Santander Holdings USA, Inc. - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 2018



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 April 30, 2018
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 March 31, 2018 and December 31, 2017	4

Condensed Consolidated Statements of Operations for the three-month period ended March 31, 2018 and 2017	5

Condensed Consolidated Statements of Comprehensive Income for the three-month period ended March 31, 2018 and 2017	6

Condensed Consolidated Statements of Stockholder's Equity for the three-month period ended March 31, 2018 and 2017	7

Condensed Consolidated Statements of Cash Flows for the three-month period ended March 31, 2018 and 2017	8

Notes to Condensed Consolidated Financial Statements	9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	75

Item 3. Quantitative and Qualitative Disclosures About Market Risk	122

Item 4. Controls and Procedures	122

PART II. OTHER INFORMATION	126

Item 1. Legal Proceedings	126

Item 1A. Risk Factors	126

Item 2. Unregistered Sales of Equity Securities and use of Proceeds	126

Item 3. Defaults upon Senior Securities	126

Item 4. Mine Safety Disclosures	126

Item 5. Other Information	126

Item 6. Exhibits	127

SIGNATURES	129


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

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FORWARD-LOOKING STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

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

•

the effects of regulation and/or policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the "FDIC"), the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB”), and other changes in monetary and fiscal policies and regulations, including interest rate policies of the Federal Reserve, as well as in the impact of changes in and interpretations of generally accepted accounting principles in the United States of America ("GAAP"), the failure to adhere to which could subject SHUSA to formal or informal regulatory compliance and enforcement actions;


•	the slowing or reversal of the current U.S. economic expansion and the strength of the U.S. economy in general and regional and local economies in which SHUSA conducts operations in particular, which may affect, among other things, the level of non-performing assets, charge-offs, and provisions for credit losses;


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


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


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


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


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


•	SHUSA’s ability to effectively manage its capital and liquidity, including approval of its capital plans by its regulators and its ability to continue to receive dividends from its subsidiaries or other investments;


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


•	the ability to manage risks inherent in our businesses, including through effective use of systems and controls, insurance, derivatives and capital management;


•	SHUSA’s ability to manage credit risk that may increase to the extent our loans are concentrated by loan type, industry segment, borrower type or location of the borrower or collateral;

•

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 unexpected costs or losses not anticipated at their initiation, and expose SHUSA to increased operational risk;


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


•	changes in customer spending or savings behavior;


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


•	SHUSA's ability to control operational risks, data security breach risks and outsourcing risks, and the possibility of errors in quantitative models SHUSA uses to manage its business, including as a result of cyber-attacks, technological failure, human error, fraud or malice, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;


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


•	changes to income tax laws and regulations;


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


•	the costs and effects of regulatory or judicial proceedings; and


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

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
AFS: Available-for-sale		DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
ALLL: Allowance for loan and lease losses		DOJ: Department of Justice
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation		DRIVE: Drive Auto Receivables Trust
ASC: Accounting Standards Codification		DTI: Debt-to-income
ASU: Accounting Standards Update		ECOA: Equal Credit Opportunity Act
ATM: Automated teller machine		EPS: Enhanced Prudential Standards
Bank: Santander Bank, National Association		ETR: Effective tax rate
BEA: Bureau of Economic Analysis		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
BSPR: Banco Santander Puerto Rico		FDIA: Federal Deposit Insurance Corporation Improvement Act
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
CEF: Closed end fund		FHLMC: Federal Home Loan Mortgage Corporation
CEO: Chief Executive Officer		FICO^®: Fair Isaac Corporation credit scoring model
CEVF: Commercial equipment vehicle financing		Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CET1: Common equity Tier 1		FINRA: Financial Industrial Regulatory Authority
CFPB: Consumer Financial Protection Bureau		FNMA: Federal National Mortgage Association
Change in Control: First quarter 2014 change in control and consolidation of SC		FOB: Financial Oversight and Management Board of Puerto Rico
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		FVO: Fair value option
CID: Civil investigative demand		GAAP: Accounting principles generally accepted in the United States of America
CLTV: Combined loan-to-value		GAP: Guaranteed auto protection
CMO: Collateralized mortgage obligation		GCB: Global Corporate Banking
CMP: Civil monetary penalty		HFI: Held for investment
CODM: Chief Operating Decision Maker		HTM: Held to maturity
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
COSO: Committee of Sponsoring Organizations		IRS: Internal Revenue Service
Covered Fund: hedge fund or a private equity fund under the Volcker Rule		ISDA: International Swaps and Derivatives Association, Inc.
CPR: Changes in anticipated loan prepayment rates		LendingClub: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquires loans under flow agreements
CRA: Community Reinvestment Act		LCR: Liquidity coverage ratio
CRE: Commercial Real Estate		LHFI: Loans held-for-investment

Table of Contents



LHFS: Loans held-for-sale		Santander NY: New York branch of Santander
LIBOR: London Interbank Offered Rate		Santander UK: Santander UK plc
LTD: Long-term debt		SBNA: Santander Bank, National Association
LTV: Loan-to-value		SC: Santander Consumer USA Holdings Inc. and its subsidiaries
MBS: Mortgage-backed securities		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		SCRA: Servicemembers Civil Relief Act
MVE: Market value of equity		SDART: Santander Drive Auto Receivables Trust, a SC securitization platform
NCI: Non-controlling interest		SDGT: Specially Designated Global Terrorist
NMD: Non-maturity deposits		SEC: Securities and Exchange Commission
NMTC: New market tax credits		Securities Act: Securities Act of 1933, as amended
NPL: Non-performing loan		Separation Agreement: Agreement entered into by Thomas Dundon, the former Chief Executive Officer of SC, DDFS, SC and Santander on July 2, 2015
NSFR: Net stable funding ratio		SFS: Santander Financial Services, Inc.
NYSE: New York Stock Exchange		SHUSA: Santander Holdings USA, Inc.
OCC: Office of the Comptroller of the Currency		SIS: Santander Investment Securities Inc.
OEM: Original equipment manufacturer		SPAIN: Santander Prime Auto Issuing Note Trust, a securitization platform
OREO: Other real estate owned		SPE: Special purpose entity
OTTI: Other-than-temporary impairment		Sponsor Holdings: Sponsor Auto Finance Holding Series LP
Parent Company: the parent holding company of SBNA and other consolidated subsidiaries		SSLLC: Santander Securities LLC
PROMESA: Puerto Rico Management and Economic Stability Act		Subvention: Reimbursement of the finance provider by a manufacturer for the difference between a market loan or lease rate and the below-market rate given to a customer.
REIT: Real estate investment trust		TCJA: Tax Cut and Jobs Act of 2017
RIC: Retail installment contract		TDR: Troubled debt restructuring
RV: Recreational vehicle		TLAC: Total loss-absorbing capacity
RWA: Risk-weighted assets		Trusts: Securitization trusts
S&P: Standard & Poor's		UPB: Unpaid principal balance
Santander: Banco Santander, S.A.		VOE: Voting rights entity
Santander BanCorp: Santander BanCorp and its subsidiaries

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PART I. FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)



	March 31, 2018			December 31, 2017
	(in thousands)
ASSETS
Cash and cash equivalents	$	7,900,607		$	6,519,967
Investment securities:
Available-for-sale ("AFS") at fair value	13,321,594			14,413,183
Held-to-maturity ("HTM") (fair value of $2,797,698 and $1,773,938 as of March 31, 2018 and December 31, 2017, respectively)	2,877,357			1,799,808
Other investments (includes Trading securities of $3,024 and $1 as of March 31, 2018 and December 31, 2017, respectively)	765,041			658,864
Loans held-for-investment ("LHFI")^{(1) (5)}	80,118,328			80,740,852
Allowance for loan and lease losses ("ALLL") ⁽⁵⁾	(3,853,209		)	(3,911,575		)
Net LHFI	76,265,119			76,829,277
Loans held-for-sale ("LHFS") ⁽²⁾	1,960,695			2,522,486
Premises and equipment, net ⁽³⁾	791,882			849,061
Operating lease assets, net ⁽⁵⁾⁽⁶⁾	10,770,896			10,474,308
Goodwill	4,444,389			4,444,389
Intangible assets, net	520,468			535,753
Bank-owned life insurance ("BOLI")	1,804,133			1,795,700
Restricted cash ⁽⁵⁾	3,810,962			3,818,807
Other assets ^{(4) (5)}	3,994,748			3,632,427
TOTAL ASSETS	$	129,227,891		$	128,294,030
LIABILITIES
Accrued expenses and payables	$	2,949,708		$	2,825,263
Deposits and other customer accounts	61,841,175			60,831,103
Borrowings and other debt obligations ⁽⁵⁾	38,350,245			39,003,313
Advance payments by borrowers for taxes and insurance	209,088			159,321
Deferred tax liabilities, net	1,037,909			969,996
Other liabilities ⁽⁵⁾	996,685			799,403
TOTAL LIABILITIES	105,384,810			104,588,399
STOCKHOLDER'S EQUITY
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at both March 31, 2018 and December 31, 2017)	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 March 31, 2018 and December 31, 2017)	17,732,184			17,723,010
Accumulated other comprehensive loss	(370,281		)	(198,431		)
Retained earnings	3,685,111			3,462,674
TOTAL SHUSA STOCKHOLDER'S EQUITY	21,242,459			21,182,698
Noncontrolling interest ("NCI")	2,600,622			2,522,933
TOTAL STOCKHOLDER'S EQUITY	23,843,081			23,705,631
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	129,227,891		$	128,294,030

(1) LHFI includes $167.6 million and $186.5 million of loans recorded at fair value at March 31, 2018 and December 31, 2017, respectively.

(2) Includes $162.5 million and $197.7 million of loans recorded at the fair value option ("FVO") at March 31, 2018 and December 31, 2017, respectively.

(3) Net of accumulated depreciation of $1.5 billion and $1.4 billion at March 31, 2018 and December 31, 2017, respectively.

(4) Includes mortgage servicing rights ("MSRs") of $160.1 million and $146.0 million at March 31, 2018 and December 31, 2017, 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. At March 31, 2018 and December 31, 2017, LHFI included $22.1 billion and $22.7 billion, Operating leases assets, net included $10.6 billion and $10.2 billion, restricted cash included $2.4 billion and $2.0 billion, other assets included $810.5 million and $733.1 million, Borrowings and other debt obligations included $28.6 billion and $28.5 billion, and Other Liabilities included $0.2 billion and $0.2 billion of assets or liabilities that were included within VIEs, respectively. See Note 6 to these Condensed Consolidated Financial Statements for additional information.

(6) Net of accumulated depreciation of $3.1 billion and $3.4 billion at March 31, 2018 and December 31, 2017, respectively.

See accompanying notes to Condensed Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



	Three-Month Period Ended March 31,
	2018			2017
	(in thousands)
INTEREST INCOME:
Loans	$	1,747,734		$	1,838,938
Interest-earning deposits	32,513			18,433
Investment securities:
AFS	73,505			81,427
HTM	17,064			10,632
Other investments	5,248			6,163
TOTAL INTEREST INCOME	1,876,064			1,955,593
INTEREST EXPENSE:
Deposits and other customer accounts	75,424			61,993
Borrowings and other debt obligations	304,690			291,035
TOTAL INTEREST EXPENSE	380,114			353,028
NET INTEREST INCOME	1,495,950			1,602,565
Provision for credit losses	502,534			735,445
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	993,416			867,120
NON-INTEREST INCOME:
Consumer and commercial fees	138,561			154,349
Lease income	540,896			496,045
Miscellaneous income, net⁽¹⁾	124,570			77,505
TOTAL FEES AND OTHER INCOME	804,027			727,899
Net (losses)/gains on sale of investment securities	(663		)	519
TOTAL NON-INTEREST INCOME	803,364			728,418
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits	469,406			452,241
Occupancy and equipment expenses	159,340			162,712
Technology, outside service, and marketing expense	152,282			135,509
Loan expense	96,814			98,324
Lease expense	424,266			358,792
Other administrative expenses	103,554			102,238
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES	1,405,662			1,309,816
OTHER EXPENSES:
Amortization of intangibles	15,288			15,491
Deposit insurance premiums and other expenses	16,761			17,830
Loss on debt extinguishment	2,212			6,749
Other miscellaneous expenses	3,601			3,006
TOTAL OTHER EXPENSES	37,862			43,076
INCOME BEFORE INCOME TAX PROVISION	353,256			242,646
Income tax provision	95,321			78,937
NET INCOME INCLUDING NCI	257,935			163,709
LESS: NET INCOME ATTRIBUTABLE TO NCI	74,397			50,628
NET INCOME ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC.	$	183,538		$	113,081

(1) Includes impact of $70.5 million and $66.1 million in 2018 and 2017 of lower of cost or market adjustments on a portion of the Company's LHFS portfolio.

See accompanying notes to Condensed Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(unaudited)



	Three-Month Period Ended March 31,
	2018			2017
	(in thousands)
NET INCOME INCLUDING NCI	$	257,935		$	163,709
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized losses on cash flow hedge derivative financial instruments, net of tax ⁽¹⁾	(17,365		)	(2,487		)
Net unrealized (losses) / gains on AFS investment securities, net of tax ⁽²⁾	(110,929		)	20,969
Pension and post-retirement actuarial (losses) / gains, net of tax	(4,462		)	485
TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAX	(132,756		)	18,967
COMPREHENSIVE INCOME	125,179			182,676
NET INCOME ATTRIBUTABLE TO NCI	74,397			50,628
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA	$	50,782		$	132,048

(1) Excludes $4.1 million and $3.0 million of other comprehensive income attributable to NCI for the three-month period ended March 31, 2018 and 2017, respectively.

(2) Excludes $39.1 million impact of other comprehensive income reclassified to Retained earnings as a result of the adoption of ASU 2018-02.

