, due January 2018⁽¹⁾⁽²⁾	41,888		0.37	%	249,705		1.99	%
8.750% subordinated debentures, due May 2018	499,260		8.92	%	498,882		8.92	%
Subordinated term loan, due February 2019	116,519		7.01	%	122,313		6.78	%
FHLB advances, maturing through July 2019	5,350,000		1.22	%	5,950,000		0.85	%
REIT preferred, due May 2020 ⁽³⁾	143,461		13.05	%	156,457		13.46	%
Subordinated term loan, due August 2022	28,431		8.77	%	29,202		8.35	%
Total Bank borrowings and other debt obligations	$	6,256,513	2.25	%	$	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) Effective rate of this debt is a proxy to account for the portion of this debt that was repurchased following a tender offer which settled on March 29, 2017.

(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 $777.3 million from the FHLB of Pittsburgh at June 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 June 30, 2017 and December 31, 2016:



	June 30, 2017
	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
	(dollars in thousands)
Warehouse line, maturing on various dates⁽¹⁾	$	406,845	$	1,250,000	3.05	%	$	585,892	$	15,554
Warehouse line, due November 2018	425,220		500,000		1.71	%	460,321		14,651
Warehouse line, due August 2018⁽²⁾	258,020		780,000		3.14	%	287,163		10,465
Warehouse line, due August 2018⁽³⁾	2,536,942		3,120,000		2.27	%	3,833,368		61,011
Warehouse line, due October 2018	359,577		1,800,000		3.69	%	513,837		10,686
Warehouse line, due October 2018	144,865		400,000		2.96	%	206,322		3,718
Warehouse line, due January 2018	214,484		500,000		2.78	%	308,211		—
Warehouse line, due November 2018	167,799		1,000,000		3.83	%	253,895		6,438
Warehouse line, due October 2017	253,000		300,000		2.58	%	299,444		10,364
Warehouse line, due July 2018	158,735		250,000		3.46	%	414,321		29,964
Repurchase facility, due December 2017⁽⁴⁾	262,363		262,363		3.54	%	—		11,423
Repurchase facility, due April 2018⁽⁴⁾	202,311		202,311		2.49	%	—		—
Repurchase facility, due March 2018⁽⁴⁾	147,182		147,182		3.31	%	—		—
Repurchase facility, due August 2017⁽⁴⁾	87,097		87,097		2.42	%	—		—
Line of credit with related party, due December 2017⁽⁵⁾	825,000		1,000,000		3.03	%	—		—
Line of credit with related party, due December 2018⁽⁵⁾	—		1,000,000		3.29	%	—		—
Line of credit with related party, due December 2018⁽⁵⁾	—		750,000		3.17	%	—		—
Line of credit with related party, due December 2018⁽⁵⁾	—		500,000		3.89	%	—		—
Total SC revolving credit facilities	$	6,449,440	$	13,848,953	2.69	%	$	7,162,774	$	174,274

(1) As of June 30, 2017, half of the outstanding balance on this facility matured in April 2017 and half matures in March 2018. In April 2017, the facilities that matured were extended to 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) 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.

(5) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of June 30, 2017, $1.6 billion of the aggregate outstanding balances on these credit 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 2018⁽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 matured in March 2017 and half matures 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 June 30, 2017 and December 31, 2016:



	June 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)	$	15,222,575	$	35,291,692	0.89% - 2.80%	$	19,723,449	$	1,567,511
SC privately issued amortizing notes, maturing on various dates⁽¹⁾	8,529,281		12,445,241		0.88% - 2.86%	11,809,555		511,632
Total SC secured structured financings	$	23,751,856	$	47,736,933	0.88% - 2.86%	$	31,533,004	$	2,079,143

(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.

In July 2017, the Company executed a new warehouse line with an overall commitment limit of $600.0 million.

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 are 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 June 30, 2017, derivatives in this category had a fair value of $19.8 million. The credit ratings of the Company and Bank are currently considered investment grade. During the second 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 June 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 $35.2 million and $27.0 million, respectively. The Company had $38.1 million and $28.3 million in cash and securities collateral posted to cover those positions as of June 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 six-month periods ended June 30, 2017. 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 during 2016.

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 six-month periods ended June 30, 2017 and 2016. As of June 30, 2017, the Company expects $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 June 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)
June 30, 2017
Fair value hedges:
Interest rate swaps	$	650,000	$	1,258	$	—	1.94	%	4.2	%	4.75
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	6,649,230		45,003		5,367		1.08	%	1.20	%	2.31
Pay variable - receive fixed interest rate swaps	4,000,000		1,783		50,322		1.41	%	1.10	%	3.48
Total	$	11,299,230	$	48,044	$	55,689	1.25	%	1.34	%	2.86

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.

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.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. DERIVATIVES (continued)

Customer-related derivatives

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

Other derivative activities

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

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 June 30, 2017 and December 31, 2016 included:



	Notional				Asset derivatives Fair value				Liability derivatives Fair value
	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
	(in thousands)
Mortgage banking derivatives:
Forward commitments to sell loans	$	465,975	$	693,137	$	1,262	$	8,577	$	—	$	—
Interest rate lock commitments	187,111		253,568		2,896		2,316		—		—
Mortgage servicing	320,000		295,000		2,246		838		1,043		1,635
Total mortgage banking risk management	973,086		1,241,705		6,404		11,731		1,043		1,635

Customer related derivatives:
Swaps receive fixed	9,233,955		9,646,151		113,495		127,123		42,012		49,642
Swaps pay fixed	9,524,931		9,785,170		73,244		85,877		82,254		97,759
Other	2,256,215		1,611,342		24,614		3,421		22,992		1,989
Total customer related derivatives	21,015,101		21,042,663		211,353		216,421		147,258		149,390

Other derivative activities:
Foreign exchange contracts	3,622,161		3,366,483		34,338		56,742		38,879		46,430
Interest rate swap agreements	631,414		1,064,289		2,957		2,075		1,932		2,647
Interest rate cap agreements	10,101,891		9,491,468		95,731		76,387		—		—
Options for interest rate cap agreements	10,074,799		9,463,935		—		—		95,630		76,281
Total return settlement	658,471		658,471		—		—		31,123		30,618
Other	1,228,440		1,265,583		12,263		12,293		17,043		16,325
Total	$	48,305,363	$	47,594,597	$	363,046	$	375,649	$	332,908	$	323,326

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. DERIVATIVES (continued)

Gains (Losses) on All Derivatives

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



		Three-Month Period Ended June 30,						Six-Month Period Ended June 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	(2,162		)	6,253			(2,162		)	1,769
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Net interest income	(4,084		)	(1,462		)	(6,471		)	(4,125		)
Pay variable receive-fixed interest rate swap	Net interest income	(3,506		)	—			(6,287		)	—
Other derivative activities:
Forward commitments to sell loans	Mortgage banking income	3,625			(4,581		)	(7,315		)	(8,476		)
Interest rate lock commitments	Mortgage banking income	(1,414		)	2,986			580			7,438
Mortgage servicing	Mortgage banking income	1,503			8,757			2,000			23,827
Customer related derivatives	Miscellaneous income	(1,124		)	(6,707		)	(2,737		)	(5,113		)
Foreign exchange	Miscellaneous income	886			1,665			3,146			3,728
Interest rate swaps, caps, and options	Miscellaneous income	4			(500		)	1,511			(6,130		)
Interest rate swaps, caps, and options	Net interest income	(1,068		)	15,033			3,662			30,172

Total return settlement	Other administrative expenses	—			(1,364		)	(505		)	(2,680		)
Other	Miscellaneous income	557			2,870			(944		)	1,739

(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.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. DERIVATIVES (continued)

Information about financial assets and liabilities that are eligible for offset on the Condensed Consolidated Balance Sheet as of June 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)
June 30, 2017
Fair value hedges	$	1,258	$	—	$	1,258	$	—	$	85	$	1,173
Cash flow hedges	46,786		—		46,786		—		2,704		44,082
Other derivative activities⁽¹⁾	359,654		4,526		355,128		4,928		26,959		323,241
Total derivatives subject to a master netting arrangement or similar arrangement	407,698		4,526		403,172		4,928		29,748		368,496
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	3,392		—		3,392		—		—		3,392
Total Derivative Assets	$	411,090	$	4,526	$	406,564	$	4,928	$	29,748	$	371,888


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)
June 30, 2017
Fair value hedges	$	—	$	—	$	—	$	—	$	—
Cash flow hedges ⁽³⁾	55,689		—		55,689		127,918		—
Other derivative activities⁽¹⁾	301,785		29,611		272,174		119,560		152,614
Total derivatives subject to a master netting arrangement or similar arrangement	357,474		29,611		327,863		247,478		152,614
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	31,123		—		31,123		—		31,123
Total Derivative Liabilities	$	388,597	$	29,611	$	358,986	$	247,478	$	183,737

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 or Due from affiliates 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 $92.0 million and $170.9 million was recorded for the three-month and six-month periods ended June 30, 2017, respectively, compared to $153.3 million and $232.1 million for the corresponding periods in 2016. This resulted in an effective tax rate ("ETR") of 24.2% and 27.5% for the three-month and six-month periods ended June 30, 2017, respectively, compared to 35.8% and 37.6% for the corresponding periods in 2016.

The decrease in the ETR for the three-month and six-month periods ending June 30, 2017 was predominantly due to the undistributed net earnings of a Puerto Rico subsidiary that will be indefinitely reinvested outside the U.S., in addition to the increase in certain tax credits.

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.

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 million to an increase of $0 million.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 six-month periods ended June 30, 2017 and 2016, respectively.



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Three-Month Period Ended June 30, 2017									March 31, 2017					June 30, 2017
	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity		Ending Balance
	(in thousands)
Change in accumulated gains on cash flow hedge derivative financial instruments	$	10,205		$	(596	)	$	9,609
Reclassification adjustment for net (losses)/gains on cash flow hedge derivative financial instruments ⁽¹⁾	(4,072		)	986			(3,086		)
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	6,133			390			6,523			$	(9,212	)	$	6,523	$	(2,689	)

Change in unrealized gains/(losses) on investment securities available-for-sale	36,480			(14,369		)	22,111
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	(11,125		)	4,363			(6,762		)
Reclassification adjustment for net (gains)/losses included in net income/(expense) on OTTI securities	—			—			—
Net unrealized gains/(losses) on investment securities available-for-sale	25,355			(10,006		)	15,349			(109,785		)	15,349		(94,436		)

Pension and post-retirement actuarial losses⁽³⁾	911			(355		)	556			(55,244		)	556		(54,688		)

As of June 30, 2017	$	32,399		$	(9,971	)	$	22,428		$	(174,241	)	$	22,428	$	(151,813	)

(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) 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
	Six-Month Period Ended June 30, 2017									December 31, 2016					June 30, 2017
	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	$	12,151		$	(3,430	)	$	8,721
Reclassification adjustment for net (losses)/gains on cash flow hedge derivative financial instruments ⁽¹⁾	(6,459		)	1,774			(4,685		)
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments	5,692			(1,656		)	4,036			$	(6,725	)	$	4,036	$	(2,689	)

Change in unrealized gains/(losses) on investment securities available-for-sale	67,928			(24,477		)	43,451
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	(11,125		)	3,992			(7,133		)
Reclassification adjustment for net (gains)/losses included in net income/(expense) on OTTI securities	—			—			—
Net unrealized gains/(losses) on investment securities available-for-sale	56,803			(20,485		)	36,318			(130,754		)	36,318		(94,436		)

Pension and post-retirement actuarial gains/(losses)⁽³⁾	1,824			(783		)	1,041			(55,729		)	1,041		(54,688		)

As of June 30, 2017	$	64,319		$	(22,924	)	$	41,395		$	(193,208	)	$	41,395	$	(151,813	)

(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
	Three-Month Period Ended June 30, 2016									March 31, 2016						June 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	$	(17,457	)	$	1,327		$	(16,130	)
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments ⁽¹⁾	2,113			(755		)	1,358
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments	(15,344		)	572			(14,772		)	$	(49,109	)	$	(14,772	)	$	(63,881	)

Change in unrealized gains/(losses) on investment securities available-for-sale	84,909			(33,295		)	51,614
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	(30,138		)	12,178			(17,960		)
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities ⁽³⁾	34			(13		)	21
Reclassification adjustment for net (gains)/losses included in net income	(30,104		)	12,165			(17,939		)
Net unrealized gains/(losses) on investment securities available-for-sale	54,805			(21,130		)	33,675			49,587			33,675			83,262

Pension and post-retirement actuarial gains/(losses)⁽⁴⁾	929			(364		)	565			(57,442		)	565			(56,877		)

As of June 30, 2016	$	40,390		$	(20,922	)	$	19,468		$	(56,964	)	$	19,468		$	(37,496	)

(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
	Six-Month Period Ended June 30, 2016									December 31, 2015						June 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	$	(81,647	)	$	31,371		$	(50,276	)
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments⁽¹⁾	4,770			(1,794		)	2,976
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments	(76,877		)	29,577			(47,300		)	$	(16,581	)	$	(47,300	)	$	(63,881	)

Change in unrealized gains/(losses) on investment securities available-for-sale	352,049			(137,796		)	214,253
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities ⁽²⁾	(57,770		)	22,694			(35,076		)
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities ⁽³⁾	44			(17		)	27
Reclassification adjustment for net (gains)/losses included in net income	(57,726		)	22,677			(35,049		)
Net unrealized gains/(losses) on investment securities available-for-sale	294,323			(115,119		)	179,204			(95,942		)	179,204			83,262

Pension and post-retirement actuarial gains/(losses)⁽⁴⁾	1,858			(728		)	1,130			(58,007		)	1,130			(56,877		)

As of June 30, 2016	$	219,304		$	(86,270	)	$	133,034		$	(170,530	)	$	133,034		$	(37,496	)

(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	June 30, 2017		December 31, 2016
	(in thousands)
Commitments to extend credit	$	29,019,869	$	28,889,904
Unsecured revolving lines of credit	27,294		30,547
Letters of credit	1,763,155		2,071,089
Recourse exposure on sold loans	69,534		69,877
Commitments to sell loans	19,954		49,121
Total commitments	$	30,899,806	$	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 June 30, 2017 and December 31, 2016 are $6.6 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:



	June 30, 2017		December 31, 2016
	(in thousands)
1 year or less	$	4,881,551	$	5,656,552
Over 1 year to 3 years	5,695,104		5,265,685
Over 3 years to 5 years	3,772,868		4,680,057
Over 5 years ⁽¹⁾	14,670,346		13,287,610
Total	$	29,019,869	$	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 June 30, 2017 was 12.3 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 June 30, 2017 was $1.8 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 June 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 June 30, 2017 and December 31, 2016, the liability related to these letters of credit was $5.2 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 June 30, 2017 and December 31, 2016 were lines of credit outstanding of $106.6 million and $114.4 million, respectively.

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



	June 30, 2017		December 31, 2016
	(in thousands)
1 year or less	$	1,260,401	$	1,360,495
Over 1 year to 3 years	435,597		399,866
Over 3 years to 5 years	37,941		283,975
Over 5 years	29,216		26,753
Total	$	1,763,155	$	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 $253.5 million as of June 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 June 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 June 30, 2017 and December 31, 2016, the Company had $2.6 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 obligated to make purchase price holdback payments to a third-party originator of auto loans it has purchased when losses are lower than originally expected. SC also is obligated to make total return settlement payments to this third-party originator in 2017 if returns on the purchased loans are greater than originally expected. These obligations are accounted for as derivatives (Note 11).

SC has extended revolving lines of credit to certain auto dealers. Under this arrangement, SC is committed to lend up to each dealer’s established credit limit. At June 30, 2017 and December 31, 2016, there was an outstanding balance of $26,000 and $2.5 million, respectively, and a committed amount under these lines of credit of $26,000 and $2.9 million, respectively.

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 June 30, 2017 and December 31, 2016, SC was obligated to purchase $14.0 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, comprised of a volume bonus fee and a loss betterment bonus 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 June 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 HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 $16.1 million and $10.1 million at June 30, 2017 and December 31, 2016, respectively, related to these obligations.

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 June 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 $8.9 million and $9.8 million at June 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 $4.6 million at June 30, 2017 and December 31, 2016 related to this obligation.

As of June 30, 2017, SC is 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 June 30, 2017 and December 31, 2016, the remaining aggregate commitments were $119.3 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.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 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 June 30, 2017 and December 31, 2016, the Company has accrued aggregate legal and regulatory liabilities of $63.7 million and $98.8 million, respectively. Descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject are set forth below.

Other Regulatory and Governmental Proceedings

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. In response to those concerns, as of December 31, 2016, the Bank made $37.3 million in total remediation payments to customers. Notwithstanding those payments, on March 26, 2015, the Bank entered into a Consent Cease and Desist Order ("SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP. Pursuant to the SIP Consent Order, the Bank paid a civil monetary penalty ("CMP") of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of SIP. As indicated above, as of the end of 2014, all customers had been mailed a refund representing the amount paid for product enrollment.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 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. The Bank is working to meet the 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.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

In August and September 2014, SC received civil subpoenas and/or CIDs from the Attorney General of Massachusetts ("the Massachusetts AG") and Delaware Department of Justice (the "Delaware DOJ") under the authority of each state’s consumer protection statutes requesting information and the production of documents related to our underwriting and securitizations of nonprime auto loans. On March 29, 2017, SC entered into an Assurance of Discontinuance ("AOD") with the Massachusetts AG and a Cease and Desist by Agreement ("C&D") with the Delaware DOJ to settle allegations that it facilitated the origination of certain Massachusetts and Delaware loans that it knew - or should have known - were in violation of applicable state consumer protection laws. In the AOD, filed in the Superior Court of Suffolk County, State of Massachusetts, captioned In the Matter of Santander Consumer USA Holdings Inc., C.A. # 17-946E, SC agreed to pay $16.3 million to an independent trust for the benefit of eligible customers and $5.8 million to the Commonwealth of Massachusetts. In the C&D, filed before the Consumer Protection Director of the Delaware Department of Justice, captioned In the Matter of Santander Consumer USA Holdings Inc., C.P.U. # 17-17-17001637, SC agreed to pay $2.9 million to an independent trust for the benefit of eligible customers and $1.0 million to the State of Delaware. SC also agreed to make certain changes to its business practices. Among other things, it agreed to enhance certain aspects of its dealer oversight and monitoring processes.

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 and securitization 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, which could be material to its operating activities and/or results, 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 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 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.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Puerto Rico FINRA Arbitrations

As of June 30, 2017, SSLLC has received 232 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 are 151 arbitration cases that remain pending as of June 30, 2017

Puerto Rico Closed-End Funds Shareholder Derivative and Class Action

On September 12, 2016, customers of certain Puerto Rico closed-end funds (“CEFs”) filed a shareholder derivative and class action in the Court of First Instance of the Commonwealth of Puerto Rico, Superior Court of San Juan, captioned Dionisio Trigo González et al. v. Banco Santander, S.A. et al., Civil No. 2016-0857. Customers filed this action against 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 through the present to the detriment of the Funds and their shareholders. Brought on behalf of the Funds and Puerto-Rico based investors, the complaint contains numerous allegations and seeks unspecified damages but alleges damages to be at least tens of millions of dollars. 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.

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.

On March 29, 2017, SC entered into a Master Securities Purchase Agreement (“MSPA”) 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 six months ended June 30, 2017, SC sold $1.2 billion of loans under this agreement and recognized a loss of $6.2 million. The Company had $5.2 million of collections due to Santander as of June 30, 2017.

Employment and Related Agreements

On July 2, 2015, SC announced the departure of Mr. Dundon from his roles as Chairman of the Board and Chief Executive Officer 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 June 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. RELATED PARTY TRANSACTIONS (continued)

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 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 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 June 30, 2017 and December 31, 2016, had an unpaid principal balance 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 $905.4 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. 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 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE

General

A portion of the Company’s assets and liabilities are carried at fair value, including available-for-sale ("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 June 30, 2017, $19.5 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 $185.3 million of these financial assets were measured using quoted market prices for identical instruments, or Level 1 inputs. Approximately $18.3 billion of these financial assets were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $943.8 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 4.8% of total assets measured at fair value and approximately 0.7% of total consolidated assets.

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

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

•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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE (continued)

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 six-month periods ended June 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 June 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 June 30, 2017
	(in thousands)
Financial assets:
U.S. Treasury securities	$	184,605	$	1,492,821	$	—	$	1,677,426
Corporate debt	—		197,021		—		197,021
ABS	—		176,233		587,571		763,804
Equity securities⁽¹⁾	579		—		—		579
State and municipal securities	—		27		—		27
MBS	—		15,749,980		—		15,749,980
Total investment securities available-for-sale⁽¹⁾	185,184		17,616,082		587,571		18,388,837
Trading securities	89		10,156		—		10,245
RICs held-for-investment	—		—		207,216		207,216
LHFS ⁽²⁾	—		303,154		—		303,154
MSRs ⁽³⁾	—		—		146,091		146,091
Derivatives:
Fair value	—		1,258		—		1,258
Cash flow	—		46,786		—		46,786
Mortgage banking interest rate lock commitments	—		—		2,896		2,896
Mortgage banking forward sell commitments	—		1,256		6		1,262
Customer related	—		211,353		—		211,353
Foreign exchange	—		34,338		—		34,338
Mortgage servicing	—		2,246		—		2,246
Interest rate swap agreements	—		2,957		—		2,957
Interest rate cap agreements	—		95,731		—		95,731
Other	—		12,263		—		12,263
Total financial assets	$	185,273	$	18,337,580	$	943,780	$	19,466,633
Financial liabilities:
Derivatives:
Cash flow	$	—	$	55,689	$	—	$	55,689
Mortgage banking forward sell commitments	—		—		—		—
Customer related	—		147,258		—		147,258
Foreign exchange	—		38,879		—		38,879
Mortgage servicing	—		1,043		—		1,043
Interest rate swaps	—		1,932		—		1,932
Option for interest rate cap	—		95,630		—		95,630
Total return settlement	—		—		31,123		31,123
Other	—		16,244		799		17,043
Total financial liabilities	$	—	$	356,675	$	31,922	$	388,597

(1) Investment securities AFS disclosed on the Condensed Consolidated Balance Sheet at June 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 $149.6 million as of June 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 available-for-sale⁽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)
June 30, 2017
Impaired LHFI	$	5,148	$	229,196	$	274,479	$	508,823
Foreclosed assets	—		15,831		79,922		95,753
Vehicle inventory	—		237,525		—		237,525
LHFS	—		—		2,200,792		2,200,792
Auto loans impaired due to bankruptcy	—		77,005		—		77,005
MSRs	—		—		9,703		9,703

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	—		—		2,133,040		2,133,040
MSRs	—		—		10,287		10,287

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 $452.9 million and $449.5 million at June 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.

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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. FAIR VALUE (continued)

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 June 30,						Six-Month Period Ended June 30,
		2017			2016			2017			2016
		(in thousands)
Impaired loans held-for-investment	Provision for credit losses	$	12,969		$	(17,993	)	$	(32,803	)	$	(108,549	)
Foreclosed assets	Miscellaneous income⁽¹⁾	(2,929		)	(1,748		)	(4,671		)	(4,742		)
LHFS	Provision for credit losses	(13,200		)	—			(13,200		)	—
LHFS	Miscellaneous income⁽¹⁾	(95,921		)	(94,767		)	(162,042		)	(158,980		)
Auto loans impaired due to bankruptcy	Provision for credit losses	(24,513		)	—			(48,113		)	—
Mortgage servicing rights	Mortgage banking income, net	102			137			197			318
		$	(123,492	)	$	(114,371	)	$	(260,632	)	$	(271,953	)

(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 six-month periods ended June 30, 2017 and 2016, respectively, for those assets and liabilities measured at fair value on a recurring basis.



Three-Month Period Ended June 30, 2017
	Investments Available-for-Sale			RICs Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, March 31, 2017	$	573,454		$	202,473		$	149,455		$	(27,709	)	$	897,673
Losses in other comprehensive income	(2,059		)	—			—			—			(2,059		)
Gains/(losses) in earnings	—			4,742			(1,194		)	(1,409		)	2,139
Additions/Issuances	—			6,396			2,867			—			9,263
Settlements⁽¹⁾	16,176			(6,395		)	(5,037		)	98			4,842
Balance, June 30, 2017	$	587,571		$	207,216		$	146,091		$	(29,020	)	$	911,858
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2017	$	—		$	4,742		$	(1,194	)	$	5		$	3,553

Six-Month Period Ended June 30, 2017
	Investments Available-for-Sale			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	(2,678		)	—			—			—			(2,678		)
Gains/(losses) in earnings	—			21,633			263			(215		)	21,681
Additions/Issuances	—			19,727			8,597			—			28,324
Settlements⁽¹⁾	(224,318		)	(51,314		)	(9,358		)	195			(284,795		)
Balance, June 30, 2017	$	587,571		$	207,216		$	146,091		$	(29,020	)	$	911,858
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2017	$	—		$	21,633		$	263		$	(795	)	$	21,101


(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 June 30, 2016
	Investments Available-for-Sale			RICs Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, March 31, 2016	$	1,640,423		$	289,950		$	130,742		$	(47,198	)	$	2,013,917
Gains in other comprehensive income	624			—			—			—			624
Gains/(losses) in earnings	—			25,313			(11,468		)	1,108			14,953
Additions/Issuances	220,841			11,874			4,801			—			237,516
Settlements⁽¹⁾	(335,197		)	(63,832		)	(6,283		)	1,712			(403,600		)
Balance, June 30, 2016	$	1,526,691		$	263,305		$	117,792		$	(44,378	)	$	1,863,410
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2016	$	—		$	25,313		$	(11,468	)	$	(1,878	)	$	11,967

Six-Month Period Ended June 30, 2016
	Investments Available-for-Sale			RICs Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, December 31, 2015	$	1,360,240		$	335,425		$	147,233		$	(51,278	)	$	1,791,620
Gains in other comprehensive income	2,209			—			—			—			2,209
Gains/(losses) in earnings	—			53,355			(25,824		)	4,135			31,666
Additions/Issuances	499,527			11,874			8,392			—			519,793
Settlements⁽¹⁾	(335,285		)	(137,349		)	(12,009		)	2,765			(481,878		)
Balance, June 30, 2016	$	1,526,691		$	263,305		$	117,792		$	(44,378	)	$	1,863,410
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2016	$	—		$	53,355		$	(25,824	)	$	(3,303	)	$	24,228


(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 Available-for-Sale and Trading Securities

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

The classification of securities within the fair value hierarchy is based upon the activity level in the market for the security type and the observability of the inputs used to determine their fair 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 gain 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 $5.0 million and $9.6 million, respectively, at June 30, 2017.