See accompanying notes to Condensed Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2018 AND 2017 (in thousands)

(unaudited)




	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	—	—		(26,456		)	—			14,764			37,401			25,709
Comprehensive (loss)/income attributable to SHUSA	—	—		—			18,967			113,081			—			132,048
Other comprehensive income attributable to NCI	—	—		—			—			—			2,990			2,990
Net income attributable to NCI	—	—		—			—			—			50,628			50,628
Impact of SC stock option activity	—	—		—			—			—			4,431			4,431
Capital from shareholder	—	—		9,000			—			—			—			9,000
Stock issued in connection with employee benefit and incentive compensation plans	—	—		(164		)	—			—			—			(164		)
Dividends paid on preferred stock	—	—		—			—			(3,650		)	—			(3,650		)
Balance, March 31, 2017	530,391	$	195,445	$	16,581,877		$	(174,241	)	$	3,144,344		$	2,852,325		$	22,599,750

Balance, January 1, 2018	530,391	195,445		17,723,010			(198,431		)	3,462,674			2,522,933			23,705,631
Cumulative-effect adjustment upon adoption of new accounting standards and other (Note 1)	—	—		—			(39,094		)	47,549			—			8,455
Comprehensive income attributable to SHUSA	—	—		—			(132,756		)	183,538			—			50,782
Other comprehensive income attributable to NCI	—	—		—			—			—			4,079			4,079
Net income attributable to NCI	—	—		—			—			—			74,397			74,397
Contribution from shareholder and related tax impact (Note17)	—	—		9,174			—			—			—			9,174
Impact of stock issued in connection with employee benefit and incentive compensation plans	—	—		—			—			—			4,961			4,961
Dividends paid on common stock	—	—		—			—			(5,000		)	—			(5,000		)
Dividends paid to NCI	—	—		—			—			—			(5,748		)	(5,748		)
Dividends paid on preferred stock	—	—		—			—			(3,650		)	—			(3,650		)
Balance, March 31, 2018	530,391	$	195,445	$	17,732,184		$	(370,281	)	$	3,685,111		$	2,600,622		$	23,843,081

See accompanying notes to Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	Three-Month Period Ended March 31,
	2018			2017

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including NCI	$	257,935		$	163,709
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	502,534			735,445
Deferred tax expense	84,567			75,276
Depreciation, amortization and accretion⁽²⁾	437,506			349,747
Net loss on sale of loans	66,370			77,753
Net loss/(gain) on sale of investment securities	663			(519		)
Net gain on sale of operating leases	(131		)	(319		)
Loss on debt extinguishment	2,212			6,749
Net loss on real estate owned and premises and equipment	1,476			2,285
Stock-based compensation	274			(1,406		)
Equity loss on equity method investments	2,164			2,368
Originations of LHFS, net of repayments	(1,225,975		)	(1,209,200		)
Purchases of LHFS	(550		)	(1,450		)
Proceeds from sales of LHFS	1,789,969			1,559,128
Purchases of trading securities	(3,776		)	(17,756		)
Proceeds from sales of trading securities	1,640			9,145
Net change in:
Revolving personal loans	5,723			(5,064		)
Other assets and BOLI	(305,866		)	(403,187		)
Other liabilities	346,354			272,351
NET CASH PROVIDED BY OPERATING ACTIVITIES	1,963,089			1,615,055

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of AFS investment securities	39,446			—
Proceeds from prepayments and maturities of AFS investment securities	605,286			1,311,490
Purchases of AFS investment securities	(840,948		)	(2,841,388		)
Proceeds from prepayments and maturities of HTM investment securities	86,097			35,121
Proceeds from sales of other investments	25,946			64,469
Purchases of other investments	(109,576		)	(13,199		)
Proceeds from sales of LHFI	681,754			257,943
Proceeds from the sales of equity method investments	—			17,717
Distributions from equity method investments	1,111			1,144
Contributions to equity method and other investments	(23,832		)	(11,660		)
Proceeds from settlements of BOLI policies	6,043			12,426
Purchases of LHFI	(225,226		)	(64,046		)
Net change in loans other than purchases and sales	(421,195		)	1,410,582
Purchases and originations of operating leases	(2,155,881		)	(1,615,629		)
Proceeds from the sale and termination of operating leases⁽¹⁾	1,164,362			940,879
Manufacturer incentives	213,784			326,946
Proceeds from sales of real estate owned and premises and equipment	12,017			14,187
Purchases of premises and equipment	(38,412		)	(16,159		)
NET CASH USED IN INVESTING ACTIVITIES	(979,224		)	(169,177		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	1,010,072			(639,456		)
Net change in short-term borrowings	54,155			(59,595		)
Net proceeds from long-term borrowings	11,482,934			15,124,445
Repayments of long-term borrowings	(11,751,288		)	(15,525,950		)
Repayments of FHLB advances (with terms greater than 3 months)	(450,000		)	(1,600,000		)
Net change in advance payments by borrowers for taxes and insurance	49,767			47,893
Cash dividends paid to preferred stockholders	(3,650		)	(3,650		)
Dividends paid on common stock	(5,000		)	—
Dividends paid to noncontrolling interest	(5,748		)	—
Proceeds from the issuance of common stock	1,947			2,473
Capital contribution from shareholder	5,741			9,000
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES	388,930			(2,644,840		)

NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ⁽²⁾	1,372,795			(1,198,962		)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD ⁽²⁾	10,338,774			13,052,807
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD ⁽²⁾	$	11,711,569		$	11,853,845

NON-CASH TRANSACTIONS
Loans transferred to/(from) other real estate owned	(25,435		)	(3,717		)
Loans transferred from/(to) held-for-investment ("HFI")(from)/to held-for-sale, net ("HFS")	700,160			(18,992		)
Unsettled purchases of investment securities	—			19,284
Residential loan securitizations	1,633			9,272
AFS investment securities transferred to held to maturity investment securities	1,167,189			—

(1) March 31, 2017 cash flow activity has been updated for the operating lease cash flow classification correction. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

(2) The beginning, ending and net change balances for the periods ended March 31, 2018 and March 31, 2017 include restricted cash balances of $3.8 billion, $3.8 billion, and $7.8 million; and $3.0 billion, $3.3 billion, and $0.3 billion, respectively.

See accompanying 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 ("BSPR"); 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; and Santander Investment Securities Inc. ("SIS"), a registered broker-dealer located in New York providing services in investment banking, institutional sales, and 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 home 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 16 for additional details.

As of March 31, 2018, SC was owned approximately 68.0% by SHUSA and 32.0% by other shareholders. During 2017, SHUSA increased its ownership in SC; refer to additional details in Note 21 of the Company's Annual Report on Form 10-K as of December 31, 2017. Common shares of SC ("SC Common Stock") are listed on the New York Stock Exchange (the "NYSE") under the trading symbol "SC."

Basis of Presentation

These Condensed Consolidated Financial Statements include the assets, liabilities, revenues and expenses accounts of the Company and its consolidated 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. All significant intercompany balances and transactions have been eliminated in consolidation. These Consolidated Financial Statements have been prepared by the Company pursuant to Securities and Exchange Commission ("SEC") regulations. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the 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.

Corrections to Previously Reported Amounts

We have made certain corrections to previously disclosed amounts to correct for errors related to the classification of cash flows from the sale of automobiles returned to the Company at the end of a lease term.

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

Operating Lease Cash Flow Classification

Beginning June 30, 2014 through September 30, 2017, cash flows from the sale of automobiles returned to the Company at the end of a lease term were incorrectly recorded in the Consolidated SCF, resulting in an overstatement of cash flows from investing activities (Proceeds from the sale and termination of operating leases) and an understatement of cash flows from operating activities (Depreciation, amortization and accretion) in the amount of $149.9 million for the three-months ended March 31, 2017. There was no net impact to cash provided by financing activities. The misclassification errors did not impact the net change in cash and cash equivalents, total cash and cash equivalents, net income, or any other operating measure. There was no impact to the Company's Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Other Comprehensive Income, or Consolidated Statements of Equity for any period as a result of the Consolidated SCF error. Management has evaluated the errors and determined they are immaterial to previously issued financial statements. The Company has corrected the balance described above for the three-months ended March 31, 2017 in its Consolidated SCF included herein. In future filings, the Company will correct the Consolidated SCF disclosures for the comparative periods when presented.

Significant Accounting Policies

Management has identified (i) the allowance for loan losses for originated and purchased loans and the reserve for unfunded lending commitments, (ii) valuation of automotive leases and residuals, (iii) accretion of discounts and subvention on RICs, (iv) goodwill, (vi) fair value of financial instruments, and (v) income taxes as the Company's significant accounting policies and estimates, in that they are important to the portrayal of the Company's financial condition, results of operations and cash flows and the accounting estimates related thereto require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

As of March 31, 2018, with the exception of the items noted in the section captioned "Recently Adopted Accounting Standards" 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, 2017.

Recently Adopted Accounting Standards

Since January 1, 2018, the Company adopted the following Financial Accounting Standards Board ("FASB") Accounting Standards Updates (“ASUs"):

•

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as amended. 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. It includes a five-step process to assist an entity in achieving the main principles of revenue recognition under ASC 606. Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), it did not have a material impact on the elements of the Company's 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 adopted this ASU as of January 1, 2018 using the modified retrospective method of transition, resulting in an immaterial cumulative-effect adjustment recorded to opening retained earnings for the current period. The adoption of this ASU did not result in material changes in the timing of the Company's revenue recognition, but requires gross presentation of certain costs previously offset against revenue. This change in presentation is reflected in the current period and will increase both noninterest revenue and noninterest expense for the Company. The increase is predominantly associated with certain distribution costs on wealth management products (historically offset against Miscellaneous income), with the remainder of the increase associated with certain underwriting service costs (historically offset against Miscellaneous income). Refer to Note 15 for additional details. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting.

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

The cumulative-effect of the changes made to our January 1, 2018 Condensed Consolidated Balance Sheet for the adoption of the new revenue recognition standard were as follows:



(in thousands)	Balance at December 31, 2017		Adjustments			Balance at January 1, 2018
Assets - LHFI	$	80,740,852	$	5,514		$	80,746,366
Other assets	3,632,427		(3,592		)	3,628,835
Total Assets	128,294,030		1,922			128,295,952

Liabilities - Other liabilities	799,403		(1,378		)	798,025
Total Liabilities	104,588,399		(1,378		)	104,587,021

Stockholders' Equity - Retained earnings	3,462,674		3,300			3,465,974
Total Stockholders' Equity	23,705,631		3,300			23,708,931

The following discloses the impact on the Company's Condensed Balance Sheet at March 31, 2018 and the Condensed Statement of Operations for the three-months ended March 31, 2018 for the adoption of this new accounting standard:



	March 31, 2018
(in thousands)	As Reported		Balance Without Adoption
Assets - LHFI	$	80,118,328	$	80,113,022
Other assets	3,994,748		3,998,267
Total assets	129,227,891		129,226,104

Liabilities - Other liabilities	996,685		998,063
Total Liabilities	105,384,810		105,386,188

Stockholders' Equity - Retained earnings	3,685,111		3,681,946
Total Stockholders' Equity	23,843,081		23,839,916



	Three-Month Period Ended March 31, 2018
(in thousands)	As Reported		Balance Without Adoption
Non-interest income
Consumer and commercial fees	$	138,561	$	137,893
Miscellaneous income/(loss)	124,570		118,882
Total non-interest income	803,364		797,008
General and administrative expense
Technology, outside service, and marketing expense	152,282		150,111
Loan expense	96,814		99,193
Other administrative expenses	103,554		96,782
Total general and administrative expenses	1,405,662		1,399,098
Income before income tax provision	353,256		353,464
Income tax provision	95,321		95,394
Net income	$	257,935	$	258,070

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

•

ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as amended. This new guidance amends the presentation and accounting for certain financial instruments, including liabilities measured at fair value under the FVO and equity investments. The guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost. The Company adopted this standard on January 1, 2018, and it did not have a material impact on the Company's financial position or results of operations. As a result of the adoption of this standard, the Company reclassified approximately $10.0 million of equity securities from Investments AFS to Other Investments on January 1, 2018. Future changes in the fair value of the Company's equity securities will be recognized in the Condensed Consolidated Statements of Operations rather than Other comprehensive Income.

•

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This new guidance amends the hedge accounting model to enable entities to better portray their risk management activities in their financial statements. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line in which the earnings effect of the hedged item is reported. The new guidance is effective for public companies for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted this standard in the first quarter of 2018. It did not have a material impact on the opening balance of retained earnings for the cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness. Refer to Note 12 for further discussion of the Company's derivatives.

•

ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cut and Jobs Act of 2017 (the “TCJA"). As a result of adoption of this ASU in the first quarter of 2018, the Company reclassified $39.1 million from accumulated other comprehensive income with an offsetting credit to retained earnings.

Cumulative net impact to opening Retained earnings

As a result of the adoption of the new accounting standards outlined above, the Company recorded a cumulative net increase to opening Retained earnings of $42.0 million. Those impacts were attributed to the following ASUs adopted during the period:



	Impact to Retained earnings
	(in thousands)

Adoption of ASU 2014-09, Revenue Recognition	$	3,300
Adoption of ASU 2016-1, Financial Instruments	(418		)
Adoption of ASU 2018-02, Statement of Comprehensive Income	39,094
Cumulative-effect adjustment upon adoption of new accounting standards	$	41,976
Other adjustments at subsidiary	5,573
Net impact to opening Retained earnings	$	47,549

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


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


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


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


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


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


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


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


•	ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118

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

As required by the adoption of ASU 2016-18 and ASU 2014-09, the following additional accounting policy disclosures are required for the nature of cash restrictions, and revenue recognized from contracts with customers from disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2017:

Cash, Cash Equivalents, and Restricted Cash

Cash deposited to support securitization transactions, lockbox collections, and related required reserve accounts are recorded in the Company's Consolidated Balance Sheets as Restricted cash. Excess cash flows generated by Trusts are added to the restricted cash reserve account, creating additional over-collateralization until the contractual securitization requirement has been reached. Once the targeted reserve requirement is satisfied, additional excess cash flows generated by the Trusts are released to the Company as distributions from the Trusts. Lockbox collections are added to restricted cash and released when transferred to the appropriate warehouse line of credit or trust. The Company also maintains restricted cash primarily related to cash posted as collateral related to derivative agreements, cash restricted for investment purposes and cash advanced for loan purchases.

Revenue Recognized from Contracts with Customers

Depository services

Depository services are performed under an agreement with a customer, and those services include: personal deposit account opening and maintaining, checking service, online banking service, debit card services, etc. Depository service fees related to customer deposits can generally be distinguished between monthly service fees and transactional fees within the single performance obligation of providing depository account services. Monthly account service and maintenance fees are provided over a period of time (usually a month), and revenue is recognized as the Company performs the service (usually at the end of the month). The services for transactional fees are performed at a point in time and revenue is recognized when the transaction occurs.

Commissions and trailer fees

Commission fees are earned from the selling of annuity contracts to customers on behalf of insurance companies, acting as the broker for certain equity trading, and sales of interests in mutual funds. The Company elected the expected value method for estimating commission fees, due to the large number of customer contracts with similar characteristics. However, commissions and trailer fees are fully constrained as the Company cannot sufficiently estimate the consideration to which it could be entitled to earn. Commissions are generally associated with point-in-time transactions or agreements that are one year or less. The performance obligation is satisfied immediately and revenue is recognized as the Company performs the service.

Interchange income, net

The Company has entered into agreements with payment networks, in which the Company will issue the payment network's credit card as part of the Company's credit card portfolio. Each time a cardholder makes a purchase at a merchant and the transaction is processed, the Company receives an interchange fee in exchange for the authorization and settlement services provided to the payment networks.

The performance obligation for the Company is to provide authorization and settlement services to the payment network when the payment network submits a transaction for authorization. The Company considers the payment network to be the customer, and the Company is acting as a principal when performing the transaction authorization and settlement services. The performance obligation for authorization and settlement services is satisfied at point in time and revenue is recognized on the date when the Company authorizes and routes the payment to the merchant. The expenses paid to payment networks are accounted for as considerations payable to the customer and therefore reduce the transaction price. Therefore, interchange income is recorded net against the expenses paid to the payment network and the cost of rewards programs.

The agreements also contain immaterial fixed consideration related to upfront sign-on bonuses and program development bonuses, which are amortized over the remainder of the agreement's life on a straight-line basis.

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

Underwriting service fees

SIS, as a registered broker-dealer, performs underwriting services by raising investment capital from investors on behalf of corporations that are issuing securities. Underwriting services have one performance obligation, which is satisfied on the day SIS purchases the securities.

Underwriting services include multiple parties in delivering the performance obligation. The Company has evaluated whether it is the principal or agent when we provide underwriting services. The Company acts as the principal when performing underwriting services, and recognizes fees on a gross basis. Revenue is recorded as the difference between the price the Company pays the issuer of the securities and the public offering price, and expenses are recorded as the proportionate share of the underwriting costs incurred by SIS. The Company is the principal because we obtain control of the services provided by third-party vendors and combine them with other services as part of delivering on the underwriting service.

Asset and wealth management fees

Asset and wealth management fees includes fee income generated from discretionary investment management and non-discretionary investment advisory contracts with customers. Discretionary investment management fees are earned when the Company performs the administration and management of a customer’s account. The transaction price includes variable consideration, however there is uncertainty associated with accurately estimating revenue to be earned in the future. The Company earns and recognizes investment management fees on a quarterly basis based on the average assets under management.

Non-discretionary investment advisory fees are earned when the Company provides investment advisory services to customers, such as recommending the rebalancing or restructuring of the securities in the Customer’s account. The transaction price for investment advisory fees includes both fixed consideration, in the form of a minimum annual fee, and variable consideration dependent on the average assets under management, calculated similarly to investment management fees above. The Company earns investment advisory fees on a quarterly basis based on the minimum annual fee and the average assets under management.

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance, as amended, in this update supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases. The new guidance requires lessees to evaluate whether a lease is a finance lease using criteria similar to what lessees use today to determine whether they have a capital lease. Leases not classified as finance leases are classified as operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similarly to today’s guidance for operating leases. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance. 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 AFS debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment (“OTTI') model. The standard 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

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

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 addition to those described in detail above, the Company is 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 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging Issues Task Force)


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

•

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

Summary of Investment in Debt Securities - AFS and HTM

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities AFS at the dates indicated:



	March 31, 2018									December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
U.S. Treasury securities	$	1,388,611	$	4	$	(13,510	)	$	1,375,105	$	1,006,219	$	—	$	(8,107	)	$	998,112
Corporate debt securities	2,722		1		—			2,723		11,639		21		—			11,660
Asset-backed securities (“ABS”)	482,770		6,341		(1,879		)	487,232		501,575		6,901		(1,314		)	507,162
Equity securities ⁽¹⁾	—		—		—			—		11,428		—		(614		)	10,814
State and municipal securities	21		—		—			21		23		—		—			23
Mortgage-backed securities (“MBS”):
GNMA - Residential	3,999,258		5,022		(99,197		)	3,905,083		4,745,998		3,531		(62,524		)	4,687,005
GNMA - Commercial	895,577		82		(17,192		)	878,467		1,377,449		179		(19,917		)	1,357,711
FHLMC and FNMA - Residential	6,879,034		417		(228,635		)	6,650,816		6,958,433		1,093		(141,393		)	6,818,133
FHLMC and FNMA - Commercial	22,840		—		(693		)	22,147		23,003		—		(440		)	22,563
Total investments in debt securities AFS	$	13,670,833	$	11,867	$	(361,106	)	$	13,321,594	$	14,635,767	$	11,725	$	(234,309	)	$	14,413,183

(1) Reflects the reclassification of the Company's investments in equity securities to Other investments as a result of the adoption of ASU 2016-01 as of January 1, 2018.

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities HTM at the dates indicated:



	March 31, 2018									December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
MBS:
GNMA - Residential	$	1,947,672	$	—	$	(62,258	)	$	1,885,414	$	1,447,669	$	722	$	(26,150	)	$	1,422,241
GNMA - Commercial	929,685		—		(17,401		)	912,284		352,139		325		(767		)	351,697
Total investments in debt securities HTM	$	2,877,357	$	—	$	(79,659	)	$	2,797,698	$	1,799,808	$	1,047	$	(26,917	)	$	1,773,938

NOTE 3. INVESTMENT SECURITIES (continued)

The Company continuously evaluates its investment strategies in light of changes in the regulatory and market environments that could have an impact on capital and liquidity. Based on this evaluation, it is reasonably possible that the Company may elect to pursue other strategies relative to its investment securities portfolio. During the three-month period ended March 31, 2018, the Company transferred approximately $1.2 billion of MBS from AFS to HTM in conjunction with Santander's capital management strategy.

As of March 31, 2018 and December 31, 2017, the Company had investments in debt securities AFS with an estimated fair value of $6.1 billion and $5.9 billion, respectively, pledged as collateral, which was comprised of the following: $3.1 billion and $3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the Federal Reserve Bank (the "FRB"); $2.1 billion and $2.3 billion, respectively, were pledged to secure public fund deposits; $225.1 million and $243.8 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $347.4 million and $0.0 million, respectively, were pledged to deposits with clearing organizations; and $325.6 million and $387.9 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At March 31, 2018 and December 31, 2017, the Company had $44.9 million and $47.0 million, respectively, of accrued interest related to investment securities which is included in the Other assets line of the Company's Condensed Consolidated Balance Sheets.

Contractual Maturity of Debt Securities

Contractual maturities of the Company’s debt securities AFS at March 31, 2018 were as follows:



(in thousands)	Amortized Cost		Fair Value
Due within one year	$	540,050	$	539,712
Due after 1 year but within 5 years	1,214,394		1,207,322
Due after 5 years but within 10 years	169,152		165,500
Due after 10 years	11,747,237		11,409,060
Total	$	13,670,833	$	13,321,594

Contractual maturities of the Company’s debt securities HTM at March 31, 2018 were as follows:



(in thousands)	Amortized Cost		Fair Value
Due within one year	$	—	$	—
Due after 1 year but within 5 years	—		—
Due after 5 years but within 10 years	—		—
Due after 10 years	$	2,877,357	$	2,797,698
Total	$	2,877,357	$	2,797,698

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

NOTE 3. INVESTMENT SECURITIES (continued)

Gross Unrealized Loss and Fair Value of Debt Securities AFS and HTM

The following tables present the aggregate amount of unrealized losses as of March 31, 2018 and December 31, 2017 on securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:



	March 31, 2018										December 31, 2017
	Less than 12 months					12 months or longer					Less than 12 months					12 months or longer
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities	$	1,097,855	$	(8,900	)	$	247,265	$	(4,610	)	$	998,112	$	(8,107	)	$	—	$	—
Corporate debt securities	1,086		—			13		—			—		—			—		—
ABS	46,388		(260		)	92,232		(1,619		)	8,013		(125		)	103,559		(1,189		)
Equity securities⁽¹⁾	—		—			—		—			335		(2		)	10,398		(612		)
MBS:
GNMA - Residential	1,246,568		(28,253		)	1,807,860		(70,944		)	1,236,716		(8,600		)	2,583,955		(53,924		)
GNMA - Commercial	817,989		(16,664		)	34,670		(528		)	1,022,452		(11,492		)	251,209		(8,425		)
FHLMC and FNMA - Residential	3,703,742		(81,349		)	2,846,957		(147,286		)	3,429,678		(32,899		)	3,017,533		(108,494		)
FHLMC and FNMA - Commercial	6,772		(238		)	15,375		(455		)	6,948		(103		)	15,614		(337		)
Total investments in debt securities AFS	$	6,920,400	$	(135,664	)	$	5,044,372	$	(225,442	)	$	6,702,254	$	(61,328	)	$	5,982,268	$	(172,981	)

(1) Reflects the reclassification of the Company's investments in equity securities to Other investments as a result of the adoption of ASU 2016-01 as of January 1, 2018.

The following tables present the aggregate amount of unrealized losses as of March 31, 2018 and December 31, 2017 on debt 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:



	March 31, 2018										December 31, 2017
	Less than 12 months					12 months or longer					Less than 12 months					12 months or longer
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
MBS:
GNMA - Residential	$	642,688	$	(20,624	)	$	1,242,725	$	(41,634	)	$	434,322	$	(6,419	)	$	739,612	$	(19,731	)
GNMA - Commercial	624,936		(13,073		)	287,348		(4,328		)	118,951		(767		)	—		—
Total investments in debt securities HTM	$	1,267,624	$	(33,697	)	$	1,530,073	$	(45,962	)	$	553,273	$	(7,186	)	$	739,612	$	(19,731	)

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.

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 recorded no OTTI related to its investment securities for the three-month periods ended March 31, 2018 and 2017, respectively.

NOTE 3. INVESTMENT SECURITIES (continued)

Management has concluded that the unrealized losses on its debt securities for which it has not recognized OTTI (which were comprised of 531 individual securities at March 31, 2018) 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 Debt Securities

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



	Three-Month Period Ended March 31,
(in thousands)	2018			2017
Proceeds from the sales of debt securities AFS	$	39,446		$	—

Gross realized gains	$	—		$	—
Gross realized losses	(18		)	—
OTTI	—			—
Net realized gains/(losses) ⁽¹⁾	$	(18	)	$	—


(1)	Excludes the net realized gains/(losses) related to investments in debt securities held for trading purposes.

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

The Company recognized $18.0 thousand for the three-month period ended March 31, 2018 in net losses on the sale of AFS investment securities as a result of overall balance sheet and interest rate risk management. The net loss realized for the three-month period ended March 31, 2018 was primarily comprised of the sale of MBS, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a fair value of $319 thousand for a loss of $18 thousand.

There was no significant activity for the three-month period ended March 31, 2017.

Other Investments

Other Investments consisted of the following as of:



(in thousands)	March 31, 2018		December 31, 2017
FHLB of Pittsburgh and Federal Reserve Bank stock	$	500,833	$	516,693
Low Income Housing Tax Credit investments ("LIHTC")	96,899		88,170
Equity Securities not held for trading	10,927		—
CDs with a maturity greater than 90 days	153,358		54,000
Trading Securities	3,024		1
Total	$	765,041	$	658,864

Other investments primarily include the Company's investment in the stock of the Federal Home Loan Bank ("FHLB") of Pittsburgh and the FRB. 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 period ended March 31, 2018, the Company purchased $10.2 million of FHLB stock at par and redeemed $25.9 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the three-month period ended March 31, 2018, the Company did not purchase any FRB stock.

Other investments also includes low-income housing tax credit (“LIHTC") investments, time deposits with a maturity of greater than 90 days held at non-affiliated financial institutions, trading securities, and $10.9 million of equity securities measured at fair value with changes in fair value

NOTE 3. INVESTMENT SECURITIES (continued)

recognized in net income. These consist primarily of Community Reinvestment Act (“CRA") mutual fund investments reclassified as a result of the first quarter 2018 adoption of ASU 2016-01, discussed further in Note 1. These investments were included in Investments AFS at December 31, 2017.

With the exception of equity and trading securities which are measured at fair value, the Company evaluates these other investments for impairment based on the ultimate recoverability of the carrying value, rather than by recognizing temporary declines in value.

Realized and Unrealized Gains (Losses) on Equity Securities



	Three-Month Period Ended March 31,
(in thousands)	2018		2017
Net gains/(losses) on equity securities¹	$	47	$	(18	)
Less: net gains/(losses) recognized during the period on equity securities sold during the period¹	—		—
Unrealized gains/(losses) recognized during the reporting period on equity securities still held at the reporting period date¹	$	47	$	(18	)


(1)	Changes in the fair value of equity securities were not recognized in earnings prior to the adoption of ASU 2016-01.

The Company held an immaterial amount of equity securities without readily determinable fair values at the reporting date.

NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Overall

The Company's loans are reported at their outstanding principal balances net of any 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 $47.3 billion at March 31, 2018 and $50.8 billion at December 31, 2017.

Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at March 31, 2018 was $2.0 billion, compared to $2.5 billion at December 31, 2017. LHFS in the residential mortgage portfolio are reported at either estimated fair value (if the fair value option (the "FVO") is elected) or the lower of cost or fair value. For a discussion on the valuation of LHFS at fair value, see Note 14 to the Condensed Consolidated Financial Statements. Loans under SC’s personal lending platform have been classified as HFS and adjustments to lower of cost or market are recorded through Miscellaneous Income (Expense), net on the Condensed Consolidated Statements of Operations. As of March 31, 2018, the carrying value of the personal unsecured HFS portfolio was $1.0 billion.

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. Loan origination costs and fees and premiums and discounts on RICs are deferred and recognized in interest income over their estimated lives using estimated prepayment speeds, which are updated on a monthly basis. At March 31, 2018 and December 31, 2017, accrued interest receivable on the Company's loans was $450.0 million and $515.9 million, respectively.

During the quarter ended March 31, 2018, the Company sold substantially all of its mortgage warehouse facilities, which had a book value of $499.2 million for net proceeds of $515.8 million. The $16.7 million gain on sale is recognized within Miscellaneous income, net on the Condensed Consolidated Statements of Operations.

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 HFI by portfolio and by rate type:



	March 31, 2018				December 31, 2017
(dollars in thousands)	Amount		Percent		Amount		Percent
Commercial LHFI:
Commercial real estate ("CRE") loans	$	9,072,529	11.3	%	$	9,279,225	11.5	%
Commercial and industrial loans	13,712,573		17.1	%	14,438,311		17.9	%
Multifamily loans	8,081,924		10.1	%	8,274,435		10.1	%
Other commercial⁽²⁾	7,337,433		9.2	%	7,174,739		8.9	%
Total commercial LHFI	38,204,459		47.7	%	39,166,710		48.4	%
Consumer loans secured by real estate:
Residential mortgages	9,198,059		11.5	%	8,846,765		11.0	%
Home equity loans and lines of credit	5,788,682		7.2	%	5,907,733		7.3	%
Total consumer loans secured by real estate	14,986,741		18.7	%	14,754,498		18.3	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	23,583,727		29.4	%	23,081,424		28.6	%
RICs and auto loans - purchased	1,515,086		1.9	%	1,834,868		2.3	%
Personal unsecured loans	1,261,238		1.6	%	1,285,677		1.6	%
Other consumer⁽³⁾	567,077		0.7	%	617,675		0.8	%
Total consumer loans	41,913,869		52.3	%	41,574,142		51.6	%
Total LHFI⁽¹⁾	$	80,118,328	100.0	%	$	80,740,852	100.0	%
Total LHFI:
Fixed rate	$	51,066,020	63.7	%	$	50,653,790	62.7	%
Variable rate	29,052,308		36.3	%	30,087,062		37.3	%
Total LHFI⁽¹⁾	$	80,118,328	100.0	%	$	80,740,852	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 $1.4 billion and $1.3 billion as of March 31, 2018 and December 31, 2017, 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

Generally accepted accounting principles (“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 similar 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 CRE line of business includes commercial and industrial owner-occupied real estate and specialized lending for investment real estate. The Company's allowance methodology further classifies loans in this line of business into construction and non-construction loans; however, the methodology for development and determination of the allowance is generally consistent between the two portfolios. "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.

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. "RICs 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.

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

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.