•	A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $5.0 million and $9.7 million, respectively, at June 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 June 30, 2017		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	(in thousands)
Financial Assets:
ABS
Financing bonds	$	538,504	DCF	Discount Rate ⁽¹⁾	1.52% - 2.46% (1.88% )
Sale-leaseback securities	$	49,067	Consensus Pricing ⁽²⁾	Offered quotes ⁽³⁾	124.95	%
RICs held-for-investment	$	207,216	DCF	Prepayment rate (CPR) ⁽⁴⁾	6.66	%
				Discount Rate ⁽⁵⁾	9.5% - 14.5% (10.08% )
				Recovery Rate ⁽⁶⁾	25% - 43% (30.21% )
MSRs	$	146,091	DCF	Prepayment rate (CPR) ⁽⁷⁾	[0.26% - 51.43%] (9.40% )
				Discount Rate ⁽⁸⁾	9.90	%
Mortgage banking interest rate lock commitments	$	2,896	DCF	Pull through percentage ⁽⁹⁾	78.42	%
				MSR value ⁽¹⁰⁾	[0.733% - 1.032%] (0.99%)
Financial Liabilities:
Total return settlement	$	31,123	DCF	Discount Rate ⁽⁴⁾	6.40	%

(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:



	June 30, 2017
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	7,539,679	$	7,539,679	$	7,539,679	$	—	$	—
Available-for-sale investment securities⁽¹⁾	18,388,837		18,388,837		185,184		17,616,082		587,571
Held to maturity investment securities	1,575,037		1,549,011		—		1,549,011		—
Trading securities	10,245		10,245		89		10,156		—
LHFI, net	79,003,171		79,661,064		5,148		229,196		79,426,720
LHFS	2,503,811		2,441,252		—		303,154		2,138,098
Restricted cash	3,280,999		3,280,999		3,280,999		—		—
MSRs⁽²⁾	149,645		155,794		—		—		155,794
Derivatives	411,090		411,090		—		408,188		2,902

Financial liabilities:
Deposits	62,956,555		62,775,810		56,469,380		6,306,430		—
Borrowings and other debt obligations	43,379,055		43,192,941		690		26,790,238		16,402,013
Derivatives	388,597		388,597		—		356,675		31,922



	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	$	—	$	—
Available-for-sale 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 June 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 June 30, 2017 and December 31, 2016, the Company had $3.3 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 June 30, 2017.



	Fair Value		Aggregate Unpaid Principal Balance		Difference
	(in thousands)
June 30, 2017
LHFS⁽¹⁾	$	303,154	$	296,279	$	6,875
RICs held-for-investment	207,216		262,847		(55,631		)
Nonaccrual loans	23,073		31,194		(8,121		)

(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 $146.1 million at June 30, 2017. Changes in fair value totaling a loss of $1.2 million and a gain of $0.3 million were recorded in Mortgage banking income, net in the Condensed Consolidated Statements of Operations during the three-month and six-month periods ended June 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 the Santander Group to provide financing and banking services to corporations with over $500 million in annual revenues. GCB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.

•

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

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

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

The Company’s segment results, excluding SC and the 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 quarter ended June 30, 2017. The results of segments for the three-month and six-month periods ended June 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
June 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	$	317,117		$	87,005	$	78,213		$	41,568		$	22,252		$	1,053,673	$	34,095		$	7,826		$	1,641,749
Total non-interest income	96,778			16,527		3,021			13,933			180,252			432,373		(3,719		)	(10,218		)	728,947
Provision for credit losses	21,410			4,255		(5,344		)	13,635			16,051			520,555		34,206			—			604,768
Total expenses	395,618			55,788		20,613			26,410			265,009			617,383		11,508			(6,147		)	1,386,182
Income/(loss) before income taxes	(3,133		)	43,489		65,965			15,456			(78,556		)	348,108		(15,338		)	3,755			379,746
Intersegment revenue/(expense)⁽¹⁾	2,800			1,762		679			(1,869		)	(3,372		)	—		—			—			—
Total assets	19,596,316			11,685,019		14,091,865			6,962,778			42,912,235			39,507,482		—			—			134,755,695


(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 Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


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


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)



For the Six-Month Period Ended	SHUSA Reportable Segments
June 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	$	620,562		$	172,324	$	147,711		$	84,472		$	35,078		$	2,096,600	$	71,399		$	16,167		$	3,244,313
Total non-interest income	181,777			29,893		5,266			25,603			367,897			867,221		1,735			(22,002		)	1,457,390
Provision for credit losses	43,861			10,257		(5,960		)	12,271			31,663			1,155,568		92,554			—			1,340,214
Total expenses	780,926			110,035		42,608			49,877			506,017			1,238,717		23,380			(12,463		)	2,739,097
Income/(loss) before income taxes	(22,448		)	81,925		116,329			47,927			(134,705		)	569,536		(42,800		)	6,628			622,392
Intersegment revenue/(expense)⁽¹⁾	6,149			2,933		1,496			(4,044		)	(6,534		)	—		—			—			—
Total assets	19,596,316			11,685,019		14,091,865			6,962,778			42,912,235			39,507,482		—			—			134,755,695


(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 Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


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


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



For the Three-Month Period Ended	SHUSA Reportable Segments
June 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	$	272,832		$	89,016		$	72,287	$	61,269		$	(16,707	)	$	1,129,637	$	52,082		$	4,470		$	1,664,886
Total non-interest income	94,589			17,593			6,381		18,516			214,482			367,329		15,487			(13,836		)	720,541
Provision for credit losses	19,842			(8,808		)	8,280		(16,420		)	13,312			511,921		85,640			—			613,767
Total expenses	385,843			54,391			23,941		24,921			304,903			547,482		13,898			(12,389		)	1,342,990
Income/(loss) before income taxes	(38,264		)	61,026			46,447		71,284			(120,440		)	437,563		(31,969		)	3,023			428,670
Intersegment revenue/(expense)⁽¹⁾	11,753			4,707			4,039		(62		)	(20,437		)	—		—			—			—
Total assets	19,809,800			12,360,710			15,440,551		11,968,432			43,086,829			38,490,611		—			—			141,156,933


(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 Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


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


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. BUSINESS SEGMENT INFORMATION (continued)



For the Six-Month Period Ended	SHUSA Reportable Segments
June 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	$	495,393		$	166,162	$	137,043	$	121,589		$	37,505		$	2,293,215	$	103,852		$	5,931		$	3,360,690
Total non-interest income	192,575			34,147		11,321		39,498			415,460			720,520		29,269			(25,072		)	1,417,718
Provision for credit losses	20,343			52,848		20,960		31,376			26,808			1,172,091		187,803			—			1,512,229
Total expenses	766,331			106,516		46,263		63,122			588,290			1,075,139		28,629			(25,325		)	2,648,965
Income/(loss) before income taxes	(98,706		)	40,945		81,141		66,589			(162,133		)	766,505		(83,311		)	6,184			617,214
Intersegment revenue/(expense)⁽¹⁾	24,455			9,311		7,416		(78		)	(41,104		)	—		—			—			—
Total assets	19,809,800			12,360,710		15,440,551		11,968,432			43,086,829			38,490,611		—			—			141,156,933


(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 Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.


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


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

NOTE 18. INTERMEDIATE HOLDING COMPANY

On February 18, 2014, 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18. INTERMEDIATE HOLDING COMPANY (continued)

The following table summarizes the impact of the transfer to certain items within the Company's Condensed Consolidated Statement of Operations for the three months ended June 30, 2016:



Income Statement	As Previously Reported		Retrospective Adjustments		As Retrospectively Adjusted
	(in thousands)
Three-months Ended June 30, 2016
Total interest income	$	1,941,790	$	87,619	$	2,029,409
Total interest expense	356,347		8,176		364,523
Provision for credit losses	597,309		16,458		613,767
Total fees and other income	584,256		105,521		689,777
Total general and administrative expenses	1,143,577		121,295		1,264,872
Income tax provision	134,590		18,666		153,256
Net Income	$	144,646	$	22,296	$	166,942

The following table summarizes the impact of the transfer to certain items within the Company's Condensed Consolidated Statement of Operations for the six months ended June 30, 2016:



Income Statement	As Previously Reported		Retrospective Adjustments		As Retrospectively Adjusted
	(in thousands)
Six-months Ended June 30, 2016
Total interest income	$	3,911,295	$	175,884	$	4,087,179
Total interest expense	709,800		16,689		726,489
Provision for credit losses	1,479,588		32,641		1,512,229
Total fees and other income	1,155,536		204,168		1,359,704
Total general and administrative expenses	2,252,850		237,404		2,490,254
Income tax provision	199,987		32,130		232,117
Net Income	$	158,423	$	46,927	$	205,350

Additionally, the Consolidated Statement of Comprehensive Income, Shareholder's Equity and Cash Flows, along with Footnotes 3, 4, 8, 11, 12, 13, 16, and 17 have been adjusted to reflect these retrospective adjustments.

Subsequent Event

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 $678 million of assets which were primarily comprised of cash and cash equivalents, approximately $356 million of liabilities and approximately $322 million of equity to the Company.

Although SFS is an entity under common control, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company will report the results of SFS on a prospective basis beginning July 1, 2017.

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%	20%

(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 June 30, 2017.

The target penetration rate as of April 30, 2017 (the end of the third year of the Chrysler Agreement) was 64%, and the target penetration rate as of April 30, 2018 is 65%. SC's actual penetration rate as of June 30, 2017 was 20%, an improvement from the penetration rate of 17% as of December 31, 2016. The penetration rate has been constrained due to the competitive landscape and low interest rates, causing its 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 six months ended June 30, 2017, SC originated $3.4 billion in Chrysler Capital loans, which represented 43% of total RIC originations, with an approximately even share between prime and non-prime, as well as more than $3.0 billion in Chrysler Capital leases. Since its May 1, 2013 launch, Chrysler Capital has originated $41.9 billion in retail loans and $20.6 billion in leases, and facilitated the origination of $3.0 billion in leases and dealer loans for the Bank. As of June 30, 2017, SC's auto RIC portfolio consisted of $7.2 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the second quarter of 2017, unemployment declined, while market results improved and the gross domestic product ("GDP") growth rate came in under expectations, marking overall mixed results for the U.S. economy.

The unemployment rate at June 30, 2017 decreased to 4.4% compared to 4.5% at March 31, 2017, and was down from 4.9% one year ago. According to the U.S. Bureau of Labor Statistics, employment increased in professional and business services and in mining, while retail trade lost jobs.

The Bureau of Economic Analysis advance estimate indicates that real GDP grew at an annualized rate of 2.6% for the second quarter of 2017, compared to 1.4% in the first quarter of 2017.The acceleration in real GDP in the second quarter is reflective of positive contributions from personal consumption expenditures, non-residential fixed investment, exports, and federal government spending. These positive contribution were partly offset by negative contributions from private residential fixed investment, private inventory investment and state and local government spending.

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



		June 30, 2017
Dow Jones Industrial Average		8.0%
S&P 500		8.2%
NASDAQ Composite		14.1%

At its July 2017 meeting, the Federal Open Market Committee decided to raise the federal funds rate target to 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 just below the targeted rate of 2.0%.

The 10-year Treasury bond rate at June 30, 2017 was 2.3%, down from 2.5% at December 31, 2016. Over the past twelve months, however, the 10-year Treasury bond rate increased 81 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, second quarter 2017 information was not available; however, for the first quarter of 2017, mortgage originations were down approximately 23.19% over the fourth quarter of the prior year, but up 3.14% year-over-year. Similarly, refinancing activity showed an overall decrease of approximately 9.7% from March 2016 to March 2017. 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. This trend confirmed an improvement in credit quality and downward trends in general allowance reserves and has continued throughout 2016 and early 2017.

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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Credit Rating Actions

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

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 their outlook on Santander to stable from positive, saying it's stable outlook reflects limited prospects for ratings upside until we see evidence that the integration of Banco Popular is proceeding smoothly, not facing meaningful business or financial setbacks.

During the second quarter of 2017, there were no changes to SHUSA's or the Bank's ratings.

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 June 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 $230 million. As of June 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.

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 and written agreements 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.

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

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. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the 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.

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 CET-1 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.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

As of June 30, 2017, the Bank's and the Company's CET1 ratios under the transitional provisions provided under Basel III, were 17.59% and 14.64%, 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 17.22% and 14.18%, 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 June 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 bank holding companies ("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 90% effective on January 1, 2016, which increased to 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

The Company is subject to written agreements with the Federal Reserve Bank (the "FRB") of Boston that address stress testing and capital adequacy:

•

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


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

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

The Company remains 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 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. While no longer subject to the qualitative assessment of the revised capital plan rule, the Company remains subject to the written agreements with the FRB of Boston described above, and may not make or permit any subsidiary to make any capital distribution, without the prior written approval of the Federal Reserve.

Total Loss-Absorbing Capacity ("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, as well as 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 must 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 is 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 requirements of 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.

100

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

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

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

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

During the period covered by this report:

•

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 six-month periods ended June 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 six-month periods ended June 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 six-month periods ended June 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 six-month periods ended June 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.

101

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.

RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2017 AND 2016



	Three-Month Period Ended June 30,						Six-Month Period Ended June 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	$	1,641,749		$	1,664,886		$	3,244,313		$	3,360,690		$	(23,137	)	(1.4	)%	$	(116,377	)	(3.5	)%
Provision for credit losses	(604,768		)	(613,767		)	(1,340,214		)	(1,512,229		)	(8,999		)	(1.5	)%	(172,015		)	(11.4	)%
Total non-interest income	728,947			720,541			1,457,390			1,417,718			8,406			1.2	%	39,672			2.8	%
General and administrative expenses	(1,341,636		)	(1,264,872		)	(2,651,475		)	(2,490,254		)	76,764			6.1	%	161,221			6.5	%
Other expenses	(44,546		)	(78,118		)	(87,622		)	(158,711		)	(33,572		)	(43.0	)%	(71,089		)	(44.8	)%
Income before income taxes	379,746			428,670			622,392			617,214			(48,924		)	(11.4	)%	5,178			0.8	%
Income tax provision	(91,983		)	(153,256		)	(170,920		)	(232,117		)	(61,273		)	(40.0	)%	(61,197		)	(26.4	)%
Net income⁽¹⁾	$	287,763		$	275,414		$	451,472		$	385,097		$	12,349		4.5	%	$	66,375		17.2	%

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

The Company reported pre-tax income of $379.7 million and $622.4 million for the three-month and six-month periods ended June 30, 2017, compared to a pre-tax income of $428.7 million and $617.2 million for the three-month and six-month periods ended June 30, 2016. Factors contributing to these changes were as follows:


•	Net interest income decreased $23.1 million and $116.4 million for the three-month and six-month periods ended June 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 $9.0 million and $172.0 million for the three-month and six-month periods ended June 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. 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 $8.4 million and $39.7 million for the three-month and six-month periods ended June 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. This was offset by a decrease in net gains recognized on investment securities in the three-month and six-month periods ended June 30, 2017, and a decrease in consumer loan fees due to the reduction of loans serviced by the Company.