The RIC and auto loan portfolio is comprised of: (1) RICs originated by SC prior to the first quarter 2014 consolidation and change in control 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:



(in thousands)	March 31, 2018			December 31, 2017
RICs - Purchased HFI:
Unpaid principal balance ("UPB") ⁽¹⁾	$	1,592,887		$	1,929,548
UPB - FVO ⁽²⁾	19,773			24,926
Total UPB	1,612,660			1,954,474
Purchase marks ⁽³⁾	(97,574		)	(119,606		)
Total RICs - Purchased HFI	1,515,086			1,834,868

RICs - Originated HFI:
UPB ⁽¹⁾	23,817,893			23,373,202
Net discount	(272,727		)	(309,920		)
Total RICs - Originated	23,545,166			23,063,282
SBNA auto loans	38,561			18,142
Total RICs - originated post Change in Control	23,583,727			23,081,424
Total RICs and auto loans HFI	$	25,098,813		$	24,916,292


(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 $4.4 million and $5.5 million related to purchase loan portfolios on which we elected to apply the FVO at March 31, 2018 and December 31, 2017, respectively.

During the three-month periods ended March 31, 2018 and 2017, the Company originated $2.0 billion and $1.6 billion, respectively, in Chrysler Capital loans, which represented 46% and 42%, respectively, of the Company's total RIC originations. As of March 31, 2018 and December 31, 2017, the Company's auto RIC portfolio consisted of $7.0 billion and $8.2 billion, respectively, of Chrysler Capital loans, which represented 31% and 37%, respectively, of the Company's auto RIC portfolio.

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 period ended March 31, 2018 and 2017 was as follows:



	Three-Month Period Ended March 31, 2018
(in thousands)	Commercial			Consumer			Unallocated		Total
Allowance for loan and lease losses ("ALLL"), beginning of period	$	443,796		$	3,420,756		$	47,023	$	3,911,575
Provision for loan and lease losses	41,232			480,548			—		521,780
Charge-offs	(32,960		)	(1,218,936		)	—		(1,251,896		)
Recoveries	10,006			661,744			—		671,750
Charge-offs, net of recoveries	(22,954		)	(557,192		)	—		(580,146		)
ALLL, end of period	$	462,074		$	3,344,112		$	47,023	$	3,853,209
Reserve for unfunded lending commitments, beginning of period	$	108,805		$	306		$	—	$	109,111
(Release of)/Provision for reserve for unfunded lending commitments	(19,263		)	17			—		(19,246		)
Reserve for unfunded lending commitments, end of period	89,542			323			—		89,865
Total ACL, end of period	$	551,616		$	3,344,435		$	47,023	$	3,943,074
Ending balance, individually evaluated for impairment⁽¹⁾	$	94,993		$	1,628,930		$	—	$	1,723,923
Ending balance, collectively evaluated for impairment	367,081			1,715,182			47,023		2,129,286

Financing receivables:
Ending balance	$	38,400,180		$	43,678,843		$	—	$	82,079,023
Ending balance, evaluated under the FVO or lower of cost or fair value	195,721			1,798,347			—		1,994,068
Ending balance, individually evaluated for impairment⁽¹⁾	568,557			6,315,802			—		6,884,359
Ending balance, collectively evaluated for impairment	37,635,902			35,564,694			—		73,200,596


(1)	Consists of loans in troubled debt restructuring ("TDR") status.



	Three-Month Period Ended March 31, 2017
(in thousands)	Commercial			Consumer			Unallocated		Total
ALLL, beginning of period	$	449,835		$	3,317,606		$	47,023	$	3,814,464
Provision for loan and lease losses	18,777			718,558			—		737,335
Charge-offs	(26,173		)	(1,237,280		)	—		(1,263,453		)
Recoveries	10,580			623,937			—		634,517
Charge-offs, net of recoveries	(15,593		)	(613,343		)	—		(628,936		)
ALLL, end of period	$	453,019		$	3,422,821		$	47,023	$	3,922,863

Reserve for unfunded lending commitments, beginning of period	$	121,613		$	806		$	—	$	122,419
(Release of) unfunded lending commitments	(1,860		)	(30		)	—		(1,890		)
Loss on unfunded lending commitments	(133		)	—			—		(133		)
Reserve for unfunded lending commitments, end of period	119,620			776			—		120,396
Total ACL, end of period	$	572,639		$	3,423,597		$	47,023	$	4,043,259
Ending balance, individually evaluated for impairment⁽¹⁾	$	99,914		$	1,518,545		$	—	$	1,618,459
Ending balance, collectively evaluated for impairment	353,105			1,904,276			47,023		2,304,404

Financing receivables:
Ending balance	$	42,415,806		$	43,402,053		$	—	$	85,817,859
Ending balance, evaluated under the FVO or lower of cost or fair value⁽¹⁾	103,834			2,008,152			—		2,111,986
Ending balance, individually evaluated for impairment⁽¹⁾	675,116			6,040,694			—		6,715,810
Ending balance, collectively evaluated for impairment	41,636,856			35,353,207			—		76,990,063


(1)	Consists of loans in TDR status.

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
	March 31, 2018
(in thousands)	Purchased			Originated			Total
ALLL, beginning of period	$	384,167		$	2,779,044		$	3,163,211
(Release of) / Provision for loan and lease losses	(15,830		)	487,159			471,329
Charge-offs	(105,510		)	(1,078,515		)	(1,184,025		)
Recoveries	59,899			594,952			654,851
Charge-offs, net of recoveries	(45,611		)	(483,563		)	(529,174		)
ALLL, end of period	$	322,726		$	2,782,640		$	3,105,366



	Three-Month Period Ended
	March 31, 2017
(in thousands)	Purchased			Originated			Total
ALLL, beginning of period	$	559,092		$	2,538,127		$	3,097,219
Provision for loan and lease losses	26,125			660,524			686,649
Charge-offs	(188,686		)	(1,008,053		)	(1,196,739		)
Recoveries	98,690			517,286			615,976
Charge-offs, net of recoveries	(89,996		)	(490,767		)	(580,763		)
ALLL, end of period	$	495,221		$	2,707,884		$	3,203,105

Refer to Note 16 for discussion of contingencies and possible losses related to the impact of hurricane activity in regions where the Company has lending activities.

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:



(in thousands)	March 31, 2018		December 31, 2017
Non-accrual loans:
Commercial:
CRE	$	132,941	$	139,236
Commercial and industrial	203,738		230,481
Multifamily	10,569		11,348
Other commercial	79,474		83,468
Total commercial loans	426,722		464,533
Consumer:
Residential mortgages	257,995		265,436
Home equity loans and lines of credit	131,036		134,162
RICs and auto loans - originated	1,644,605		1,816,226
RICs - purchased	207,328		256,617
Personal unsecured loans	2,820		2,366
Other consumer	11,118		10,657
Total consumer loans	2,254,902		2,485,464
Total non-accrual loans	2,681,624		2,949,997

Other real estate owned ("OREO")	126,714		130,777
Repossessed vehicles	171,359		210,692
Foreclosed and other repossessed assets	1,324		2,190
Total OREO and other repossessed assets	299,397		343,659
Total non-performing assets	$	2,981,021	$	3,293,656

Age Analysis of Past Due Loans

The servicing practices for RICs originated after January 1, 2017 changed such that there is an increase in the minimum payment requirements. While this change does impact the measurement of customer delinquencies, we concluded that it does not have a significant impact on the amount or timing of the recognition of credit losses and allowance for loan losses. 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 through which the receivable was originated. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time.

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

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



	As of:
		March 31, 2018
(in thousands)		30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Financing Receivables⁽¹⁾		Recorded Investment > 90 Days and Accruing
Commercial:
CRE		$	33,982	$	74,069	$	108,051	$	8,964,478	$	9,072,529	$	—
Commercial and industrial ⁽¹⁾		90,510		82,703		173,213		13,735,081		13,908,294		—
Multifamily		13,443		3,003		16,446		8,065,478		8,081,924		—
Other commercial		48,961		3,180		52,141		7,285,292		7,337,433		—
Consumer:
Residential mortgages		189,872		191,010		380,882		8,994,194		9,375,076		15
Home equity loans and lines of credit		47,614		87,221		134,835		5,653,847		5,788,682		—
RICs and auto loans - originated		2,634,364		228,811		2,863,175		21,340,720		24,203,895		—
RICs and auto loans - purchased		330,226		24,139		354,365		1,160,721		1,515,086		—
Personal unsecured loans		99,826		90,329		190,155		2,038,872		2,229,027		81,440
Other consumer		20,501		13,701		34,202		532,875		567,077		—
Total		$	3,509,299	$	798,166	$	4,307,465	$	77,771,558	$	82,079,023	$	81,455


(1)	Commercial and industrial loans includes $195.7 million of LHFS at March 31, 2018.


(2)	Residential mortgages includes $177.0 million of LHFS at March 31, 2018.


(3)	RICs and auto loans includes $620.2 million of LHFS at March 31, 2018.


(4)	Personal unsecured loans includes $967.8 million of LHFS at March 31, 2018.



	As of
		December 31, 2017
(in thousands)		30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Financing Receivable⁽¹⁾		Recorded Investment > 90 Days and Accruing
Commercial:
CRE		$	25,174	$	100,524	$	125,698	$	9,153,527	$	9,279,225	$	—
Commercial and industrial		49,584		75,924		125,508		14,461,981		14,587,489		—
Multifamily		3,562		2,990		6,552		8,267,883		8,274,435		—
Other commercial		34,021		3,359		37,380		7,137,359		7,174,739		—
Consumer:
Residential mortgages		217,558		210,777		428,335		8,628,600		9,056,935		—
Home equity loans and lines of credit		50,919		91,975		142,894		5,764,839		5,907,733		—
RICs and auto loans - originated		3,405,721		327,045		3,732,766		20,449,706		24,182,472		—
RICs and auto loans - purchased		452,235		40,516		492,751		1,342,117		1,834,868		—
Personal unsecured loans		85,394		105,054		190,448		2,157,319		2,347,767		96,461
Other consumer		24,879		14,220		39,099		578,576		617,675		—
Total		$	4,349,047	$	972,384	$	5,321,431	$	77,941,907	$	83,263,338	$	96,461


(1)	Commercial and industrial loans included$149.2 million of LHFS at December 31, 2017.


(2)	Residential mortgages included $210.2 million of LHFS at December 31, 2017,


(3)	RICs and auto loans included $1.1 billion of LHFS at December 31, 2017.


(4)	Personal unsecured loans included $1.1 billion of LHFS at December 31, 2017.

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:



	March 31, 2018
(in thousands)	Recorded Investment⁽¹⁾		UPB		Related Specific Reserves		Average Recorded Investment
With no related allowance recorded:
Commercial:
CRE	$	125,669	$	151,164	$	—	$	126,039
Commercial and industrial	51,175		53,140		—		66,858
Multifamily	11,929		11,929		—		10,908
Other commercial	1,877		1,877		—		1,322
Consumer:
Residential mortgages	147,333		198,200		—		127,327
Home equity loans and lines of credit	53,101		55,368		—		52,749
RICs and auto loans - originated	11		11		—		6
RICs and auto loans - purchased	13,252		17,010		—		14,722
Personal unsecured loans⁽²⁾	31,972		31,972		—		31,482
Other consumer	8,559		12,183		—		9,058
With an allowance recorded:
Commercial:
CRE	99,787		112,480		15,976		98,734
Commercial and industrial	184,297		185,115		55,322		180,533
Multifamily	4,791		4,791		19		5,496
Other commercial	73,696		73,696		23,676		75,704
Consumer:
Residential mortgages	279,472		319,018		38,586		300,782
Home equity loans and lines of credit	64,004		76,156		5,078		64,416
RICs and auto loans - originated	4,736,587		4,787,816		1,281,642		4,762,443
RICs and auto loans - purchased	1,003,764		1,134,415		294,669		1,085,120
Personal unsecured loans	16,590		16,842		6,934		16,534
Other consumer	10,792		14,446		2,021		11,192
Total:
Commercial	$	553,221	$	594,192	$	94,993	$	565,594
Consumer	6,365,437		6,663,437		1,628,930		6,475,831
Total	$	6,918,658	$	7,257,629	$	1,723,923	$	7,041,425


(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.

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

The Company recognized interest income, not including the impact of purchase accounting adjustments, of $261.2 million for the three-month period ended March 31, 2018 on approximately $5.8 billion of TDRs that were in performing status as of March 31, 2018.



	December 31, 2017
(in thousands)	Recorded Investment⁽¹⁾		UPB		Related Specific Reserves		Average Recorded Investment
With no related allowance recorded:
Commercial:
CRE	$	126,406	$	174,842	$	—	$	139,063
Commercial and industrial	82,541		96,324		—		75,338
Multifamily	9,887		10,838		—		10,129
Other commercial	767		911		—		903
Consumer:
Residential mortgages	107,320		128,458		—		141,195
Home equity loans and lines of credit	52,397		54,421		—		50,635
RICs and auto loans - purchased	16,192		20,783		—		25,283
Personal unsecured loans⁽²⁾	30,992		30,992		—		28,500
Other consumer	9,557		13,055		—		14,446
With an allowance recorded:
Commercial:
CRE	97,680		117,730		18,523		118,492
Commercial and industrial	176,769		200,382		59,696		196,674
Multifamily	6,201		6,201		313		4,566
Other commercial	77,712		77,772		23,794		42,465
Consumer:
Residential mortgages	322,092		392,833		40,963		303,361
Home equity loans and lines of credit	64,827		77,435		4,770		57,345
RICs and auto loans - originated	4,788,299		4,847,929		1,350,022		4,029,808
RICs and auto loans - purchased	1,166,476		1,318,306		347,663		1,511,212
Personal unsecured loans	16,477		16,661		6,259		16,668
Other consumer	11,592		15,290		2,151		12,343
Total:
Commercial	$	577,963	$	685,000	$	102,326	$	587,630
Consumer	6,586,221		6,916,163		1,751,828		6,190,796
Total	$	7,164,184	$	7,601,163	$	1,854,154	$	6,778,426


(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, not including the impact of purchase accounting adjustments, of $795.4 million for the year ended December 31, 2017 on approximately $5.8 billion of TDRs that were in performing status as of December 31, 2017.

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.

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

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:



March 31, 2018	CRE		Commercial and industrial		Multifamily		Remaining commercial		Total⁽¹⁾
			(in thousands)
Rating:
Pass	$	8,120,502	$	12,576,220	$	7,900,191	$	7,212,830	$	35,809,743
Special mention	617,232		831,097		135,106		43,314		1,626,749
Substandard	302,262		417,553		46,627		19,117		785,559
Doubtful	32,533		83,424		—		62,172		178,129
Total commercial loans	$	9,072,529	$	13,908,294	$	8,081,924	$	7,337,433	$	38,400,180


(1)	Financing receivables include LHFS.



December 31, 2017	CRE		Commercial and industrial		Multifamily		Remaining commercial		Total⁽¹⁾
			(in thousands)
Rating:
Pass	$	8,281,626	$	13,176,248	$	8,123,727	$	7,059,627	$	36,641,228
Special mention	645,835		941,683		105,225		29,657		1,722,400
Substandard	317,510		398,325		45,483		21,747		783,065
Doubtful	34,254		71,233		—		63,708		169,195
Total commercial loans	$	9,279,225	$	14,587,489	$	8,274,435	$	7,174,739	$	39,315,888


(1)	Financing receivables include LHFS.

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:



Credit Score Range⁽²⁾	March 31, 2018				December 31, 2017
(dollars in thousands)	RICs and auto loans⁽³⁾		Percent		RICs and auto loans⁽³⁾		Percent
No FICO^®(1)	$	4,016,803	15.6	%	$	4,530,238	17.4	%
<600	13,532,536		52.7	%	13,395,203		51.4	%
600-639	4,410,604		17.1	%	4,332,278		16.7	%
>=640	3,759,038		14.6	%	3,759,621		14.5	%
Total	$	25,718,981	100.0	%	$	26,017,340	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 $620.2 million and $1.1 billion of LHFS at March 31, 2018 and December 31, 2017, respectively, that do not have an allowance.

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

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⁾
March 31, 2018	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⁾	$	266,671	$	6,616	$	1,208	$	—	$	—	$	—	$	—	$	274,495
<600	13		223,009		54,447		33,835		21,303		2,609		1,422		336,638
600-639	44		155,786		41,930		34,643		32,438		1,229		6,283		272,353
640-679	34		319,185		97,132		89,991		90,856		2,446		2,502		602,146
680-719	95		579,125		254,807		138,197		163,235		3,436		9,669		1,148,564
720-759	173		1,004,260		573,335		188,949		195,187		4,819		7,740		1,974,463
>=760	563		3,148,412		1,106,980		290,938		200,107		8,371		11,046		4,766,417
Grand Total	$	267,593	$	5,436,393	$	2,129,839	$	776,553	$	703,126	$	22,910	$	38,662	$	9,375,076

(1) Includes LHFS.

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

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



	Home Equity Loans and Lines of Credit⁽²⁾
March 31, 2018	N/A⁽¹⁾		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A⁽¹⁾	$	190,747	$	1,393	$	478	$	—	$	—	$	192,618
<600	7,436		195,852		69,172		19,838		7,444		299,742
600-639	4,896		150,132		56,266		7,613		6,090		224,997
640-679	4,793		279,728		123,431		17,573		10,114		435,639
680-719	6,921		506,113		245,154		21,419		16,864		796,471
720-759	7,073		719,337		325,201		31,454		14,985		1,098,050
>=760	14,169		1,881,952		746,823		64,040		34,181		2,741,165
Grand Total	$	236,035	$	3,734,507	$	1,566,525	$	161,937	$	89,678	$	5,788,682


(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.

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



	Residential Mortgages⁽¹⁾⁽³⁾
December 31, 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⁾	$	372,116	$	6,759	$	1,214	$	—	$	—	$	—	$	—	$	380,089
<600	21		220,737		55,108		35,617		23,834		2,505		6,020		343,842
600-639	45		155,920		42,420		35,009		34,331		2,696		6,259		276,680
640-679	37		320,248		94,601		90,708		86,740		3,011		2,641		597,986
680-719	98		554,058		236,602		136,980		147,754		3,955		10,317		1,089,764
720-759	92		952,532		480,900		178,876		183,527		4,760		8,600		1,809,287
>=760	588		3,019,514		1,066,919		263,541		187,713		8,418		12,594		4,559,287
Grand Total	$	372,997	$	5,229,768	$	1,977,764	$	740,731	$	663,899	$	25,345	$	46,431	$	9,056,935


(1)	Includes LHFS.


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


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



	Home Equity Loans and Lines of Credit⁽²⁾
December 31, 2017	N/A⁽¹⁾		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A⁽¹⁾	$	154,690	$	536	$	238	$	—	$	—	$	155,464
<600	8,064		190,657		64,554		16,634		22,954		302,863
600-639	6,276		158,461		61,250		9,236		9,102		244,325
640-679	6,745		297,003		127,347		19,465		14,058		464,618
680-719	8,875		500,234		258,284		24,675		20,261		812,329
720-759	8,587		724,831		332,508		30,526		19,119		1,115,571
>=760	17,499		1,917,373		768,905		73,573		35,213		2,812,563
Grand Total	$	210,736	$	3,789,095	$	1,613,086	$	174,109	$	120,707	$	5,907,733


(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.

TDR Loans

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



(in thousands)	March 31, 2018		December 31, 2017
Performing	$	5,811,401	$	5,824,304
Non-performing	785,958		982,868
Total	$	6,597,359	$	6,807,172

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 and interest rate reductions. 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.

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

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 the fair market value of the collateral, less costs to sell and classified as non-accrual/non-performing loans (“NPLs") for the remaining life of the loan.

TDR Impact to ALLL

The ALLL is established to recognize losses inherent in funded loans intended to be HFI 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.

RIC TDRs that subsequently default continue to have impairment measured based on the difference between the recorded investment of the RIC and the present value of expected cash flows. For the Company's other consumer TDR portfolios, impairment on subsequent defaults is generally measured 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.

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 period ended March 31, 2018 and 2017, respectively:



	Three-Month Period Ended March 31, 2018
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Principal Forbearance			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
CRE	27	$	34,507	$	(11	)	$	(30	)	$	(1,101	)	$	33,365
Commercial and industrial	80	3,725		(4		)	—			(131		)	3,590
Consumer:
Residential mortgages⁽³⁾	61	9,927		—			—			(720		)	9,207
Home equity loans and lines of credit	94	6,104		—			—			(232		)	5,872
RICs and auto loans - originated	32,787	562,736		(1,175		)	—			(73		)	561,488
RICs - purchased	1,895	14,217		(316		)	—			(2		)	13,899
Personal unsecured loans	4,833	7,860		—			—			(98		)	7,762
Other consumer	13	136		(1		)	—			(4		)	131
Total	39,790	$	639,212	$	(1,507	)	$	(30	)	$	(2,361	)	$	635,314

(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.



	Three-Month Period Ended March 31, 2017
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Principal Forbearance		Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
CRE	24	$	30,001	$	(2	)	$	1	$	340		$	30,340
Commercial and industrial	242	8,034		(4		)	—		—			8,030
Consumer:
Residential mortgages⁽³⁾	89	15,993		—			—		(183		)	15,810
Home equity loans and lines of credit	19	1,432		—			—		121			1,553
RICs and auto loans - originated	50,910	906,599		(934		)	—		(107		)	905,558
RICs - purchased	55	289		(5		)	—		(2		)	282
Personal unsecured loans	17,757	24,855		—			—		(109		)	24,746
Other consumer	59	2,118		—			—		(1		)	2,117
Total	69,155	$	989,321	$	(945	)	$	1	$	59		$	988,436

(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.

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 periods ended March 31, 2018 and March 31, 2017, respectively.



	Three-Month Period Ended March 31,
	2018			2017
	Number of Contracts	Recorded Investment⁽¹⁾		Number of Contracts	Recorded Investment⁽¹⁾
	(dollars in thousands)
Commercial
CRE	2	$	284	35	$	7,721
Commercial and industrial	52	1,520		66	2,887
Consumer:
Residential mortgages	64	8,868		29	4,161
Home equity loans and lines of credit	7	551		2	173
RICs and auto loans	12,022	201,669		12,281	214,002
Personal Unsecured loans	2,324	3,243		874	1,707
Other consumer	1	10		9	105
Total	14,472	$	216,145	13,296	$	230,756


(1)	The recorded investment represents the period-end balance at March 31, 2018 and 2017. Does not include Chapter 7 bankruptcy TDRs.

NOTE 5. OPERATING LEASE ASSETS, NET

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

Operating lease assets, net consisted of the following as of March 31, 2018 and December 31, 2017:



(in thousands)	March 31, 2018			December 31, 2017
Leased vehicles	$	14,777,384		$	14,751,568
Origination fees and other costs	36,563			27,246
Manufacturer subvention payments	(1,077,250		)	(1,047,113		)
Leased vehicles, gross	13,736,697			13,731,701
Less: accumulated depreciation	(3,075,176		)	(3,333,125		)
Leased vehicles, net	10,661,521			10,398,576

Commercial equipment vehicles and aircraft, gross	131,316			93,981
Less: accumulated depreciation	(21,941		)	(18,249		)
Commercial equipment vehicles and aircraft, net	109,375			75,732

Total operating lease assets, net	$	10,770,896		$	10,474,308

The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of March 31, 2018 (in thousands):



2018	$	1,393,256
2019	1,326,920
2020	647,034
2021	59,511
2022	6,754
Thereafter	16,370
Total	$	3,449,845

NOTE 5. OPERATING LEASE ASSETS, NET (continued)

Lease income was $540.9 million and $496.0 million for the three-month periods ended March 31, 2018 and 2017, respectively.

During the three-month periods ended March 31, 2018 and 2017, the Company recognized $53.2 million and $22.7 million, respectively, of net gains on the sale of operating lease assets that had been returned to the Company at the end of the lease term. These amounts are recorded within Miscellaneous income, net in the Company's Condensed Consolidated Statements of Operations.

Lease expense was $424.3 million and $358.8 million for the three-month periods ended March 31, 2018 and 2017, respectively.

NOTE 6. VIEs

The Company transfers RICs and vehicle leases 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 Financial Statements.

For further description of the Company’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Note 7 of its Annual Report on Form 10-K for 2017.

On-balance sheet VIEs

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



(in thousands)	March 31, 2018		December 31, 2017
Assets
Restricted cash	$	2,380,619	$	1,995,557
Loans⁽¹⁾⁽²⁾	22,121,392		22,712,864
Operating lease assets, net	10,612,824		10,160,327
Various other assets	810,497		733,123
Total Assets	$	35,925,332	$	35,601,871
Liabilities
Notes payable⁽²⁾	$	28,634,362	$	28,469,999
Various other liabilities	193,133		197,969
Total Liabilities	$	28,827,495	$	28,667,968

(1) Includes $453.0 million and $1.1 billion of RICs HFS at March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, the Company was servicing $25.4 billion and $26.1 billion, respectively, of RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.

NOTE 6. VIEs (continued)

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



	Three-Month Period Ended March 31,
(in thousands)	2018		2017
Assets securitized	$	7,240,944	$	7,646,625

Net proceeds from new securitizations ⁽¹⁾	$	3,476,322	$	5,576,801
Net proceeds from sale of retained bonds	211,610		115,970
Cash received for servicing fees ⁽²⁾	215,790		208,923
Net distributions from Trusts ⁽²⁾	545,152		678,229
Total cash received from Trusts	$	4,448,874	$	6,579,923

(1) Includes additional advances on existing securitizations.

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

Off-balance sheet VIEs

During the three-month periods ended March 31, 2018 and 2017, the Company sold $1.5 billion and $700.0 million of gross RICs to VIEs in off-balance sheet securitizations for a loss of $16.9 million and $2.7 million, respectively. The transactions were executed under securitization platforms with Santander. Santander holds eligible vertical interests in notes and certificates of not less than 5% to comply with the DFA's risk retention rules.

As of March 31, 2018 and December 31, 2017, the Company was servicing $4.4 billion and $3.4 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:



(in thousands)	March 31, 2018		December 31, 2017
SPAIN	$	3,176,238	$	2,024,016
Total serviced for related parties	3,176,238		2,024,016

Chrysler Capital securitizations	1,182,457		1,404,232
Total serviced for third parties	1,182,457		1,404,232
Total serviced for other portfolio	$	4,358,695	$	3,428,248

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 March 31,
(in thousands)	2018		2017
Assets securitized ⁽¹⁾	$	1,475,253	$	700,022

Net proceeds from new securitizations	$	1,474,820	$	702,319
Cash received for servicing fees	8,078		1,398
Total cash received from Trusts	$	1,482,898	$	703,717

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

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presents the Company's goodwill by its reporting units at March 31, 2018:



(in thousands)	Consumer and Business Banking		Commercial Banking		GCB		SC		Total
Goodwill at March 31, 2018	$	1,880,304	$	1,412,995	$	131,130	$	1,019,960	$	4,444,389

During the first quarter of 2018, the reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. Refer to Note 18 for further discussion on the change in reportable segments. There were no additions or removals of underlying lines of business in connection with this reporting change. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million, for Commercial Banking and CRE, respectively, have been combined. There were no additions or impairments of goodwill for the three-month period ended March 31, 2018.

There were no additions, impairments, or re-allocations of goodwill for the three-month period ended March 31, 2017.

The Company conducted its last annual goodwill impairment tests as of October 1, 2017 using generally accepted valuation methods. After conducting an analysis of the fair value of each reporting unit as of October 1, 2017, the Company determined that the full amount of goodwill attributed to Santander BanCorp of $10.5 million was impaired and, as a result, it was written-off, primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effects of Hurricane Maria. No impairments of goodwill attributed to other reporting units were identified.

Other Intangible Assets

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



	March 31, 2018					December 31, 2017
(in thousands)	Net Carrying Amount		Accumulated Amortization			Net Carrying Amount		Accumulated Amortization
Intangibles subject to amortization:
Dealer networks	$	416,607	$	(163,393	)	$	426,411	$	(153,589	)
Chrysler relationship	76,250		(62,500		)	80,000		(58,750		)
Trade name	15,600		(2,400		)	15,900		(2,100		)
Other intangibles	12,011		(57,311		)	13,442		(56,021		)
Total intangibles subject to amortization	$	520,468	$	(285,604	)	$	535,753	$	(270,460	)

At March 31, 2018 and December 31, 2017, the Company did not have any intangibles, other than goodwill, that were not subject to amortization.

Amortization expense on intangible assets was $15.3 million and $15.5 million for the three-month periods ended March 31, 2018 and March 31, 2017, respectively.

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)
2018	$	60,644	$	15,288	$	45,356
2019	58,975		—		58,975
2020	58,642		—		58,642
2021	39,889		—		39,889
2022	39,889		—		39,889
Thereafter	277,717		—		277,717

NOTE 8. OTHER ASSETS

The following is a detail of items that comprise other assets at March 31, 2018 and December 31, 2017:



(in thousands)	March 31, 2018		December 31, 2017
Income tax receivables	$	293,072	$	292,220
Derivative assets at fair value	581,076		448,977
Other repossessed assets	172,683		212,882
MSRs	163,148		149,197
Prepaid expenses	178,920		172,547
OREO	126,714		130,777
Deferred tax asset, net	799,423		771,652
Accrued interest receivable	496,144		563,607
Equity method investments	198,923		194,434
Miscellaneous assets and receivables	984,645		696,134
Total other assets	$	3,994,748	$	3,632,427

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 12 to these Condensed Consolidated Financial Statements for the detail of these amounts.

MSRs

The Company maintains an MSR asset for sold residential real estate loans serviced for others. At March 31, 2018 and December 31, 2017, the balance of these loans serviced for others accounted for at fair value was $14.8 billion and $14.9 billion, respectively. The Company accounts for a majority of its residential MSRs using the FVO. Changes in fair value are recorded through the Miscellaneous Income, net on the Condensed Consolidated Statements of Operations. The fair value of the MSRs at March 31, 2018 and December 31, 2017 were $160.1 million and $146.0 million, respectively. See further discussion on the valuation of the MSRs in Note 14. 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 12 to these Condensed Consolidated Financial Statements. The remainder of MSRs not accounted for using the FVO are accounted for at lower of cost or market.

For the three-month period ended March 31, 2018 and March 31, 2017, the Company recorded net changes in the fair value of MSRs due to valuation totaling $15.0 million and $1.5 million, respectively.