•

Total general and administrative expenses increased $76.8 million and $161.2 million for the three-month and six-month periods ended June 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 outside service fees.


•	Other expenses decreased $33.6 million and $71.1 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding period in 2016. This was primarily due to a decrease in expenses associated with loss on debt repurchases.

102

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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


•	The income tax provision decreased $61.3 million and $61.2 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016. These decreases were primarily due to discrete income tax benefits recognized.




CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	THREE-MONTH PERIODS ENDED JUNE 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	$	26,612,518		$	130,527	1.96	%	$	30,666,476		$	104,140	1.36	%	$	26,387		$	(11,176	)	$	37,563
LOANS⁽³⁾:
Commercial loans	33,236,428			307,791		3.70	%	38,159,917			306,353		3.21	%	1,438			(7,572		)	9,010
Multifamily	8,337,231			81,807		3.92	%	9,215,850			83,823		3.64	%	(2,016		)	(11,622		)	9,606
Total commercial loans	41,573,659			389,598		3.75	%	47,375,767			390,176		3.29	%	(578		)	(19,194		)	18,616
Consumer loans:
Residential mortgages	8,123,344			81,519		4.01	%	7,807,570			79,009		4.05	%	2,510			3,162			(652		)
Home equity loans and lines of credit	5,929,744			57,417		3.87	%	6,100,806			55,463		3.64	%	1,954			(1,479		)	3,433
Total consumer loans secured by real estate	14,053,088			138,936		3.95	%	13,908,376			134,472		3.87	%	4,464			1,683			2,781
RICs and auto loans	27,007,022			1,169,140		17.32	%	26,806,137			1,230,443		18.36	%	(61,303		)	9,301			(70,604		)
Personal unsecured	2,427,266			155,043		25.55	%	2,184,198			149,090		27.30	%	5,953			14,073			(8,120		)
Other consumer⁽⁴⁾	716,140			16,201		9.05	%	941,490			21,088		8.96	%	(4,887		)	(5,100		)	213
Total consumer	44,203,516			1,479,320		13.39	%	43,840,201			1,535,093		14.01	%	(55,773		)	19,957			(75,730		)
Total loans	85,777,175			1,868,918		8.72	%	91,215,968			1,925,269		8.44	%	(56,351		)	763			(57,114		)
Allowance for loan and lease losses ⁽⁵⁾	(3,937,680		)	—		—	%	(3,710,922		)	—		—	%
NET LOANS	81,839,495			1,868,918		9.13	%	87,505,046			1,925,269		8.80	%	(56,351		)	763			(57,114		)
Intercompany investments	14,640			232		6.34	%	14,640			226		6.17	%	6			—			6
TOTAL EARNING ASSETS	108,466,653			1,999,677		7.37	%	118,186,162			2,029,635		6.87	%	(29,958		)	(10,413		)	(19,545		)
Other assets⁽⁶⁾	26,096,475							26,118,517
TOTAL ASSETS	$	134,563,128						$	144,304,679
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	10,121,592		$	4,846	0.19	%	$	12,317,235		$	14,614	0.47	%	$	(9,768	)	$	(2,248	)	$	(7,520	)
Savings	6,025,607			2,815		0.19	%	6,011,086			2,933		0.20	%	(118		)	7			(125		)
Money market	25,789,677			31,675		0.49	%	24,751,346			31,397		0.51	%	278			1,145			(867		)
Certificates of deposit ("CDs")	7,003,835			19,488		1.11	%	9,974,092			24,410		0.98	%	(4,922		)	(9,112		)	4,190
TOTAL INTEREST-BEARING DEPOSITS	48,940,711			58,824		0.48	%	53,053,759			73,354		0.55	%	(14,530		)	(10,208		)	(4,322		)
BORROWED FUNDS:
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements	4,292,308			17,637		1.64	%	10,951,209			34,785		1.27	%	(17,148		)	(33,160		)	16,012
Other borrowings	37,780,229			281,235		2.98	%	38,990,435			256,384		2.63	%	24,851			(7,635		)	32,486
TOTAL BORROWED FUNDS ⁽⁷⁾	42,072,537			298,872		2.84	%	49,941,644			291,169		2.33	%	7,703			(40,795		)	48,498
TOTAL INTEREST-BEARING FUNDING LIABILITIES	91,013,248			357,696		1.57	%	102,995,403			364,523		1.42	%	(6,827		)	(51,003		)	44,176
Noninterest bearing demand deposits	15,572,982							13,679,415
Other liabilities⁽⁸⁾	4,960,554							5,474,349
TOTAL LIABILITIES	111,546,784							122,149,167
STOCKHOLDER’S EQUITY	23,016,344							22,155,512
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	134,563,128						$	144,304,679

NET INTEREST SPREAD ⁽⁹⁾						5.80	%						5.45	%
NET INTEREST MARGIN ⁽¹⁰⁾						6.06	%						5.64	%
NET INTEREST INCOME				$	1,641,749						$	1,664,886


(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.

103

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


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


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


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


(6)	Other assets primarily includes goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, bank-owned life insurance ("BOLI"), accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and 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.

104

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
	SIX-MONTH PERIODS ENDED JUNE 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	$	27,258,866		$	247,182	1.81	%	$	30,840,755		$	221,063	1.43	%	$	26,119		$	(20,367	)	$	46,486
LOANS⁽³⁾:
Commercial loans	33,936,472			605,400		3.57	%	37,623,876			609,247		3.24	%	(3,847		)	103,336			(107,183		)
Multifamily	8,441,496			158,005		3.74	%	9,280,102			167,764		3.62	%	(9,759		)	(16,042		)	6,283
Total commercial loans	42,377,968			763,405		3.60	%	46,903,978			777,011		3.31	%	(13,606		)	87,294			(100,900		)
Consumer loans:
Residential mortgages	8,141,769			162,254		3.99	%	7,779,605			158,552		4.08	%	3,702			7,069			(3,367		)
Home equity loans and lines of credit	5,949,926			111,898		3.76	%	6,115,332			110,751		3.62	%	1,147			(2,722		)	3,869
Total consumer loans secured by real estate	14,091,695			274,152		3.89	%	13,894,937			269,303		3.88	%	4,849			4,347			502
RICs and auto loans	26,957,954			2,318,294		17.20	%	26,430,806			2,458,806		18.61	%	(140,512		)	50,368			(190,880		)
Personal unsecured	2,360,993			318,566		26.99	%	2,421,380			317,344		26.21	%	1,222			(6,644		)	7,866
Other consumer⁽⁴⁾	743,321			33,439		9.00	%	971,635			43,652		8.99	%	(10,213		)	(10,271		)	58
Total consumer	44,153,963			2,944,451		13.34	%	43,718,758			3,089,105		14.13	%	(144,654		)	37,800			(182,454		)
Total loans	86,531,931			3,707,856		8.57	%	90,622,736			3,866,116		8.53	%	(158,260		)	125,094			(283,354		)
Allowance for loan and lease losses ⁽⁵⁾	(3,887,986		)	—		—	%	(3,520,781		)	—		—	%
NET LOANS	82,643,945			3,707,856		8.97	%	87,101,955			3,866,116		8.88	%	(158,260		)	125,094			(283,354		)
Intercompany investments	14,640			464		6.34	%	14,640			451		6.16	%	13			—			13
TOTAL EARNING ASSETS	109,917,451			3,955,502		7.20	%	117,957,350			4,087,630		6.93	%	(132,128		)	104,727			(236,855		)
Other assets⁽⁶⁾	26,067,158							25,826,114
TOTAL ASSETS	$	135,984,609						$	143,783,464
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	10,482,158		$	10,072	0.19	%	$	12,246,111		$	29,426	0.48	%	$	(19,354	)	$	(3,746	)	$	(15,608	)
Savings	6,014,245			5,719		0.19	%	5,969,907			6,126		0.21	%	(407		)	46			(453		)
Money market	25,880,004			64,084		0.50	%	24,652,900			63,994		0.52	%	90			1,211			(1,121		)
Certificates of deposit ("CDs")	7,699,288			40,943		1.06	%	10,057,512			49,301		0.98	%	(8,358		)	(13,096		)	4,738
TOTAL INTEREST-BEARING DEPOSITS	50,075,695			120,818		0.48	%	52,926,430			148,847		0.56	%	(28,029		)	(15,585		)	(12,444		)
BORROWED FUNDS:
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements	4,707,459			34,055		1.45	%	11,975,247			83,278		1.39	%	(49,223		)	(52,721		)	3,498
Other borrowings	37,958,104			555,852		2.93	%	38,132,892			494,364		2.59	%	61,488			(2,255		)	63,743
TOTAL BORROWED FUNDS ⁽⁷⁾	42,665,563			589,907		2.77	%	50,108,139			577,642		2.31	%	12,265			(54,976		)	67,241
TOTAL INTEREST-BEARING FUNDING LIABILITIES	92,741,258			710,725		1.53	%	103,034,569			726,489		1.41	%	(15,764		)	(70,561		)	54,797
Noninterest bearing demand deposits	15,504,562							13,291,231
Other liabilities⁽⁸⁾	4,889,538							5,427,730
TOTAL LIABILITIES	113,135,358							121,753,530
STOCKHOLDER’S EQUITY	22,849,251							22,029,934
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	135,984,609						$	143,783,464

NET INTEREST SPREAD ⁽⁹⁾						5.67	%						5.52	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.90	%						5.70	%
NET INTEREST INCOME				$	3,244,313						$	3,360,690


(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.

105

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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 June 30,				Six-Month Period Ended June 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	$	20,476	$	14,473	$	38,910	$	28,507	$	6,003		41.5	%	$	10,403		36.5	%
Investments available-for-sale	95,015		81,268		176,441		174,973		13,747			16.9	%	1,468			0.8	%
Investments held-to-maturity	10,011		—		20,643		—		10,011			100%		20,643			100%
Other investments	5,025		8,399		11,188		17,583		(3,374		)	(40.2	)%	(6,395		)	(36.4	)%
Total interest income on investment securities and interest-earning deposits	130,527		104,140		247,182		221,063		26,387			25.3	%	26,119			11.8	%
Interest on loans	1,868,918		1,925,269		3,707,856		3,866,116		(56,351		)	(2.9	)%	(158,260		)	(4.1	)%
Total Interest Income	1,999,445		2,029,409		3,955,038		4,087,179		(29,964		)	(1.5	)%	(132,141		)	(3.2	)%
INTEREST EXPENSE:
Deposits and customer accounts	58,824		73,354		120,818		148,847		(14,530		)	(19.8	)%	(28,029		)	(18.8	)%
Borrowings and other debt obligations	298,872		291,169		589,907		577,642		7,703			2.6	%	12,265			2.1	%
Total Interest Expense	357,696		364,523		710,725		726,489		(6,827		)	(1.9	)%	(15,764		)	(2.2	)%
NET INTEREST INCOME	$	1,641,749	$	1,664,886	$	3,244,313	$	3,360,690	$	(23,137	)	(1.4	)%	$	(116,377	)	(3.5	)%

Net interest income decreased $23.1 million and $116.4 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. These overall decreases were primarily due to a decrease in interest income earned on loans due to lower borrowing levels and lower yield rates.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $26.4 million and $26.1 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The average balance of investment securities and interest-earning deposits for the six-month period ended June 30, 2017 was $27.3 billion with an average yield of 1.81%, compared to an average balance of $30.8 billion with an average yield of 1.43% for the corresponding period in 2016. The increase in interest income on investment securities and interest-earning deposits for the three-month and six-month periods ended June 30, 2017 was primarily attributable to an increase of $10.0 million and $20.6 million in interest income on investments held-to-maturity due to increased volume and an increase of $13.7 million and $1.5 million in interest income on investments available-for-sale deposits due to increased yield rates compared to the corresponding periods in 2016.

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 $56.4 million and $158.3 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The average balance of total loans was $86.5 billion with an average yield of 8.57% for the six-month period ended June 30, 2017, compared to $90.6 billion with an average yield of 8.53% for the corresponding period in 2016. The decrease in the average balance of total loans of $4.1 billion was primarily due to the volume in the commercial loan portfolio. The average balance of commercial loans was $42.4 billion with an average yield of 3.60% for the six-month period ended June 30, 2017, compared to $46.9 billion with an average yield of 3.31% for the corresponding period in 2016. The decrease in interest income on loans was primarily due to the activity in the RIC and auto loan portfolio. Interest income on the RIC and auto loan portfolio decreased $61.3 million and $140.5 million for the three-month and six-month periods ended June 30, 2017 due to a drop in interest rates. The average interest rate of the portfolio decreased from 18.61% in 2016 to 17.20% in 2017.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts decreased $14.5 million and $28.0 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The average balance of total interest-bearing deposits was $50.1 billion with an average cost of 0.48% for the six-month period ended June 30, 2017, compared to an average balance of $52.9 billion with an average cost of 0.56% for the corresponding period in 2016. The decrease in interest expense on deposits and customer-related accounts during the six-month period ended June 30, 2017 was primarily due to the decrease in interest rates of deposits during the year.

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $7.7 million and $12.3 million for the three-month and six-month periods ended June 30, 2017 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 six-month periods ended June 30, 2017. The average balance of total borrowings was $42.1 billion and $42.7 billion with an average cost of 2.84% and 2.77% for the three-month and six-month periods ended June 30, 2017, respectively, compared to an average balance of $49.9 billion and $50.1 billion with an average cost of 2.33% and 2.31% for the corresponding periods in 2016. The average balance of borrowed funds decreased from June 30, 2016 to June 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 $2.3 billion of long-term debt at higher fixed rates in 2017 to increase liquidity and to meet the FRB 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 six-month periods ended June 30, 2017 was $604.8 million and $1.3 billion, compared to $613.8 million and $1.5 billion for the corresponding periods in 2016. This decrease for the six-month period ended June 30, 2017 was primarily related to the buildup of the allowance for loan and lease losses ("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 June 30,						Six-Month Period Ended June 30,
	2017			2016			2017			2016
	(in thousands)
ALLL, beginning of period	$	3,922,863		$	3,567,864		$	3,814,464		$	3,246,145
Charge-offs:
Commercial	(60,514		)	(33,604		)	(86,687		)	(76,613		)
Consumer	(1,128,919		)	(1,032,129		)	(2,366,199		)	(2,174,289		)
Total charge-offs	(1,189,433		)	(1,065,733		)	(2,452,886		)	(2,250,902		)
Recoveries:
Commercial	9,056			21,373			19,635			47,280
Consumer	599,437			612,110			1,223,374			1,219,176
Total recoveries	608,493			633,483			1,243,009			1,266,456
Charge-offs, net of recoveries	(580,940		)	(432,250		)	(1,209,877		)	(984,446		)
Provision for loan and lease losses ⁽¹⁾	611,685			630,273			1,349,021			1,504,188
ALLL, end of period	$	3,953,608		$	3,765,887		$	3,953,608		$	3,765,887
Reserve for unfunded lending commitments, beginning of period	$	120,396		$	173,568		$	122,419		$	149,020
Provision for unfunded lending commitments ⁽¹⁾	(6,917		)	(16,506		)	(8,807		)	8,041
Loss on unfunded lending commitments	(1,668		)	(166		)	(1,801		)	(165		)
Reserve for unfunded lending commitments, end of period	111,811			156,896			111,811			156,896
Total allowance for credit losses ("ACL"), end of period	$	4,065,419		$	3,922,783		$	4,065,419		$	3,922,783

(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.

The Company's net charge-offs increased $148.7 million for the three-month period ended June 30, 2017, and increased $225.4 million for the six-month period ended June 30, 2017 compared to the corresponding periods in 2016.

Commercial charge-offs increased $26.9 million and $10.1 million for the three-month and six-month periods ended June 30, 2017, respectively compared to the corresponding periods in 2016. The three-month increase was primarily due to a $26.9 million increase in Commercial real estate charge-offs, and the six-month increase was primarily due to a $23.4 million increase in Commercial Banking charge-offs, offset by a $10.0 million decrease in Commercial Fleet charge-offs.

Commercial recoveries decreased $12.3 million and $27.6 million for the three-month and six-month periods ended June 30, 2017, respectively compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $5.8 million decrease in commercial real estate recoveries, and a $5.7 million decrease in commercial fleet recoveries. Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, were 0.12% and 0.16% for the three-month and six-month periods ended June 30, 2017, respectively.

Consumer charge-offs increased $96.8 million and $191.9 million for the three-month and six-month periods ended June 30, 2017, respectively compared to the corresponding periods in 2016. The three-month increase was primarily due to a $96.9 million increase in Consumer Auto loan charge-offs, and the six-month increase was due to a $189.8 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.

108

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Consumer recoveries decreased $12.7 million and increased $4.2 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $13.1 million decrease in Consumer Auto recoveries and the six-month increase was primarily due to a $7.7 million increase in Consumer Auto loan recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 1.2% and 2.6% for the three-month and six-month periods ended June 30, 2017, respectively, compared to 0.9% and 2.2% for the corresponding periods in 2016.

NON-INTEREST INCOME



	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,				QTD Change					YTD Change
	2017		2016		2017		2016		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(in thousands)								(dollars in thousands)
Consumer fees	$	120,047	$	129,802	$	232,113	$	263,271	$	(9,755	)	(7.5	)%	$	(31,158	)	(11.8	)%
Commercial fees	42,287		50,518		84,589		97,726		(8,231		)	(16.3	)%	(13,137		)	(13.4	)%
Mortgage banking income, net	15,092		11,546		28,266		27,896		3,546			30.7	%	370			1.3	%
Bank-owned life insurance	14,052		16,437		31,351		30,165		(2,385		)	(14.5	)%	1,186			3.9	%
Lease income	489,043		456,946		985,087		877,802		32,097			7.0	%	107,285			12.2	%
Miscellaneous income	39,377		24,528		86,415		62,844		14,849			60.5	%	23,571			37.5	%
Net gains recognized in earnings	9,049		30,764		9,569		58,014		(21,715		)	(70.6	)%	(48,445		)	(83.5	)%
Total non-interest income	$	728,947	$	720,541	$	1,457,390	$	1,417,718	$	8,406		1.2	%	$	39,672		2.8	%

Total non-interest income increased $8.4 million and $39.7 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The increases for the three-month and six-month periods ended June 30, 2017 were primarily due to lease income associated with the continued growth of lease portfolio and RICs. This was offset by a decrease in net gains recognized on investment securities due to no securities sales in the three-month and six-month periods ended June 30, 2017, and a decrease in consumer loan fees due to the reduction of loans serviced by the Company.

Consumer Fees

Consumer fees decreased $9.8 million and $31.2 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding period in 2016. The decrease in consumer fees for the three-month and six-month periods ended June 30, 2017 was primarily due to a $23.3 million and $48.6 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 in other consumer fees including credit cards and consumer deposit fees.

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 $8.2 million and $13.1 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016, primarily due to a decrease in unused line of credit fees of $3.5 million and a decrease of $5.9 million due to a decrease in syndication fees.

109

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Mortgage Banking Revenue



	Three-Month Period Ended June 30,						Six-Month Period Ended June 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	$	10,452		$	10,793		$	21,076		$	21,610		$	(341	)	(3.2	)%	$	(534	)	(2.5	)%
Net gains on sales of residential mortgage loans and related securities	1,324			7,035			5,676			10,512			(5,711		)	(81.2	)%	(4,836		)	(46.0	)%
Net gains on sales of multifamily mortgage loans	900			900			1,200			1,300			—			—	%	(100		)	(7.7	)%
Net gains on hedging activities	8,900			10,895			9,946			32,970			(1,995		)	(18.3	)%	(23,024		)	(69.8	)%
Net gains/(losses) from changes in MSR fair value	(1,193		)	(11,468		)	263			(25,824		)	10,275			(89.6	)%	26,087			(101.0	)%
MSR principal reductions	(5,291		)	(6,609		)	(9,895		)	(12,672		)	1,318			(19.9	)%	2,777			(21.9	)%
Total mortgage banking income, net	$	15,092		$	11,546		$	28,266		$	27,896		$	3,546		30.7	%	$	370		1.3	%

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 increased $3.5 million and $0.4 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The increases for 2017 were primarily attributable to $10.3 million of higher net gains from changes in MSR fair value, offset by $5.7 million of lower net gains on sales of residential mortgage loans and related securities.

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	%

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

Mortgage and multifamily servicing fees decreased $0.3 million and $0.5 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. At June 30, 2017 and 2016, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $414.2 million and $770.4 million, respectively. The decrease in loans serviced for others is primarily due to pay downs received during the remainder of 2016 and 2017.

Net gains on sales of residential mortgage loans and related securities decreased $5.7 million and $4.8 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. For the three-month and six-month periods ended June 30, 2017, the Company sold $940.0 million of mortgage loans for gains of $5.7 million, compared to $889.7 million of loans sold for gains of $10.5 million for the corresponding period in 2016.

110

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

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 six-month periods ended June 30, 2017 changed by an immaterial amount when compared to the corresponding periods in 2016. These changes were primarily due to a $0.9 million and $1.2 million release in the FNMA recourse reserve for the three-month and six-month periods ended June 30, 2017, respectively, compared to $0.9 million and $1.3 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 June 30, 2017, the Company serviced loans with a principal balance of $253.5 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 June 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 the 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 June 30, 2017 and December 31, 2016, the Company had a liability of $2.6 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 $2.0 million and $23.0 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. This variance for the three-month and six-month periods ended June 30, 2017 was primarily due to the decrease in the mortgage loan pipeline valuation and the Company's hedging strategy in the current mortgage rate environment.

Net losses and gains from changes in MSR fair value were a loss of $1.2 million and a gain of $0.3 million for the three-month and six-month periods ended June 30, 2017 and a net loss of $11.5 million and $25.8 million for the corresponding period in 2016. The value of the related MSRs carried at fair value at June 30, 2017 and December 31, 2016 was $146.1 million and $146.6 million, respectively. The MSR asset fair value changes for the three-month and six-month periods ended June 30, 2017 were the result of fluctuations in interest rates.

The Company recognized $5.3 million and $9.9 million of principal reductions for the three-month and six-month periods ended June 30, 2017, compared to $6.6 million and $12.7 million for the corresponding periods in 2016. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing and generally follows along with interest rates.

BOLI

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI decreased $2.4 million and increased $1.2 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016.

111

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Lease income

Lease income increased $32.1 million and $107.3 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016, respectively. The average leased vehicle portfolio balance as of June 30, 2017 and June 30, 2016 was $9.8 billion and $9.0 billion, respectively. These increases were the result of the growth of the Company's lease portfolio.

Miscellaneous Income

Miscellaneous income increased $14.8 million and $23.6 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. This was primarily due to an increase in gain on sale of operating leases of $28.7 million and $46.5 million for the three-month and six-month periods ended June 30, 2017, respectively, and an increase in gain on sale of other assets of $48.2 million and $51.6 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. This was offset by a decrease in other income of $27.4 million and $39.2 million, during the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. For further discussion, please see Note 16 to the Condensed Consolidated Financial Statements.

Net gains recognized in earnings

The Company recognized $9.0 million and $9.6 million of gains for the three-month and six-month periods ended June 30, 2017, respectively, in net gains on sales of investment securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the three-month and six-month periods ended June 30, 2017 was primarily comprised of the sale of MBS with a book value of $555.6 million for a gain of $9.3 million.

The Company recognized $30.8 million and $58.0 million for the three-month and six-month periods ended June 30, 2016, respectively, in net gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the three-month period ended June 30, 2016 was primarily comprised of the sale of corporate debt securities with a book value of $1.4 billion for a gain of $5.9 million, and the sale of MBS, including FHLMC swap and hold fixed rate securities and CMOs, with a book value of$1.3 billion for a gain of $24.7 million. The net gain realized for the six-month period ended June 30, 2016 was primarily comprised of the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, the sale of corporate debt securities with a book value of$1.4 billion for a gain of $5.9 million, the sale of MBS, including FHLMC swap and hold fixed rate securities and CMOs, with a book value of $1.3 billion for a gain of $24.7 million, and the sale of state and municipal securities with a book value of $748.0 million for a gain of $19.9 million.

GENERAL AND ADMINISTRATIVE EXPENSES



	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,				QTD Change					YTD Change
	2017		2016		2017		2016		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
	(dollars in thousands)
Compensation and benefits	$	455,616	$	420,319	$	907,857	$	855,951	$	35,297		8.4	%	$	51,906		6.1	%
Occupancy and equipment expenses	163,553		151,453		326,264		297,284		12,100			8.0	%	28,980			9.7	%
Technology expense	66,502		71,370		122,275		126,589		(4,868		)	(6.8	)%	(4,314		)	(3.4	)%
Outside services	59,003		68,618		107,278		145,011		(9,615		)	(14.0	)%	(37,733		)	(26.0	)%
Marketing expense	36,754		21,564		68,218		42,042		15,190			70.4	%	26,176			62.3	%
Loan expense	95,872		104,261		194,217		206,891		(8,389		)	(8.0	)%	(12,674		)	(6.1	)%
Lease expense	369,240		322,159		728,032		614,993		47,081			14.6	%	113,039			18.4	%
Other administrative expenses	95,096		105,128		197,334		201,493		(10,032		)	(9.5	)%	(4,159		)	(2.1	)%
Total general and administrative expenses	$	1,341,636	$	1,264,872	$	2,651,475	$	2,490,254	$	76,764		6.1	%	$	161,221		6.5	%

112

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

•

Compensation and benefits expense increased $35.3 million and $51.9 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The primary driver of these increases was the Company's salary expense which resulted in a $13.6 million and $22.4 million expense increase for the three-month and six-month periods ended June 30, 2017, respectively. The Company also had an increase in bonus expenses of $11.4 million for the three-month period ended June 30, 2017, but a decrease in bonus expense for the six-month period ended June 30,2017 compared to the corresponding periods in 2016. The decrease in bonus expense for the six- month period ended June 30, 2017 was caused by a $15.5 million bonus release made during the first quarter of 2017.

•

Occupancy and equipment expenses increased $12.1 million and $29.0 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. This was primarily due to an increase in depreciation expense of $6.4 million and $11.7 million for the three-month and six-month periods ended June 30, 2017, respectively. These increases were due to more assets being placed in service. There were also $6.7 million and $13.0 million increases in maintenance and repair expense and other occupancy and equipment expenses for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding period in 2016.


•	Outside services decreased $9.6 million and $37.7 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. This was primarily due to a decrease in consulting service fees of $7.2 million and $34.2 million which related to regulatory initiatives, including preparation for meeting the requirements of the IHC during 2016.