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
(in thousands)	March 31, 2018			March 31, 2017
Fair value at beginning of period⁽¹⁾	$	145,993		$	146,589
Mortgage servicing assets recognized	2,755			5,730
Principal reductions	(3,661		)	(4,321		)
Change in fair value due to valuation assumptions	15,043			1,457
Fair value at end of period⁽¹⁾	$	160,130		$	149,455


(1)	The Company had total MSRs of $163.1 million and $149.2 million as of March 31, 2018 and December 31, 2017, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or market and are not presented within this table.

NOTE 8. OTHER ASSETS (continued)

Fee income and gain on sale of mortgage loans

Included in Miscellaneous Income, net on the Condensed Consolidated Statements of Operations was mortgage servicing fee income of $10.2 million and $10.6 million for the three-month periods ended March 31, 2018 and 2017, respectively. The Company had gains on sales of mortgage loans included in Miscellaneous Income, net on the Condensed Consolidated Statements of Operations of $6.2 million and $4.4 million for the three-month periods ended March 31, 2018 and 2017, respectively.

Other repossessed assets and OREO

Other repossessed assets primarily consist of leased assets that have been terminated and are included as grounded inventory, which is obtained through repossession. OREO consists primarily of the Company's foreclosed properties.

Deferred tax assets, net

The Company recorded $799.4 million of deferred tax assets, net as of March 31, 2018, compared to $771.7 million at December 31, 2017.

Equity method investments

The Company makes certain equity investments in various limited partnerships, some of which are considered VIEs, that invest in and lend to qualified community development entities, such as renewable energy investments, through the New Market Tax Credits ("NMTC") and CRA programs. The Company acts only in a limited partner capacity in connection with these partnerships, so the Company has determined that it is not the primary beneficiary of the partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the partnerships' economic performance.

Miscellaneous assets and receivables

Miscellaneous assets and receivables includes subvention receivables in connection with the Chrysler Agreement, investment and capital market receivables, derivatives trading receivables and unapplied payments. The first quarter increase is due to increases in subvention receivables and due from others, primarily at SIS, offset by decreases in investment receivables and wire transfer clearing.

NOTE 9. DEPOSITS AND OTHER CUSTOMER ACCOUNTS

Deposits and other customer accounts are summarized as follows:



	March 31, 2018				December 31, 2017
(dollars in thousands)	Balance		Percent of total deposits		Balance		Percent of total deposits
Interest-bearing demand deposits	$	8,246,120	13.3	%	$	8,784,597	14.4	%
Non-interest-bearing demand deposits	15,603,797		25.2	%	15,402,235		25.3	%
Savings	6,123,217		9.9	%	5,903,897		9.7	%
Customer repurchase accounts	577,161		1.0	%	802,119		1.4	%
Money market	25,726,743		41.6	%	24,530,661		40.3	%
CDs	5,564,137		9.0	%	5,407,594		8.9	%
Total Deposits ⁽¹⁾	$	61,841,175	100.0	%	$	60,831,103	100.0	%


(1)	Includes foreign deposits, as defined by the FRB, of $9.0 billion and $9.1 billion at March 31, 2018 and December 31, 2017, respectively.

Deposits collateralized by investment securities, loans, and other financial instruments totaled $2.1 billion and $2.3 billion at March 31, 2018 and December 31, 2017, respectively.

Demand deposit overdrafts that have been reclassified as loan balances were $155.7 million and $38.9 million at March 31, 2018 and December 31, 2017, respectively.

At March 31, 2018 and December 31, 2017, the Company had $1.4 billion and $1.3 billion of CDs greater than $250 thousand.

NOTE 10. BORROWINGS

Total borrowings and other debt obligations at March 31, 2018 were $38.4 billion, compared to $39.0 billion at December 31, 2017. The Company's debt agreements impose certain limitations on dividends other payments and transactions. The Company is currently in compliance with these limitations.

Periodically, as part of the Company's wholesale funding management, it opportunistically repurchases outstanding borrowings in the open market and subsequently retires the obligations.

Bank

The Bank had no new securities issuances and did not repurchase any outstanding borrowings in the open market during the three-month period ended March 31, 2018.

SHUSA

During the first quarter of 2018, the Company repurchased $63.2 million of its 3.45% senior notes due 2018 and $336.8 million of its 2.70% senior notes due 2019.

The Company recorded loss on debt extinguishment related to debt repurchases and early repayments at SHUSA and the Bank of $2.2 million in total for the three-month period ended March 31, 2018, compared to $6.7 million for the three-month period ended March 31, 2017.

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:



	March 31, 2018				December 31, 2017
(dollars in thousands)	Balance		Effective Rate		Balance		Effective Rate
Parent Company
3.45% senior notes, due August 2018	$	181,227	3.62	%	$	244,317	3.62	%
2.70% senior notes, due May 2019	662,337		2.82	%	998,349		2.82	%
2.65% senior notes, due April 2020	996,636		2.82	%	996,238		2.82	%
3.70% senior notes, due March 2022	1,445,928		3.74	%	1,440,044		3.74	%
3.40% senior notes, due January 2023	993,950		3.54	%	993,662		3.54	%
4.50% senior notes, due July 2025	1,095,576		4.56	%	1,095,449		4.56	%
4.40% senior notes, due July 2027	1,049,790		4.40	%	1,049,787		4.40	%
Junior subordinated debentures - Sovereign Capital Trust IX, due July 2036	149,469		3.38	%	149,462		3.14	%
Common securities - Sovereign Capital Trust IX	4,640		3.38	%	4,640		3.14	%
Senior notes, due July 2019⁽¹⁾	388,592		2.69	%	388,565		2.31	%
Senior notes, due September 2019 ⁽¹⁾	370,783		2.70	%	370,754		2.34	%
Senior notes, due January 2020 ⁽¹⁾	302,512		2.71	%	302,494		2.40	%
Senior notes, due September 2020 ⁽²⁾	114,370		3.16	%	115,804		3.32	%
Subsidiaries
2.00% subordinated debt, maturing through 2042	40,934		2.00	%	40,842		2.00	%
Short-term borrowings, due within one year, due April 2018	93,806		1.70	%	24,000		1.38	%
Total due to others overnight, due within one year, due April 2018	18,600		1.70	%	10,000		1.38	%
Short-term borrowings, due within one year, due April 2018	20,421		0.25	%	37,546		0.25	%
Short-term borrowings, due within one year, maturing through 2018	—		—	%	7,123		0.83	%
Total Parent Company and subsidiaries' borrowings and other debt obligations	$	7,929,571	3.52	%	$	8,269,076	3.45	%

(1) These notes bear interest at a rate equal to the three-month London Interbank Offered Rate ("LIBOR") plus 100 basis points per annum.

(2) These notes will bear interest at a rate equal to the three-month LIBOR plus 105 basis points per annum.

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:



	March 31, 2018				December 31, 2017
(dollars in thousands)	Balance		Effective Rate		Balance		Effective Rate
8.750% subordinated debentures, due May 2018	$	192,098	8.92	%	$	192,019	8.92	%
Subordinated term loan, due February 2019	104,740		7.63	%	111,883		7.12	%
FHLB advances, maturing through July 2019	1,500,000		1.91	%	1,950,000		1.53	%
Securities sold under repurchase agreements	150,000		1.90	%	150,000		1.56	%
Real estate investment trust preferred, due May 2020	144,522		13.24	%	144,167		13.35	%
Subordinated term loan, due August 2022	28,001		9.29	%	27,911		8.89	%
Total Bank borrowings and other debt obligations	$	2,119,361	3.70	%	$	2,575,980	3.07	%

The Bank had outstanding irrevocable letters of credit totaling $485.8 million from the FHLB of Pittsburgh at March 31, 2018, used to secure uninsured deposits placed with the Bank by state and local governments and their political subdivisions.

Revolving Credit Facilities

The following tables present information regarding SC's credit facilities as of March 31, 2018 and December 31, 2017:



	March 31, 2018
(dollars in thousands)	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
Warehouse line, maturing on various dates⁽¹⁾	$	603,145	$	1,250,000	2.71	%	$	865,991	$	24,063
Warehouse line, due November 2019	358,220		500,000		2.06	%	421,622		21,337
Warehouse line, due August 2019⁽²⁾	2,105,842		3,900,000		3.42	%	3,108,422		68,631
Warehouse line, due October 2019	611,477		1,800,000		3.43	%	839,499		14,727
Warehouse line, due October 2019	148,565		400,000		3.65	%	206,287		4,070
Warehouse line, due August 2019⁽³⁾	229,984		500,000		3.74	%	348,645		19,915
Warehouse line, due November 2019	297,699		1,000,000		3.63	%	420,623		11,557
Warehouse line, due October 2018	229,800		300,000		3.37	%	268,054		10,719
Warehouse line, due December 2018	—		300,000		—	%	—		—
Repurchase facility, maturing on various dates⁽⁴⁾⁽⁵⁾	291,949		291,949		3.49	%	407,299		12,962
Repurchase facility, due April 2018⁽⁵⁾⁽⁷⁾	196,727		196,727		3.06	%	257,054		—
Repurchase facility, due June 2018⁽⁵⁾	153,177		153,177		3.80	%	222,108		—
Repurchase facility, due December 2018⁽⁴⁾	67,773		67,773		3.55	%	156,202		—
Line of credit with related party, due December 2018⁽⁶⁾	30,000		1,000,000		3.09	%	30,000		—
Line of credit with related party, due December 2018⁽⁶⁾	114,200		750,000		4.34	%	126,392		2,376
Total SC revolving credit facilities	$	5,438,558	$	12,409,626	3.30	%	$	7,678,198	$	190,357


(1)	As of March 31, 2018, half of the outstanding balance on this facility matures in March 2019 and the remaining balance matures in March 2020.


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


(3)	On February 14, 2018, the maturity of this warehouse line was extended from January 2018 to August 2019.

(4) The maturity of this repurchase facility ranges from April 2018 to July 2018.

(5)

These repurchase facilities are collateralized by securitization notes payable retained by SC. No portion of these facilities is unsecured. These facilities have rolling maturities of up to one year. As the borrower, SC is exposed to liquidity risk due to changes in the market value of retrained securities pledged. In some instances, SC places or receives cash collateral with counteparties under collateral arrangements associated with SC's repurchase agreements.


(6)	These lines are also collateralized by securitization notes payable and residuals retained by SC. As of March 31, 2018, no portion of these facilities was unsecured.

(7) Half of this repurchase facility was settled on maturity in April 2018 and remaining balance of this repurchase facility was extended to July 2018.

NOTE 10. BORROWINGS (continued)



	December 31, 2017
(dollars in thousands)	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
Warehouse line, maturing on various dates⁽¹⁾	$	339,145	$	1,250,000	2.53	%	$	461,353	$	12,645
Warehouse line, due November 2019	435,220		500,000		1.92	%	521,365		16,866
Warehouse line, due August 2019⁽²⁾	2,044,843		3,900,000		2.96	%	2,929,890		53,639
Warehouse line, due October 2019	226,577		1,800,000		4.95	%	311,336		6,772
Warehouse line, due October 2019	81,865		400,000		4.09	%	114,021		3,057
Warehouse line, due January 2018⁽³⁾	336,484		500,000		2.87	%	473,208		—
Warehouse line, due November 2019	403,999		1,000,000		2.66	%	546,782		14,729
Warehouse line, due October 2018	235,700		300,000		2.84	%	289,634		10,474
Warehouse line, due December 2018	—		300,000		1.49	%	—		—
Repurchase facility, maturing on various dates⁽⁴⁾⁽⁵⁾	325,775		325,775		3.24	%	474,188		13,842
Repurchase facility, due April 2018⁽⁵⁾	202,311		202,311		2.67	%	264,120		—
Repurchase facility, due March 2018⁽⁵⁾	147,500		147,500		3.91	%	222,108		—
Repurchase facility, due March 2018⁽⁵⁾	68,897		68,897		3.04	%	95,762		—
Line of credit with related party, due December 2018⁽⁶⁾	—		1,000,000		3.09	%	—		—
Line of credit with related party, due December 2018⁽⁶⁾	750,000		750,000		1.33	%	—		—
Total SC revolving credit facilities	$	5,598,316	$	12,444,483	2.73	%	$	6,703,767	$	132,024

(1) As of December 31, 2017, half of the outstanding balance on this facility will mature in March 2019 and half will mature in March 2020.

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

(3) On February 14, 2018, the maturity of this warehouse line was extended to August 2019.

(4) The maturity of this repurchase facility ranges from February 2018 to July 2018.

(5) 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. As the borrower, SC is exposed to liquidity risk due to changes in the market value of retrained securities pledged. In some instances, SC places or receives cash collateral with counteparties under collateral arrangements associated with SC's repurchase agreements.

(6) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of December 31, 2017, no portion of these facilities was unsecured.

Secured Structured Financings

The following tables present information regarding SC's secured structured financings as of March 31, 2018 and December 31, 2017:



	March 31, 2018
(dollars in thousands)	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral		Restricted Cash
SC public securitizations, maturing on various dates⁽¹⁾⁽²⁾	$	15,943,321	$	37,984,872	1.16% - 2.80%	$	20,910,432	$	1,629,738
SC privately issued amortizing notes, maturing on various dates⁽¹⁾	6,919,434		12,632,368		0.88% - 2.86%	8,522,690		573,486
Total SC secured structured financings	$	22,862,755	$	50,617,240	0.88% - 2.86%	$	29,433,122	$	2,203,224

(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 are included within this balance.

NOTE 10. BORROWINGS (continued)



	December 31, 2017
(dollars in thousands)	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral		Restricted Cash
SC public securitizations, maturing on various dates⁽¹⁾⁽²⁾	$	14,995,304	$	36,800,642	0.89% - 2.80%	$	19,873,621	$	1,470,459
SC privately issued amortizing notes, maturing on various dates⁽¹⁾	7,564,637		12,278,282		0.88% - 4.09%	9,232,658		377,300
Total SC secured structured financings	$	22,559,941	$	49,078,924	0.88% - 4.09%	$	29,106,279	$	1,847,759

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

Most of SC's secured structured financings are in the form of public, SEC-registered securitizations. SC 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. SC's securitizations and private issuances are collateralized by RICs or vehicle leases. As of March 31, 2018 and December 31, 2017, SC had private issuances of notes backed by vehicle leases totaling $4.6 billion and $3.7 billion. respectively.

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)

The following table presents the components of accumulated other comprehensive income/(loss), net of related tax, for the three-month period ended March 31, 2018 and 2017, respectively.