•	Marketing expense increased $15.2 million and $26.2 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding period in 2016. These increases were primarily due to expenses such as direct mail, advertising and outside marketing associated with corporate marketing campaigns.


•	Loan expense decreased $8.4 million and $12.7 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. These decreases were primarily due to decreases of $8.5 million and $10.1 million in loan origination expenses.


•	Lease expense increased $47.1 million and $113.0 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. These decreases 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 $10.0 million and $4.2 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. These decreases were primarily attributable to a decrease in other administrative expenses is due to lower operational risk expenses and miscellaneous expenses for three-month and six-month periods ended June 30, 2017.

OTHER EXPENSES



	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,				QTD Change					YTD Change
	2017		2016		2017		2016		Dollar (decrease)/increase			Percentage		Dollar (decrease)/increase			Percentage
	(dollars in thousands)
Amortization of intangibles	$	15,424	$	17,754	$	30,915	$	35,686	$	(2,330	)	(13.1	)%	$	(4,771	)	(13.4	)%
Deposit insurance premiums and other expenses	17,596		13,505		35,426		39,017		4,091			30.3	%	(3,591		)	(9.2	)%
Loss on debt extinguishment	3,991		45,573		10,740		78,445		(41,582		)	(91.2	)%	(67,705		)	(86.3	)%
Other miscellaneous expenses	7,535		1,286		10,541		5,563		6,249			485.9	%	4,978			89.5	%
Total other expenses	$	44,546	$	78,118	$	87,622	$	158,711	$	(33,572	)	(43.0	)%	$	(71,089	)	(44.8	)%

113

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Total other expenses decreased $33.6 million and $71.1 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The primary factors contributing to these decreases were:


•	Amortization of intangibles decreased $2.3 million and $4.8 million for the three-month and six-month periods ended June 30, 2017 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 $4.1 million and decreased $3.6 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The expense for the three-month and six-month periods ended June 30, 2016 included a $6.2 million contingent loss on a transfer of $9 billion of unfunded credit facilities to Santander, which did not recur in 2017. This decrease in costs was offset by the impairment of internally developed software during the three-month period ended June 30, 2017.

•

Losses on debt extinguishment decreased $41.6 million and $67.7 million for the three-month and six-month periods ended June 30, 2017 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 six-month periods ended June 30, 2016, the Bank terminated $1.5 billion and $2.8 billion of FHLB advances, incurring costs of $45.6 million and $78.4 million. During the three-month and six-month periods ended June 30, 2017, a $4.0 million charge on the buyback of REIT preferred stock was incurred and a tender offer on Bank debt resulted in a charge of $6.7 million.


•	Other miscellaneous expenses increased $6.2 million and $5 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. These increases were primarily due to the impairment of capitalized software of $6.6 million in the three-month period ended June 30, 2017.

INCOME TAX PROVISION

An income tax provision of $92.0 million and $170.9 million was recorded for the three-month and six-month periods ended June 30, 2017, respectively, compared to $153.3 million and $232.1 million for the corresponding periods in 2016. This resulted in effective tax rates ("ETR") of 24.2% and 27.5% for the three-month and six-month periods ended June 30, 2017, respectively, compared to 35.8% and 37.6% 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 June 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.

114

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

Results Summary

Consumer and Business Banking

Net interest income increased $44.3 million and $125.2 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The average balances of the Consumer and Business Banking segment's gross loans were $17.0 billion and $17.0 billion for the three-month and six-month periods ended June 30, 2017, compared to $16.8 billion and $16.8 billion for the corresponding periods in 2016. The average balances of deposits were $41.9 billion and $41.6 billion for the three-month and six-month periods ended June 30, 2017, compared to $40.8 billion and $40.5 billion for the corresponding periods in 2016, primarily driven by growth in non-interest-bearing deposits. Total non-interest income increased $2.2 million and decreased $10.8 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses increased $1.6 million and $23.5 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. Total expenses increased $9.8 million and $14.6 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016.

Total assets as of June 30, 2017 were $19.6 billion, compared to $19.8 billion as of June 30, 2016.

Commercial Banking

Net interest income decreased $2.0 million and increased $6.2 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. Total average gross loans were $11.6 billion and $11.6 billion for the three-month and six-month periods ended June 30, 2017, compared to $12.0 billion and $11.7 billion for the corresponding periods in 2016. Total non-interest income decreased $1.1 million and $4.3 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses increased $13.1 million and decreased $42.6 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016, primarily driven by reserves for the energy finance business line that were required in 2016. Total expenses increased $1.4 million and $3.5 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016.

Total assets were $11.7 billion as of June 30, 2017, compared to $12.4 billion as of June 30, 2016. Total average deposits were $7.1 billion and $7.5 billion for the three-month and six-month periods ended June 30, 2017, compared to $8.1 billion and $8.5 billion for the corresponding periods in 2016.

Commercial Real Estate

Net interest income increased $5.9 million and $10.7 million during the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016. The average balance of this segment's gross loans decreased to $14.3 billion and $14.4 billion during the three-month and six-month periods ended June 30, 2017, compared to $15.5 billion and $15.4 billion for the corresponding periods in 2016. The average balance of deposits was $898.5 million and $912.4 million for the three-month and six-month periods ended June 30, 2017, compared to $818.7 million and $773.6 million for the corresponding periods in 2016. Total non-interest income decreased $3.4 million and $6.1 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses decreased $13.6 million and $26.9 million for the three-month and six-month periods ended June 30, 2017 compared the corresponding periods in 2016. Total expenses decreased $3.3 million and $3.7 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. Total assets were $14.1 billion as of June 30, 2017, compared to $15.4 billion as of June 30, 2016.

115

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

GCB

Net interest income decreased $19.7 million and $37.1 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The average balance of this segment's gross loans were $6.2 billion and $6.8 billion for the three-month and six-month periods ended June 30, 2017, compared to $9.8 billion and $9.9 billion for the corresponding periods in 2016. The average balance of deposits was $2.2 billion and $2.3 billion for the three-month and six-month periods ended June 30, 2017, compared to $1.9 billion for the corresponding periods in 2016. Total non-interest income decreased $4.6 million and $13.9 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses increased $30.1 million and decreased $19.1 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016. Total expenses increased $1.5 million and decreased $13.2 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding period in 2016.

Total assets were $7.0 billion as of June 30, 2017, compared to $12.0 billion as of June 30, 2016.

Other

Net interest income increased $39.0 million and decreased $2.4 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. Total non-interest income decreased $34.2 million and $47.6 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses increased $2.7 million and $4.9 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. Total expenses decreased $39.9 million and $82.3 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016.

Total assets were $42.9 billion as of June 30, 2017, compared to $43.1 billion as of June 30, 2016.

Net interest income decreased $76.0 million and $196.6 million for the three-month and six-month periods ended June 30, 2017 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 $65.0 million and $146.7 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses increased $8.6 million and decreased $16.5 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. Total expenses increased $69.9 million and $163.6 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016.

Total assets were $39.5 billion as of June 30, 2017, compared to $38.5 billion as of June 30, 2016.

116

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES


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

FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's loan held for investment portfolioconsisted of the following at the dates indicated:



	June 30, 2017				December 31, 2016				June 30, 2016
	Amount		Percent		Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial loans held for investment:
Commercial real estate loans	$	9,799,724	11.8	%	$	10,112,043	11.8	%	$	10,410,998	11.8	%
Commercial and industrial loans and other commercial	23,032,638		27.8	%	25,644,405		29.9	%	27,134,937		30.8	%
Multifamily	8,240,516		9.9	%	8,683,680		10.1	%	9,225,985		10.5	%
Total Commercial Loans ⁽¹⁾	41,072,878		49.5	%	44,440,128		51.8	%	46,771,920		53.1	%
Consumer loans secured by real estate:
Residential mortgages	8,040,363		9.7	%	7,775,272		9.1	%	7,519,954		8.5	%
Home equity loans and lines of credit	5,903,913		7.1	%	6,001,192		7.0	%	6,078,463		6.9	%
Total consumer loans secured by real estate	13,944,276		16.8	%	13,776,464		16.1	%	13,598,417		15.4	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	23,466,768		28.3	%	22,104,918		25.8	%	20,903,940		23.8	%
RICs and auto loans - purchased	2,554,220		3.1	%	3,468,803		4.0	%	4,629,815		5.3	%
Personal unsecured loans	1,229,497		1.5	%	1,234,094		1.4	%	1,189,787		1.4	%
Other consumer	689,140		0.8	%	795,378		0.9	%	908,720		1.0	%
Total Consumer Loans	41,883,901		50.5	%	41,379,657		48.2	%	41,230,679		46.9	%
Total loans held for investment ("LHFI")	$	82,956,779	100.0	%	$	85,819,785	100.0	%	$	88,002,599	100.0	%
Total LHFI with:
Fixed	$	50,623,536	61.0	%	$	51,752,761	60.3	%	$	52,233,658	59.4	%
Variable	32,333,243		39.0	%	34,067,024		39.7	%	35,768,941		40.6	%
Total LHFI	$	82,956,779	100.0	%	$	85,819,785	100.0	%	$	88,002,599	100.0	%

(1)As of June 30, 2017, the Company had $263.0 million of loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans decreased approximately $3.4 billion, or 7.6%, from December 31, 2016 to June 30, 2017, and decreased $5.7 billion, or 12.2%, from June 30, 2016 to June 30, 2017. The decrease from December 31, 2016 to June 30, 2017 was primarily due to a decrease in commercial and industrial loans of $2.7 billion, which includes payoffs to approximately 900 loans totaling $1.5 billion. Additionally, there was a decrease in multifamily loans of $443.2 million as the company switches it's focus to Commercial Real Estate banking. Commercial real estate loans decreased $312.3 million offset by an increase of $70.6 million in Other commercial loans.



	At June 30, 2017, Maturing
	In One Year Or Less		One to Five Years		After Five Years		Total⁽¹⁾
	(in thousands)
Commercial real estate loans	$	2,396,397	$	5,738,352	$	1,664,975	$	9,799,724
Commercial and industrial loans and other	9,350,567		11,383,353		2,458,970		23,192,890
Multi-family loans	999,929		6,258,012		982,575		8,240,516
Total	$	12,746,893	$	23,379,717	$	5,106,520	$	41,233,130
Loans with:
Fixed rates	$	4,012,904	$	10,539,225	$	2,066,922	$	16,619,051
Variable rates	8,733,989		12,840,492		3,039,598		24,614,079
Total	$	12,746,893	$	23,379,717	$	5,106,520	$	41,233,130

(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 $167.8 million, or 1.2%, from December 31, 2016 to June 30, 2017, and increased $345.9 million, or 2.5%, from June 30, 2016 to June 30, 2017. The increase from December 31, 2016 to June 30, 2017 was comprised of an increase in the residential mortgage portfolio of $265.1 million, offset by a decrease in the home equity loans and lines of credit portfolio of $97.3 million.

Consumer Loans Not Secured By Real Estate

The consumer loan portfolio not secured by real estate increased $336.4 million, or 1.2%, from December 31, 2016 to June 30, 2017, and increased $307.4 million, or 1.1%, from June 30, 2016 to June 30, 2017. The increase was primarily due to the $1.4 billion increase in the RIC and auto loans - originated portfolio. The growth was offset by a decrease in the RIC and auto loan portfolio - purchased portfolio of $914.6 million. This decrease is due to run-off of the portfolio.

As of June 30, 2017, 68.8% of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a 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.



	June 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)	5.2	%	59.2	%	5.5	%	61.7	%
<600	60.9	%	20.6	%	60.1	%	20.6	%
600-639	19.0	%	9.0	%	19.4	%	7.9	%
>=640	14.9	%	11.2	%	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 $1.1 billion and $924.7 million of LHFS at June 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.

At June 30, 2017, a typical RIC was originated with an average annual percentage rate of 15.6% and was purchased from the dealer at a discount of 0.3%. 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 June 30, 2017, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.

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

As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. In connection with this review, on October 9, 2015, SC delivered a 90-day notice of termination of its loan purchase agreement with LendingClub. On February 1, 2016, SC completed the sale of substantially all of its LendingClub loans to a third-party buyer at an immaterial premium to par value. 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 consistency and quality in accordance with the Company's credit and governance standards, authority to approve loans is shared jointly between the businesses and the Credit Risk Review group. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.

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

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

Commercial Loans

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

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

Consumer Loans Secured by Real Estate

Credit risk in the direct and indirect consumer loan portfolio is controlled by strict adherence to underwriting standards that consider DTI levels, the creditworthiness of the borrower, and collateral values. In the home equity loan portfolio, combined 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.

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

NON-PERFORMING ASSETS

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



	June 30, 2017			December 31, 2016
	(dollars in thousands)
Non-accrual loans:
Commercial:
Commercial real estate	$	126,357		$	179,220
Commercial and industrial loans and other commercial	286,729			193,465
Multifamily	6,212			8,196
Total commercial loans	419,298			380,881
Consumer:
Residential mortgages	265,454			287,140
Consumer loans secured by real estate	118,860			120,065
RICs and auto loans - originated	1,284,957			1,045,587
RICs - purchased	260,759			284,486
Personal unsecured and other consumer	16,004			17,895
Total consumer loans	1,946,034			1,755,173
Total non-accrual loans	2,365,332			2,136,054

Other real estate owned	108,046			116,705
Repossessed vehicles	161,020			173,754
Other repossessed assets	1,834			3,838
Total other real estate owned and other repossessed assets	270,900			294,297
Total non-performing assets	$	2,636,232		$	2,430,351

Past due 90 days or more as to interest or principal and accruing interest	$	143,984		$	93,846
Annualized net loan charge-offs to average loans ⁽¹⁾	2.8		%	2.7		%
Non-performing assets as a percentage of total assets	2.0		%	1.8		%
Non-performing loans ("NPLs") as a percentage of total loans	2.8		%	2.4		%
ALLL as a percentage of total NPLs	167.1		%	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 June 30, 2017.

No commercial loans were 90 days or more past due and still accruing interest as of June 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 $137.2 million and $120.7 million at June 30, 2017 and December 31, 2016, respectively. Potential problem consumer loans amounted to $4.2 billion and $4.3 billion at June 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 $2.6 billion, or 2.0% of total assets, at June 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 auto loan portfolios, offset by a decrease in the mortgage and home equity loan portfolios.

General

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

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

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

Commercial

Commercial NPLs increased $38.4 million from December 31, 2016 to June 30, 2017. At June 30, 2017, commercial NPLs accounted for 1.0% of commercial LHFI, compared to 0.9% of commercial LHFI at December 31, 2016. The increase in commercial NPLs was comprised of an $81.8 million increase in the commercial and industrial portfolio, primarily with customers related to the energy sector, offset by a decrease of $52.9 million in the commercial real estate portfolio.

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 June 30, 2017 and December 31, 2016, respectively:



	June 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	$	265,454		$	118,860		$	287,140		$	120,065
Total LHFI	8,040,363			5,903,913			7,775,272			6,001,192
NPLs as a percentage of total LHFI	3.3		%	2.0		%	3.7		%	2.0		%
NPLs in foreclosure status	55.6		%	34.0		%	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 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.

NPLs in the RIC and auto loan portfolio increased $215.6 million from December 31, 2016 to June 30, 2017. The increase was comprised of a $239.4 million increase in RICs and auto loans-originated offset by a $23.7 million decrease in RICs - purchased. At June 30, 2017, non-performing RICs and auto loans accounted for 5.9% of total RIC and auto loans held for investment, compared to 5.2% of total RICs and auto loans at December 31, 2016. NPLs in the unsecured and other consumer loan portfolio decreased $1.9 million from December 31, 2016 to June 30, 2017. At June 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 55.6% at June 30, 2017 for residential mortgages and from 38.4% at December 31, 2016 to 34.0% at June 30, 2017 for Home Equity loans.

The dollar value of NPLs in foreclosure status decreased from $168.2 million at December 31, 2016 to $147.5 million at June 30, 2017 for residential mortgages and from $46.2 million at December 31, 2016 to $40.4 million at June 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 immerse 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, to the banking industry consolidation in 2010; and to 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.

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



	June 30, 2017	December 31, 2016

Puerto Rico	54.2%	60.0%
New York	12.3%	10.7%
Massachusetts	10.8%	7.0%
All other states⁽¹⁾	22.7%	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 98.6% of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only 53.8% 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 June 30, 2017 and December 31, 2016, the residential mortgage portfolio included the following Alt-A loans:



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

Alt-A loans	$	431,579		$	476,229
Alt-A loans as a percentage of the residential mortgage portfolio⁽¹⁾	5.2		%	5.8		%
Alt-A loans in NPL status	$	42,501		$	48,189
Alt-A loans in NPL status as a percentage of residential mortgage NPLs	16.0		%	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 9.8% NPL ratio in 2017. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of 2.0% 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 16.0% at June 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:



	June 30, 2017		December 31, 2016
	(in thousands)
Performing
Commercial	$	165,108	$	214,474
Residential mortgage	278,114		268,777
RICs and auto loans	4,981,017		4,556,770
Other consumer	129,786		129,767
Total performing	5,554,025		5,169,788
Non-performing
Commercial	203,562		148,038
Residential mortgage	122,896		139,274
RICs and auto loans	596,401		604,864
Other consumer	44,594		44,951
Total non-performing	967,453		937,127
Total	$	6,521,478	$	6,106,915

Performing TDRs totaled $5.6 billion at June 30, 2017, an increase of $384.2 million compared to December 31, 2016. Non-performing TDRs totaled $1.0 billion at June 30, 2017, an increase of $30.3 million compared to December 31, 2016.

The following table provides a summary of TDR activity:



	Six-Month Period Ended June 30, 2017						Six-Month Period Ended June 30, 2016
	RICs and auto loans			All other loans⁽¹⁾			RICs and auto loans			All other loans⁽¹⁾
	(in thousands)
TDRs, beginning of period	$	5,161,935		$	944,981		$	3,866,235		$	800,220
New TDRs⁽²⁾	2,062,608			163,156			1,597,316			213,608
Charged-Off TDRs	(1,091,066		)	(132,541		)	(691,772		)	(40,844		)
Sold TDRs	—			(7,252		)	—			(3,321		)
Payments on TDRs	(556,121		)	(24,222		)	(317,734		)	(50,454		)
TDRs, end of period	$	5,577,356		$	944,122		$	4,454,045		$	919,209

(1) Excludes SC personal unsecured loans, which amounted to $28.5 million and $21.7 million at June 30, 2017 and 2016, respectively, which were reclassified to LHFS during the third quarter of 2015.

(2) 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 $165.1 million, or 44.8% of total commercial TDRs at June 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 material borrowers who were current and performing. The increase in non-performing commercial TDRs can be attributed to four material 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 $278.1 million, or 69.4% of total residential TDRs at June 30, 2017.

RICs

The RIC and auto loan held for investment portfolio is primarily comprised of nonprime loans (68.8% at June 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 21.4% at June 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 that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts used in the determination of the adequacy of the ALLL for loans classified as TDRs are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the ALLL and related provision for loan and lease losses. Changes in these ratios and periods are considered in determining the appropriate level of the ALLL and related provision for loan and lease losses. 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 increased from $129.8 million, or 74.3% of total other consumer loan TDRs at December 31, 2016 to $129.8 million, or 74.4% of total other consumer loan TDRs, at June 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 June 30, 2017 and December 31, 2016, the Company's delinquencies consisted of the following:



	June 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	$515,091	$4,139,265	$238,950	$266,821	$5,160,127	$568,517	$4,261,192	$245,588	$257,152	$5,332,449
Total Loans⁽¹⁾	$14,262,290	$27,074,623	$2,890,547	$41,233,130	$85,460,590	$14,239,357	$26,498,469	$3,107,074	$44,561,193	$88,406,093
Delinquencies as a % of Loans	3.6%	15.3%	8.3%	0.6%	6.0%	4.0%	16.1%	7.9%	0.6%	6.0%

(1) Includes LHFS.

Overall, total delinquencies decreased by $172.3 million, or 3.2%, from December 31, 2016 to June 30, 2017. Consumer loans secured by real estate delinquencies decreased $53.4 million, primarily due to improvements in credit quality in the residential mortgage portfolio. RICs and auto loan and other consumer loan delinquencies decreased $121.9 million and decreased $6.6 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 $9.7 million.

ALLOWANCE FOR CREDIT LOSSES ("ACL")

The ACL is maintained at levels that management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks inherent in the portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, the level of originations, credit quality metrics such as FICO^®scores 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:



	June 30, 2017				December 31, 2016
	Amount		% of Loans to Total HFI Loans		Amount		% of Loans to Total HFI Loans
	(dollars in thousands)
Allocated allowance:
Commercial loans	$	428,248	49.5	%	$	449,837	51.8	%
Consumer loans	3,478,337		50.5	%	3,317,604		48.2	%
Unallocated allowance	47,023		n/a		47,023		n/a
Total ALLL	3,953,608		100.0	%	3,814,464		100.0	%
Reserve for unfunded lending commitments	111,811				122,418
Total ACL	$	4,065,419			$	3,936,882

General

The ACL increased $128.5 million from December 31, 2016 to June 30, 2017. The increase in the overall ACL was primarily attributable to continued growth in SC's RIC and auto loan portfolio.

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, a review of allowance levels based on nationally published statistics is conducted quarterly.

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

Commercial

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

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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 $428.2 million at June 30, 2017 (1.0% 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 25.5% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.0% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impacts to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown.

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 balances at the time of default. Auto loans are charged off when an account becomes 120 days delinquent if the Company has not repossessed the vehicle. The Company writes the vehicle down to the estimated recovery amount of the collateral when the automobile is repossessed and legally available for disposition.

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

The allowance for consumer loans was $3.5 billion and $3.3 billion at June 30, 2017 and December 31, 2016, respectively. The allowance as a percentage of held-for-investment consumer loans was 8.3% at June 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 allowance for loan and lease loss positions are considered in light of these factors. The unallocated ALLL was $47.0 million at June 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 $111.8 million at June 30, 2017. This change was primarily due to a reduction during 2016 in off-balance sheet lending commitments. During the three-month and six-month periods ended June 30, 2017, SBNA transferred $6.6 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 available-for-sale investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.

Total investment securities available-for-sale increased $1.4 billion to $18.4 billion at June 30, 2017, compared to $17.0 billion at December 31, 2016. During the six-month period ended June 30, 2017, the composition of the Company's investment portfolio changed due to increase in MBS, which were offset by a decrease in ABS. MBS increased by $1.8 billion primarily due to investment purchases of $3.6 billion, offset by $1.8 billion of principal paydowns and maturities. ABS securities decreased $446.9 million, primarily due to $223.8 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 June 30, 2017. The Company had 22 investment securities classified as held-to-maturity as of June 30, 2017.

Total trading securities increased $8.6 million to $10.2 million at June 30, 2017, compared to $1.6 million at December 31, 2016.

Total gross unrealized losses decreased by $44.2 million to $189.4 million during the six-month period ended June 30, 2017. The majority of the decrease in unrealized losses was in the MBS portfolios. The unrealized losses decreased within the MBS portfolios by $43.2 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 $723.2 million at June 30, 2017, primarily due to the Company redeeming $117.1 million of FHLB stock at par, partially offset by the Company's purchase of $88.8 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the period ended June 30, 2017, the Company did not purchase any FRB stock.

The average life of the available-for-sale investment portfolio (excluding certain ABS) at June 30, 2017 was approximately 4.59 years. The average effective duration of the investment portfolio (excluding certain ABS) at June 30, 2017 was approximately 3.10 years. The actual maturities of MBS available-for-sale will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.

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



	June 30, 2017		December 31, 2016
	(in thousands)
Investment securities available-for-sale:
U.S. Treasury securities and government agencies	$	8,401,318	$	8,163,027
FNMA and FHLMC securities	9,026,086		7,639,823
State and municipal securities	27		30
Other securities ⁽¹⁾	972,159		1,221,345
Total investment securities available-for-sale	18,399,590		17,024,225
Investment securities held-to-maturity:
U.S. government agencies	1,575,037		1,658,644
Total investment securities held-to-maturity ⁽²⁾	1,575,037		1,658,644
Trading securities	10,245		1,630
Other investments	723,201		730,831
Total investment portfolio	$	20,708,073	$	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 June 30, 2017:



	June 30, 2017
	Amortized Cost		Fair Value
	(in thousands)
FNMA	$	4,811,677	$	4,760,280
FHLMC	4,327,452		4,265,806
Government National Mortgage Association ⁽¹⁾	8,348,481		8,272,903
Government - Treasuries	1,678,867		1,677,426
Total	$	19,166,477	$	18,976,415

(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 June 30, 2017, goodwill totaled $4.5 billion and represented 3.3% of total assets and 19.5% of total stockholder's equity. The following table shows goodwill by reporting units at June 30, 2017:



	Consumer and Business Banking		Commercial Real Estate		Commercial Banking		Global Corporate Banking		SC		Santander BanCorp		Total
	(in thousands)
Goodwill at June 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 second 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 deferred tax asset balance of $962.8 million and a deferred tax liability balance of $1.6 billion at June 30, 2017, compared to a deferred tax asset balance of $989.8 million and a deferred tax liability balance of $1.4 billion at December 31, 2016. The $159.9 million increase of net deferred liabilities for the six-month period ended June 30, 2017 was primarily due to a $136.9 million increase in deferred tax liabilities related to accelerated depreciation on leasing transactions; a $23.7 million decrease in deferred tax assets for unrealized gains and losses included in other comprehensive income; a $23.9 million decrease in deferred tax assets related to employee benefits; and a $15.1 million decrease in deferred tax assets established for SC loan mark-to-market adjustments under Internal Revenue Code ("IRC") Section 475; a $10.5 million increase in net deferred tax liabilities related to other temporary differences; and a $4.9 million decrease in deferred tax assets related to the ALLL, partially offset by a $37.6 million increase in deferred tax assets related to net operating loss carryforwards and tax credits; and a $17.6 million decrease in deferred tax liabilities related to unremitted foreign earnings of a subsidiary of SC. The IRC Section 475 mark-to-market adjustment deferred tax asset is related to SC's business as a dealer in auto and other consumer loans. The mark-to-market adjustment is required under IRC Section 475 for tax purposes, but is not required for book purposes.

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

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.

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 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 $7.3 million and $7.8 million for the six-month periods ended June 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 June 30, 2017, no shares of the Series C Preferred Stock had been redeemed.

On June 28, 2017, the Company's Board of Directors declared a cash dividend on the Company's preferred stock of $3.7 million, which is payable on August 15, 2017 to shareholders of record as of the close of business on August 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, Banco Santander Puerto Rico 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.

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

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 June 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 June 30, 2017 and December 31, 2016, based on the Company’s capital calculations, exceeded the required capital ratios for BHCs.

For a discussion of Basel III, which became effective for SHUSA and the Bank on January 1, 2015, including the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned "Regulatory Matters" in this MD&A.

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 Bank did not declare and pay any return of capital to SHUSA during the three-month and six-month periods ended June 30, 2017.