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Three-Month Period Ended March 31, 2018									December 31, 2017						March 31, 2018
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments	$	(11,462	)	$	(4,671	)	$	(16,133	)
Reclassification adjustment for net (gains) on cash flow hedge derivative financial instruments⁽¹⁾	(1,687		)	455			(1,232		)
Net unrealized (losses) on cash flow hedge derivative financial instruments	(13,149		)	(4,216		)	(17,365		)	$	(6,388	)	$	(17,365	)	$	(23,753	)

Change in unrealized (losses) on investments in debt securities AFS	(122,244		)	10,710			(111,534		)
Reclassification adjustment for net losses included in net income/(expense) on non-OTTI securities ⁽²⁾	663			(58		)	605
Net unrealized (losses) on investments in debt securities AFS	(121,581		)	10,652			(110,929		)	(140,498		)	(110,929		)
Cumulative effect of adoption of new ASUs⁽⁴⁾													(39,094		)
Net unrealized (losses) on investments in debt securities AFS - upon adoption													(150,023		)	(290,521		)

Pension and post-retirement actuarial (loss)⁽³⁾	842			(5,304		)	(4,462		)	(51,545		)	(4,462		)	(56,007		)

As of March 31, 2018	$	(133,888	)	$	1,132		$	(132,756	)	$	(198,431	)	$	(171,850	)	$	(370,281	)


(1)	Net (losses)/gains reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statements 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 Statements of Operations for the sale of AFS securities.


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

(4) Includes impact of other comprehensive income reclassified to Retained earnings as a result of the adoption of ASU 2018-02. Refer to Note 1 for further discussion.

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Three-Month Period Ended March 31, 2017									December 31, 2016						March 31, 2017
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments	$	(2,828	)	$	(1,269	)	$	(4,097	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments⁽¹⁾	2,387			(777		)	1,610
Net unrealized (losses) on cash flow hedge derivative financial instruments	(441		)	(2,046		)	(2,487		)	$	(6,725	)	$	(2,487	)	$	(9,212	)

Change in unrealized gains on investment securities AFS	31,479			(10,510		)	20,969
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities ⁽²⁾	—			—			—
Reclassification adjustment for net losses included in net income/(expense) on OTTI securities⁽³⁾	—			—			—
Reclassification adjustment for net (gains) included in net income	—			—			—
Net unrealized gains on investment securities AFS	31,479			(10,510		)	20,969			(130,754		)	20,969			(109,785		)

Pension and post-retirement actuarial gain⁽⁴⁾	913			(428		)	485			(55,729		)	485			(55,244		)
As of March 31, 2017	$	31,951		$	(12,984	)	$	18,967		$	(193,208	)	$	18,967		$	(174,241	)


(1)	Net gains/(losses) reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statements 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 Statements of Operations for the sale of AFS 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.

NOTE 12. 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, and often provides commercial loan customers the option to purchase derivative products to hedge interest rate risk associated with loans made by the Bank. 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 14 for discussion of the valuation methodology for derivative instruments.

NOTE 12. DERIVATIVES (continued)

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

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

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 March 31, 2018, derivatives in this category had a fair value of $1.7 million. The credit ratings of the Company and the Bank are currently considered investment grade. During the first quarter of 2018, 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 March 31, 2018 and December 31, 2017, 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 $7.3 million and $10.4 million, respectively. The Company had $10.7 million and $15.7 million in cash and securities collateral posted to cover those positions as of March 31, 2018 and December 31, 2017, respectively.

Hedge Accounting

Management uses derivative instruments designated as hedges to mitigate the impact of interest rate and foreign exchange 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. 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.

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 gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same Consolidated Statements of Operations line item as the earnings effect of the hedged item.

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. As of March 31, 2018, the Company expected $34.7 million of gains/losses recorded in accumulated other comprehensive loss to be reclassified to earnings during the subsequent twelve months as the future cash flows occur.

NOTE 12. DERIVATIVES (continued)

Derivatives Designated in Hedge Relationships – Notional and Fair Values

Derivatives designated as accounting hedges at March 31, 2018 and December 31, 2017 included:



(dollars in thousands)	Notional Amount		Asset		Liability		Weighted Average Receive Rate		Weighted Average Pay Rate		Weighted Average Life (Years)
March 31, 2018
Cash flow hedges:
Pay fixed — receive variable interest rate swaps	$	4,931,593	$	71,974	$	2,346	0.07	%	0.15	%	1.92
Pay variable - receive fixed interest rate swaps	4,000,000		—		117,398		1.41	%	1.73	%	2.78
Interest rate floor	1,400,000		3,819		—		0.05	%	—	%	2.37
Total	$	10,331,593	$	75,793	$	119,744	0.58	%	0.74	%	2.31

December 31, 2017
Cash flow hedges:
Pay fixed — receive variable interest rate swaps	$	5,183,511	$	46,422	$	4,458	0.05	%	0.14	%	2.12
Pay variable - receive fixed interest rate swaps	4,000,000		—		80,453		1.41	%	1.42	%	3.02
Interest rate floor	1,000,000		3,020		—		—	%	—	%	2.64
Total	$	10,183,511	$	49,442	$	84,911	0.58	%	0.63	%	2.53

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 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, 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.

Customer-related derivatives

The Company offers derivatives to its customers in connection with their risk management needs and requirements. 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.

NOTE 12. DERIVATIVES (continued)

Other derivative instruments primarily include forward contracts related to certain investment securities sales, an overnight indexed swap, 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 March 31, 2018 and December 31, 2017 included:



	Notional				Asset derivatives Fair value				Liability derivatives Fair value
(in thousands)	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Mortgage banking derivatives:
Forward commitments to sell loans	$	318,562	$	311,852	$	1	$	3	$	972	$	459
Interest rate lock commitments	175,662		126,194		2,253		2,105		—		—
Mortgage servicing	355,000		330,000		1,006		193		9,800		2,092
Total mortgage banking risk management	849,224		768,046		3,260		2,301		10,772		2,551

Customer related derivatives:
Swaps receive fixed	9,525,889		9,328,079		34,637		72,912		157,132		70,348
Swaps pay fixed	9,852,498		9,576,893		210,611		110,109		27,306		51,380
Other	2,054,761		1,834,962		25,707		19,971		23,841		18,308
Total customer related derivatives	21,433,148		20,739,934		270,955		202,992		208,279		140,036

Other derivative activities:
Foreign exchange contracts	3,708,688		2,764,999		20,053		24,932		26,872		25,521
Interest rate swap agreements	2,176,064		1,749,349		16,685		9,596		1,520		1,631
Interest rate cap agreements	10,851,530		10,932,707		197,801		135,942		—		32,109
Options for interest rate cap agreements	10,825,149		10,906,081		—		32,165		197,548		135,824
Other	979,071		824,786		4,103		5,874		5,924		5,228
Total	$	50,822,874	$	48,685,902	$	512,857	$	413,802	$	450,915	$	342,900

NOTE 12. DERIVATIVES (continued)

Gains (Losses) on All Derivatives

The following Condensed Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the three-month periods ended March 31, 2018 and 2017:



		Three-Month Period Ended March 31,
Derivative Activity⁽¹⁾	Line Item	2018			2017
		(in thousands)
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Interest expense on borrowings	$	2,764		$	2,343
Pay variable receive-fixed interest rate swap	Interest income on loans	(2,020		)	(2,781		)
Other derivative activities:
Forward commitments to sell loans	Miscellaneous income, net	(514		)	(10,940		)
Interest rate lock commitments	Miscellaneous income, net	148			1,994
Mortgage servicing	Miscellaneous income, net	(6,895		)	497
Customer related derivatives	Miscellaneous income, net	2,586			(1,887		)
Foreign exchange	Miscellaneous income, net	1,289			2,260
Interest rate swaps, caps, and options	Miscellaneous income, net	9,717			1,204
Interest rate swaps, caps, and options	Interest expense	—			—

Total return settlement	Other administrative expenses	—			(505		)
Other	Miscellaneous income, net	(2,831		)	(1,501		)


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

The amount of loss recognized in Other Comprehensive Income for cash flow hedge derivatives was $16.1 million and $4.1 million, net of tax, for the three-month periods ended ended March 31, 2018 and March 31, 2017, respectively.

The amount of gain reclassified from Other Comprehensive Income into earnings for cash flow hedge derivatives was $1.2 million for the three-month period ended ended March 31, 2018 and the amount of loss reclassified from Other Comprehensive Income into earnings for cash flow hedge derivatives was $1.6 million, net of tax, for the three-month period ended ended March 31, 2017.

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 Sheets.

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 agreement with the counterparty. The collateral received or pledged in connection with these transactions is disclosed within the “Gross amounts offset in the Condensed Consolidated Balance Sheet" section of the tables below.

NOTE 12. DERIVATIVES (continued)

Information about financial assets and liabilities that are eligible for offset on the Condensed Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017, respectively, is presented in the following tables:



	Offsetting of Financial Assets
							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
(in thousands)	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
March 31, 2018
Cash flow hedges	$	75,793	$	—	$	75,793	$	—	$	50,677	$	25,116
Other derivative activities⁽¹⁾	510,604		7,496		503,108		1,978		106,006		395,124
Total derivatives subject to a master netting arrangement or similar arrangement	586,397		7,496		578,901		1,978		156,683		420,240
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	2,253		—		2,253		—		—		2,253
Total Derivative Assets	$	588,650	$	7,496	$	581,154	$	1,978	$	156,683	$	422,493


December 31, 2017
Cash flow hedges	$	49,442	$	—	$	49,442	$	—	$	3,076	$	46,366
Other derivative activities⁽¹⁾	411,697		6,731		404,966		2,021		77,975		324,970
Total derivatives subject to a master netting arrangement or similar arrangement	461,139		6,731		454,408		2,021		81,051		371,336
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	2,105		—		2,105		—		—		2,105
Total Derivative Assets	$	463,244	$	6,731	$	456,513	$	2,021	$	81,051	$	373,441


(1)	Includes customer-related and other derivatives.


(2)	Includes mortgage banking derivatives.

NOTE 12. DERIVATIVES (continued)



	Offsetting of Financial Liabilities
							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet		Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
(in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet		Financial Instruments		Cash Collateral Pledged		Net Amount
March 31, 2018
Cash flow hedges	$	119,955	$	—	$	119,955	$	—	$	211	$	119,744
Other derivative activities⁽¹⁾	450,485		13,255		437,230		—		331,304		105,926
Total derivatives subject to a master netting arrangement or similar arrangement	570,440		13,255		557,185		—		331,515		225,670
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	219		—		219		—		—		219
Total Derivative Liabilities	$	570,659	$	13,255	$	557,404	$	—	$	331,515	$	225,889

December 31, 2017
Cash flow hedges	$	84,911	$	—	$	84,911	$	—	$	622	$	84,289
Other derivative activities⁽¹⁾	342,752		16,236		326,516		—		165,716		160,800
Total derivatives subject to a master netting arrangement or similar arrangement	427,663		16,236		411,427		—		166,338		245,089
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	148		—		148		—		—		148
Total Derivative Liabilities	$	427,811	$	16,236	$	411,575	$	—	$	166,338	$	245,237


(1)	Includes customer-related and other derivatives.


(2)	Includes mortgage banking derivatives.

NOTE 13. INCOME TAXES

An income tax provision of $95.3 million was recorded for the three-month period ended March 31, 2018, compared to $78.9 million for the corresponding period in 2017. This resulted in an effective tax rate ("ETR") of 27.0% for the three-month period ended March 31, 2018, compared to 32.5% for the corresponding period in 2017.

The decrease in the ETR for the three-month period ended March 31, 2018 was due to the reduction in the Federal corporate income tax rate provided for by the TCJA as enacted on December 22, 2017 and effective January 1, 2018. The full impact of the corporate rate reduction on the period-over-period decrease in the ETR was partially off-set by the impact of the TCJA provision that disallows tax deductions for FDIC premiums, and was further off-set by the impact of discrete tax benefits booked in the first quarter of 2017 for certain state tax items.

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.

NOTE 13. INCOME TAXES (continued)

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.

As noted above, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Due to the complexities involved in accounting for the enactment of the TCJA, SEC Staff Accounting Bulletin (“SAB”) 118 specifies, among other things, that reasonable estimates of the income tax effects of the TCJA should be used, if determinable. Further, SAB 118 clarifies accounting for income taxes under ASC Topic 740, Income Taxes (ASC 740), if information is not yet available or complete and provides for up to a one-year period in which to complete the required analyses and accounting (the measurement period). The Company has obtained and analyzed all currently available information to record the effect of the change in tax law. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate and the other provisions of the TCJA, the accounting may be impacted by other analyses related to the TCJA, technical corrections or other amendments to the TCJA, and further accounting or administrative tax guidance.

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.

In November 2015, the Federal District Court granted the Company's motions for summary judgment and later ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed that judgment, and the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court, finding that 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 case has been remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.8 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 $36.8 million to no change.

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 2006.

The Company applies an aggregate portfolio approach whereby income tax effects from accumulated other comprehensive income are released only when an entire portfolio (i.e. all related units of account) of a particular type is liquidated, sold or extinguished.

NOTE 14. FAIR VALUE

General

A portion of the Company’s assets and liabilities are carried at fair value, including AFS investment securities and derivative instruments. In addition, the Company elects to account for its residential mortgages HFS 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.

NOTE 14. FAIR VALUE (continued)

As of March 31, 2018, $14.4 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 $174.4 million of these financial assets were measured using quoted market prices for identical instruments, or Level 1 inputs. Approximately $13.6 billion of these financial assets were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $678.6 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 4.7% of total assets measured at fair value on a recurring basis and approximately 0.5% of total consolidated assets.

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

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

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

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

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

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

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

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

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

There were no transfers between Levels 1, 2 or 3 during the three-month periods ended March 31, 2018 and 2017 for any assets or liabilities valued at fair value on a recurring basis.

NOTE 14. FAIR VALUE (continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of March 31, 2018 and December 31, 2017.



(in thousands)	Level 1		Level 2		Level 3		Balance at March 31, 2018		Level 1		Level 2		Level 3		Balance at December 31, 2017
Financial assets:
U.S. Treasury securities	$	174,439	$	1,200,666	$	—	$	1,375,105	$	139,615	$	858,497	$	—	$	998,112
Corporate debt	—		2,723		—		2,723		—		11,660		—		11,660
ABS	—		138,598		348,634		487,232		—		156,910		350,252		507,162
State and municipal securities	—		21		—		21		—		23		—		23
MBS	—		11,456,513		—		11,456,513		—		12,885,412		—		12,885,412
Investment in debt securities AFS⁽³⁾⁽⁶⁾	174,439		12,798,521		348,634		13,321,594		139,615		13,912,502		350,252		14,402,369
Other investments - trading securities	1		3,023		—		3,024		1		—		—		1
RICs HFI⁽⁴⁾	—		—		167,597		167,597		—		—		186,471		186,471
LHFS ⁽¹⁾⁽⁵⁾	—		162,468		—		162,468		—		197,691		—		197,691
MSRs ⁽²⁾	—		—		160,130		160,130		—		—		145,993		145,993
Other assets - derivatives ⁽³⁾	—		586,396		2,254		588,650		—		461,139		2,105		463,244
Total financial assets	$	174,440	$	13,550,408	$	678,615	$	14,403,463	$	139,616	$	14,571,332	$	684,821	$	15,395,769
Financial liabilities:
Other liabilities - derivatives ⁽³⁾	—		570,150		509		570,659		—		427,217		594		427,811
Total financial liabilities	$	—	$	570,150	$	509	$	570,659	$	—	$	427,217	$	594	$	427,811


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


(2)	The Company has total MSRs of $163.1 million and $149.2 million as of March 31, 2018.and December 31, 2017, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value and are not presented within this table.