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



	SHUSA

	June 30, 2017		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽²⁾
CET1 capital ratio	14.64	%	6.50	%	4.50	%
Tier 1 capital ratio	16.31	%	8.00	%	6.00	%
Total capital ratio	18.07	%	10.00	%	8.00	%
Leverage ratio	12.96	%	5.00	%	4.00	%

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



	BANK

	June 30, 2017		Well-capitalized Requirement⁽²⁾		Minimum Requirement⁽¹⁾
CET1 capital ratio	17.59	%	6.50	%	4.50	%
Tier 1 capital ratio	17.59	%	8.00	%	6.00	%
Total capital ratio	18.68	%	10.00	%	8.00	%
Leverage ratio	13.43	%	5.00	%	4.00	%

(2) As defined by OCC regulations. Presentation under a Basel III transitional basis.

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

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. The Company remains subject to a written agreement with the FRB of Boston under which the Company must not declare or pay, and must not permit any non-bank subsidiary that is not wholly-owned by the Company, including SC, to declare or pay, any dividends, and the Company must not make, or permit any such subsidiary to make, any capital distribution, in each case without the prior written approval of the FRB of Boston.

LIQUIDITY AND CAPITAL RESOURCES

Overall

The Company continues to maintain strong liquidity positions. Liquidity represents the ability of the Company to obtain cost-effective funding to meet the needs of customers as well as the Company's financial obligations. Factors that impact the liquidity position of the Company include loan origination volumes, loan prepayment rates, the maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, the Company's credit ratings, investment portfolio cash flows, the maturity structure of the Company's wholesale funding, and other factors. These risks are monitored and managed centrally. The Bank's Asset/Liability Committee reviews and approves the Company's liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements.

Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would increase its borrowing costs, require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, and limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the Economic and Business Environment section of this MD&A.

Sources of Liquidity

Company and Bank

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

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

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

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

SC requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. SC funds its operations through its lending relationships with 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 $5.6 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the six-month period ended June 30, 2017, SC completed on-balance sheet funding transactions totaling approximately $9.1 billion, including:


•	two securitizations on its Santander Drive Auto Receivables Trust ("SDART") platform for $2.2 billion;


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


•	three securitizations on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform for $3.1 billion;


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


•	three private amortizing lease facilities for $1.0 billion; and


•	six top-ups of private amortizing loan and lease facilities for $2.5 billion.

SC also completed $1.5 billion in asset sales, which consisted of $261.0 million of recurring monthly sales with its third-party flow partners and $1.2 billion in sales to Santander under the new Santander Prime Auto Issuing Note ("SPAIN") securitization platform, which was effective in March 2017.

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. SHUSA entered into a revolving loan agreement for a similar amount with SIS for an additional two-year term to mature in 2019.

As needed, SIS will draw down from a another subordinated loan in the amount of $525.0 million with Santander in order to enable SIS to underwrite certain large transactions in excess of the foregoing subordinated loan. At June 30, 2017, the outstanding balance of this loan was $525.0 million, which was repaid in full in July 2017.

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 June 30, 2017, the Bank had approximately $20.5 billion in committed liquidity from the FHLB and the FRB. Of this amount, $14.3 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At June 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 $20.7 billion and $21.1 billion, respectively. These amounts represented 32.9% and 31.4% of total deposits at June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, the Bank, Banco Santander International and Banco Santander Puerto Rico had $1.1 billion, $2.5 billion, and $1.1 billion, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.

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

BSPR has $905.4 million in committed liquidity from the FHLB, all of which was unused as of June 30, 2017 as well as $249.9 million in liquid assets aside from cash unused as of June 30, 2017.

Cash and cash equivalents



	Six-Month Period Ended June 30,
	2017			2016
	(in thousands)
Net cash provided by operating activities	$	2,231,758		$	1,516,036
Net cash used in investing activities	(309,324		)	(1,249,062		)
Net cash used in financing activities	(4,418,614		)	(1,852,385		)

Cash provided by operating activities

Net cash provided by operating activities was $2.2 billion for the six-month period ended June 30, 2017, which was primarily comprised of net income of $451.5 million, $2.5 billion in proceeds from sales of LHFS, and $436.0 million in depreciation, amortization and accretion, partially offset by $2.4 billion of originations of LHFS, net of repayments.

Net cash provided by operating activities was $1.5 billion for the six-month period ended June 30, 2016, which was comprised of net income of $385.1 million, $2.4 billion in proceeds from sales of LHFS, and $0.5 billion in depreciation, amortization and accretion, and , partially offset by $3.4 billion of originations of LHFS, net of repayments.

Cash used in investing activities

For the six-month period ended June 30, 2017, net cash used in investing activities was $309.3 million, primarily due to $5.1 billion of purchases of investment securities available-for-sale and $3.1 billion in operating lease purchases and originations, partially offset by $1.7 billion in normal loan activity, $3.5 billion of available-for-sale investment securities sales, maturities and prepayments, $2.1 billion in proceeds from sales and terminations of operating leases, and $551.1 million in manufacturer incentives.

For the six-month period ended June 30, 2016, net cash used in investing activities was $1.2 billion, primarily due to $8.7 billion of purchases of investment securities available-for-sale, $2.0 billion in normal loan activity, and $3.3 billion in operating lease purchases and originations, partially offset by $10.4 billion of available-for-sale investment securities sales, maturities and prepayments, $1.1 billion in proceeds from sales of LHFI, and $1.1 billion in proceeds from sales and terminations of operating leases.

Cash used in financing activities

For the six-month period ended June 30, 2017, net cash used in financing activities was $4.4 billion, which was primarily due to a decrease in net borrowing activity of $153.6 million and a $4.3 billion decrease in deposits.

Net cash used in financing activities for the six-month period ended June 30, 2016 was $1.9 billion, which was primarily due to a decrease in net borrowing activity of $2.4 billion, partially offset by a $616.0 million 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.

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

SC's warehouse lines generally have net spread, delinquency, and net loss ratio limits. Generally, these limits are calculated based on the portfolio collateralizing the respective line; however, for certain of SC's warehouse lines, delinquency and net loss ratios are calculated with respect to its serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased overcollateralization requirements or, in the case of limits calculated with respect to the specific portfolio underlying certain credit lines, result in an event of default under these agreements. If an event of default occurred under one of these agreements, the lenders could elect to declare all amounts outstanding under the agreement be immediately due and payable, enforce their interests against collateral pledged under the agreement, restrict SC's ability to obtain additional borrowings under the agreement, and/or remove SC as servicer. SC has never had a warehouse line terminated due to failure to comply with any ratio or meet any covenant. A default under one of these agreements can be enforced only with respect to the impacted warehouse line.

SC has two credit facilities with eight banks providing an aggregate commitment of $3.9 billion for the exclusive use of supplying short-term liquidity needs to support Chrysler Capital retail financing. As of June 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.

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 June 30, 2017 and December 31, 2016, there were outstanding balances of $699.0 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 $3.3 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 $1.5 billion in various term loans with maturities ranging from March 2019 to March 2022. These loans eliminate in the consolidation of SHUSA.

On August 3, 2017, the Company entered into a $650.0 million loan with SC. Interest accrues on this loan at the rate of 3.44%. The note has a maturity date of August 3, 2021. This loan will eliminate in the consolidation of SHUSA.

Santander also serves as the counterparty for many of SC's derivative financial instruments, with outstanding notional amounts of $4.5 billion and $7.3 billion at June 30, 2017 and December 31, 2016, respectively.

In August 2015, under a new agreement with Santander, SC agreed to begin paying Santander a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations.

Secured Structured Financings

SC's secured structured financings primarily consist of public, SEC-registered securitizations. SC also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and privately issues amortizing notes. The Company has completed seven securitizations year-to-date in 2017 and currently has 39 securitizations outstanding in the market with a cumulative ABS balance of approximately $17 billion.

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

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.

SC periodically executes Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Historically, as all of the notes and residual interests in these securitizations were issued to third parties, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Condensed Consolidated Balance Sheets.

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.

Banco Santander Puerto Rico uses liquidity for funding loan commitments, satisfying deposit withdrawal requests, and repayments of borrowings.

Dividends and Stock Issuances

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

There were no dividends paid during the six-month period ended June 30, 2017 on the Company's common stock. On January 19, 2017, SHUSA's Board of Directors declared a cash dividend on the Company's Preferred Stock of $0.45625 per share, which was paid on February 15, 2017 to shareholders of record as of the close of business on February 1, 2017. On April 19, 2017, SHUSA's Board of Directors declared a cash dividend on the Company's preferred stock of $0.45625 per share, which was paid on May 15, 2017 to shareholders of record as of the close of business on May 1, 2017. On June 28, 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 August 15, 2017 to shareholders of record as of the close of business on August 1, 2017, and a cash dividend of $5.0 million on its common stock to Santander.

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

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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⁾	$	5,410,571	$	4,396,306	$	1,014,265	$	—	$	—
Notes payable - revolving facilities	7,899,440		2,194,858		5,054,582		650,000		—
Notes payable - secured structured financings	23,796,457		785,083		7,012,187		11,285,964		4,713,223
Other debt obligations ^{(1) (2)}	9,643,250		2,398,560		4,563,600		1,375,342		1,305,748
Junior subordinated debentures due to capital trust entities ^{(1) (2)}	238,148		238,148		—		—		—
CDs ⁽¹⁾	6,382,492		4,048,843		1,341,425		975,139		17,085
Non-qualified pension and post-retirement benefits	128,328		12,903		26,203		25,396		63,826
Operating leases⁽³⁾	751,439		120,064		240,504		159,909		230,962
Total contractual cash obligations	$	54,250,125	$	14,194,765	$	19,252,766	$	14,471,750	$	6,330,844


(1)	Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at June 30, 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.


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


(3)	Does not include future expected sublease income.

Excluded from the above table are deposits of $56.5 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 that 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.

SC has extended revolving lines of credit to certain auto dealers. Under these arrangements, SC is committed to lend up to each dealer's established credit limit. At June 30, 2017 and December 31, 2016, there were outstanding balances of $26,000 and $2.5 million, respectively, and a committed amount of $26,000 and $2.9 million.

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$154 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 $971.9 million at June 30, 2017.

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

Employment and Other Agreements

As of June 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 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 June 30, 2017 and December 31, 2016 had a 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 $905.4 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%.

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

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

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 London Interbank Offered Rate ("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 June 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	June 30, 2017		December 31, 2016
Down 100 basis points	(1.78	)%	(2.14	)%
Up 100 basis points	2.03	%	2.36	%
Up 200 basis points	3.34	%	4.36	%

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

Market Value of Equity ("MVE") Analysis

The Company also evaluates the impact of interest rate risk by utilizing MVE modeling. This analysis measures the present value of all estimated future cash flows of the Company over the estimated remaining life of the balance sheet. MVE is calculated as the difference between the market value of assets and liabilities. The MVE calculation utilizes only the current balance sheet, and therefore does not factor in any future changes in balance sheet size, balance sheet mix, yield curve relationships or product spreads, which may mitigate the impact of any interest rate changes.

Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at June 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	June 30, 2017		December 31, 2016
Down 100 basis points	(1.08	)%	(1.23	)%
Up 100 basis points	(1.24	)%	(0.76	)%
Up 200 basis points	(3.84	)%	(2.50	)%

As of June 30, 2017, the Company’s MVE profile showed a decrease of 1.08% for downward parallel interest rate shocks of 100 basis points and a decrease of 1.24% 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.

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

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.

The Company typically retains the servicing rights related to residential mortgage loans that are sold. The majority of the Company's residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 8 to the Condensed Consolidated Financial Statements.

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

The Company also utilizes forward contracts to manage market risk associated with certain expected investment securities sales and equity options, which manage its market risk associated with certain customer deposit products.

For additional information on foreign exchange contracts, derivatives and hedging activities, see Note 11 to the Condensed Consolidated Financial Statements.

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ITEM 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of June 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.

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.

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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 troubled debt restructurings (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.

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.

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•	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).

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 Statement of Cash Flows ("SCF") and Notes to the Consolidated Financial Statements. Specifically, the Company concluded that it did not have adequate controls designed and in place over the preparation and review of 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.

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To address the material weakness in the control environment (material weakness 1, noted above), the Company has taken the following measures:


•	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 has taken the following measures:


•	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 a plan to enhance its risk assessment processes, control procedures and documentation.


•	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 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.

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 is in the process of strengthening its processes and controls as follows:


•	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.


•	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 has taken the following measures:


•	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.


•	Implemented enhanced review controls over financial statement disclosures for credit loss allowance and TDR’s to ensure compliance with the Company’s polices and U. S. GAAP.


•	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.


•	Enhanced the Company’s communication on related issues with its senior leadership team and the Board, including the Risk Committee and the Audit Committee.

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To address the material weakness in the review of new, unusual or significant transactions (material weakness 8, noted above), the Company is in the process of strengthening its processes and controls as follows:


•	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 is in the process of strengthening its processes and controls as follows:


•	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.


•	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 is in the process of strengthening its processes and controls as follows:


•	Improved reconciliation of carrying value to key information sources.


•	Increased management reviews of the goodwill carrying value calculation.


•	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 June 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 June 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 September 15, 2014, by and between Santander Holdings USA, Inc. and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed September 18, 2014) (Commission File Number 001-16581)

(10.4	)	Written Agreement, dated as of July 2, 2015, by and between Santander Holdings USA, Inc. and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed July 7, 2015) (Commission File Number 001-16581)

(10.5	)	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)

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(31.1	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

(32.1	)	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

(32.2	)	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

(101	)	Interactive Data File (XBRL). (Filed herewith)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		SANTANDER HOLDINGS USA, INC. (Registrant)

Date:	August 10, 2017	/s/ Scott E. Powell
		Scott E. Powell
		President and Chief Executive Officer (Authorized Officer)


Date:	August 10, 2017	/s/ Madhukar Dayal
		Madhukar Dayal
		Chief Financial Officer and Senior Executive Vice President

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