(3)	Refer to Note 3 for the fair value of investment securities and to Note 12 for the fair values of derivative assets and liabilities, on a further disaggregated basis.

(4) RICs collateralized by vehicle titles at SC and RV/marine loans at SBNA.

(5) Residential mortgage loans

(6) Investment in debt securities AFS disclosed on the Consolidated Balance Sheets at December 31, 2017 included $10.8 million of equity securities valued using the net asset value as a practical expedient that are not presented within this table.

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:



(in thousands)	Level 1		Level 2		Level 3		Balance at March 31, 2018		Level 1		Level 2		Level 3		Balance at December 31, 2017
Impaired commercial LHFI	$	—	$	132,339	$	310,237	$	442,576	$	—	$	226,832	$	356,343	$	583,175
Foreclosed assets	—		2,373		104,014		106,387		—		20,011		106,581		126,592
Vehicle inventory	—		415,262		—		415,262		—		325,203		—		325,203
LHFS⁽¹⁾	—		—		1,798,222		1,798,222		—		—		2,324,830		2,324,830
Auto loans impaired due to bankruptcy	—		128,641		—		128,641		—		121,578		—		121,578
MSRs	—		—		9,381		9,381		—		—		9,273		9,273


(1)	These amounts include $967.8 million and $1.1 billion of personal loans held for sale that are impaired as of March 31, 2018 and December 31, 2017, respectively.

NOTE 14. FAIR VALUE (continued)

Valuation Processes and Techniques

Impaired commercial 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 $357.7 million and $491.5 million at March 31, 2018 and December 31, 2017, 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. The lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.

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

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

Fair Value Adjustments

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



		Three-Month Period Ended March 31,
(in thousands)	Statement of Operations Location	2018			2017
Impaired LHFI	Provision for credit losses	$	(29,312	)	$	(45,772	)
Foreclosed assets	Miscellaneous income⁽¹⁾	(2,473		)	(1,742		)
LHFS	Provision for credit losses	(381		)	—
LHFS	Miscellaneous income⁽¹⁾	(70,490		)	(66,121		)
Auto loans impaired due to bankruptcy	Provision for credit losses	(82,145		)	(23,600		)
MSRs	Miscellaneous income, net	(549		)	95


(1)	These amounts reduce Miscellaneous income.

NOTE 14. 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 periods ended March 31, 2018 and 2017, respectively, for those assets and liabilities measured at fair value on a recurring basis.



	Three-Month Period Ended March 31, 2018															Three-Month Period Ended March 31, 2017
(in thousands)	Investments AFS			RICs HFI			MSRs			Derivatives			Total			Investments AFS			RICs HFI			MSRs			Derivatives			Total
Balances, beginning of period	$	350,252		$	186,471		$	145,993		$	1,514		$	684,230		$	814,567		$	217,170		$	146,589		$	(29,000	)	$	1,149,326
Losses in other comprehensive income	(499		)	—			—			—			(499		)	(619		)	—			—			—			(619		)
Gains/(losses) in earnings	—			5,276			15,043			134			20,453			—			16,891			1,457			1,194			19,542
Additions/Issuances	—			1,349			2,755			—			4,104			—			13,331			5,730			—			19,061
Settlements⁽¹⁾	(1,119		)	(25,499		)	(3,661		)	97			(30,182		)	(240,494		)	(44,919		)	(4,321		)	97			(289,637		)
Balances, end of period	$	348,634		$	167,597		$	160,130		$	1,745		$	678,106		$	573,454		$	202,473		$	149,455		$	(27,709	)	$	897,673
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period	$	—		$	5,276		$	15,043		$	(14	)	$	20,305		$	—		$	16,891		$	1,457		$	(800	)	$	17,548


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

The gains in earnings reported in the table above related to the RICs HFI 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.

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:

Debt Securities Classified as AFS and Trading Securities

Debt securities accounted for at fair value include both AFS and trading securities portfolios. The Company utilizes a third-party pricing service to value its investment securities portfolios on a global basis. 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 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.

NOTE 14. FAIR VALUE (continued)

Actively traded quoted market prices for the majority of the debt securities AFS, 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.

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

RICs HFI

For certain RICs HFI, 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 HFI for which the Company has elected the 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."

NOTE 14. FAIR VALUE (continued)

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 Miscellaneous income, net. See further discussion on MSRs in Note 8.

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


•	A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $4.9 million and $9.5 million, respectively, at March 31, 2018.


•	A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $6.0 million and $11.7 million, respectively, at March 31, 2018.

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.

NOTE 14. FAIR VALUE (continued)

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 12 for a discussion of derivatives activity.

Level 3 Inputs - Significant Recurring and Nonrecurring Fair Value Assets and Liabilities

The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring and nonrecurring assets and liabilities at March 31, 2018 and December 31, 2017.



(dollars in thousands)	Fair Value at March 31, 2018		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Financial Assets:
ABS
Financing bonds	$	304,851	DCF	Discount Rate ⁽¹⁾	2.80% - 3.02% (2.84%)
Sale-leaseback securities	$	43,783	Consensus Pricing ⁽²⁾	Offered quotes ⁽³⁾	117.11	%
RICs HFI	$	167,597	DCF	Prepayment rate (CPR) ⁽⁴⁾	6.66	%
				Discount Rate ⁽⁵⁾	9.50% - 14.50% (12.41%)
				Recovery Rate ⁽⁶⁾	25.00% - 43.00% (41.59%)
Personal LHFS	$	967,789	Lower of Market or Income Approach	Market Participant View	70.00% - 80.00%
				Discount Rate	15.00% - 20.00%
				Default Rate	30.00% - 40.00%
				Net Principal Payment Rate	50.00% - 70.00%
				Loss Severity Rate	90.00% - 95.00%
RICs HFS	$	620,168	Income Approach	Expected Yield	1.00% - 2.00%
				Expected Life Time Cumulative Loss	4.00% - 6.00%
				Weighted Average Life	2 -3 years
MSRs ⁽¹¹⁾	$	160,130	DCF	Prepayment rate ("CPR") ⁽⁷⁾	3.92% - 85.90% (8.20%)
				Discount Rate ⁽⁸⁾	9.75	%
Mortgage banking interest rate lock commitments	$	2,253	DCF	Pull through percentage ⁽⁹⁾	78.00	%
				MSR value ⁽¹⁰⁾	.73% - 1.03% (1.03%)


(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.

(11) Excludes MSR valued on a non-recurring basis for which we do not consider there to be significant unobservable assumptions.

NOTE 14. FAIR VALUE (continued)



	Fair Value at December 31, 2017		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Financing bonds
ABS
Financing bonds	$	304,727	DCF	Discount Rate (1)	2.16% - 2.90% (2.28%)
Sale-leaseback securities	$	45,525	Consensus Pricing (2)	Offered Quotes (3)	120.19	%
RICs HFI	$	186,471	DCF	CPR (4)	6.66	%
				Discount Rate (5)	9.50% - 14.50% (12.37%)
				Recovery Rate (6)	25.00% - 43.00% (41.51%)
Personal LHFS	$	1,062,090	Lower of Market or Income Approach	Market Participant View	70.00% - 80.00%
				Discount Rate	15.00% - 20.00%
				Default Rate	30.00% - 40.00%
				Net Principal Payment Rate	50.00% - 70.00%
				Loss Severity Rate	90.00% - 95.00%
RICs HFS	$	1,101,049	DCF	Discount Rate	3.00% - 6.00%
				Default Rate	3.00% - 4.00%
				Prepayment Rate	15.00% - 20.00%
				Loss Severity Rate	50.00% - 60.00%
MSRs ⁽¹¹⁾	$	145,993	DCF	CPR (7)	0.06% - 46.95% (9.80%)
				Discount Rate (8)	9.90	%
Mortgage banking interest rate lock commitments	$	2,105	DCF	Pull through percentage (9)	76.98	%
				MSR Value (10)	0.73% - 1.03% (0.95%)


(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.

(11) Excludes MSR valued on a non-recurring basis for which we do not consider there to be significant unobservable assumptions.

NOTE 14. FAIR VALUE (continued)

Fair Value of Financial Instruments

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



	March 31, 2018										December 31, 2017
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3		Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and amounts due from depository institutions	$	7,900,607	$	7,900,607	$	7,900,607	$	—	$	—	$	6,519,967	$	6,519,967	$	6,519,967	$	—	$	—
Investment in debt securities AFS	13,321,594		13,321,594		174,439		12,798,521		348,634		14,402,369		14,402,369		139,615		13,912,502		350,252
Investment in debt securities HTM	2,877,357		2,797,698		—		2,797,698		—		1,799,808		1,773,938		—		1,773,938		—
Other Investments - Trading Securities	3,024		3,024		1		3,023		—		1		1		1		—		—
LHFI, net	76,265,119		77,793,838		—		42,339		77,751,499		76,829,277		78,579,144		—		136,832		78,442,312
LHFS	1,960,695		1,960,690		—		162,468		1,798,222		2,522,486		2,522,521		—		197,691		2,324,830
Restricted cash	3,810,962		3,810,962		3,810,962		—		—		3,818,807		3,818,807		3,818,807		—		—
MSRs⁽¹⁾	163,148		169,511		—		—		169,511		149,197		155,266		—		—		155,266
Derivatives	588,650		588,650		—		586,396		2,254		463,244		463,244		—		461,139		2,105

Financial liabilities:
Deposits	61,841,175		61,598,475		53,343,250		8,255,225		—		60,831,103		60,864,110		55,456,511		5,407,599		—
Borrowings and other debt obligations	38,350,245		38,525,215		—		23,769,098		14,756,117		39,003,313		39,335,087		—		23,281,166		16,053,921
Derivatives	570,659		570,659		—		570,150		509		427,811		427,811		—		427,217		594


(1)	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.

(2) Investment in debt securities AFS disclosed on the Consolidated Balance Sheets at December 31, 2017 included $10.8 million of equity securities valued using net asset value as a practical expedient that are not presented within this table.

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.

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 HFS 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.

NOTE 14. FAIR VALUE (continued)

RICs HFI

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs HFI. These loans consisted primarily of SC’s RICs accounted for 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 balance also includes non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.

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 March 31, 2018 and December 31, 2017.



	March 31, 2018							December 31, 2017
(in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference			Fair Value		Aggregate Unpaid Principal Balance		Difference
LHFS⁽¹⁾	$	162,468	$	161,818	$	650		$	197,691	$	194,928	$	2,763
RICs HFI	167,597		190,587		(22,990		)	186,471		211,580		(25,109		)
Nonaccrual loans	9,420		13,044		(3,624		)	15,023		19,836		(4,813		)


(1)	LHFS disclosed on the Condensed Consolidated Balance Sheets 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 HFI 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 HFI.

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 $160.1 million at March 31, 2018. Changes in fair value totaling a gain of $15.0 million was recorded in Miscellaneous income, net in the Condensed Consolidated Statements of Operations during the three-month period ended March 31, 2018.

NOTE 15. NON-INTEREST INCOME

The following table presents the details of the Company's Non-interest income for the following periods:



	Three-Month Period Ended March 31,
(in thousands)	2018			2017 ⁽¹⁾
Non-interest income:
Consumer and commercial fees	$	138,561		$	154,349
Lease income	540,896			496,045
Miscellaneous income, net
Mortgage banking income, net	16,345			13,174
BOLI	14,568			17,299
Capital market revenue	56,613			45,817
Net gain on sale of operating leases	53,200			22,715
Asset and wealth management fees	43,337			36,501
Loss on sale of non-mortgage loans	(43,910		)	(69,768		)
Other miscellaneous (loss)/income, net	(15,583		)	11,767
Net (losses)/gains on sale of investment securities	(663		)	519
Total Non-interest income	$	803,364		$	728,418

(1) - Prior period amounts have not been adjusted under the modified retrospective method. For further information, see Note 1.

NOTE 15. NON-INTEREST INCOME (continued)

Disaggregation of Revenue from Contracts with Customers

Beginning January 1, 2018 the Company adopted the new accounting standard, "Revenue from Contracts with Customers", which requires the Company to disclose a disaggregation of revenue from contracts with customers that falls within the scope of this new accounting standard. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Therefore, the Company has evaluated the revenue streams within our Non-interest income line items to determine whether they are in-scope or out-of-scope. The following table presents the Company's Non-interest income disaggregated by revenue source.



	Three-Month Period Ended March 31,
(in thousands)	2018			2017 ⁽¹⁾
Non-interest income:
In-scope of Revenue from Contracts with Customers:
Depository services⁽²⁾	$	58,346		$	60,440
Commission and trailer fees⁽³⁾	29,450			31,168
Interchange income, net⁽³⁾	13,473			12,649
Underwriting service fees⁽³⁾	24,504			24,600
Asset and wealth management fees⁽³⁾	38,203			28,245
Other revenue from contracts with customers⁽³⁾	10,002			13,311
Total In-scope of Revenue from Contracts with Customers	173,978			170,413
Out-of-scope of Revenue from Contracts with Customers:
Consumer and commercial fees⁽⁴⁾	73,204			87,096
Lease income	540,896			496,045
Miscellaneous income/(loss)⁽⁴⁾	15,949			(25,655		)
Net (losses)/gains on sale of investment securities	(663		)	519
Total Out-of-scope of Revenue from Contracts with Customers	629,386			558,005
Total Non-interest income	$	803,364		$	728,418

(1) - Prior period amounts have not been adjusted under the modified retrospective method. For further information, see Note 1.

(2) - Primarily recorded in the Company's Condensed Consolidated Statements of Operations within Consumer and commercial fees.

(3) - Primarily recorded in the Company's Condensed Consolidated Statements of Operations within Miscellaneous income, net.

(4) - The balance presented excludes certain revenue streams that are considered in-scope and presented above.

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin.

Practical Expedients

In instances where incremental costs, such as commission expenses, are incurred and the period of benefit is equal to or less than one year, the Company has elected to apply the practical expedient where the Company expenses such amounts as incurred. These costs are recorded within Compensation and benefits, within the Condensed Consolidated Statements of Operations.

In instances where contracts with customers contain a financing component and the Company expects the customer to pay for the goods or services within one year or less, the Company has elected to apply the practical expedient where the Company does not adjust the contracted amount of consideration for the effects of financing components.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less or (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. As a result of the practical expedient and for the Company's material revenue streams, there are no unperformed performance obligations. As a result of the practical expedient and the Company's revenue recognition for contracts with customers, there are no material contract assets or liabilities.

NOTE 16. 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 Sheets. 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 12 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	March 31, 2018		December 31, 2017
	(in thousands)
Commitments to extend credit	$	28,753,073	$	29,475,864
Letters of credit	1,405,521		1,559,297
Unsecured revolving lines of credit	27,314		27,938
Recourse exposure on sold loans	46,720		46,572
Commitments to sell loans	26,314		19,477
Total commitments	$	30,258,942	$	31,129,148

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 March 31, 2018 and December 31, 2017 are $6.3 billion and $6.4 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:



(in thousands)	March 31, 2018		December 31, 2017
1 year or less	$	5,084,166	$	5,858,236
Over 1 year to 3 years	4,838,484		5,381,113
Over 3 years to 5 years	4,747,297		4,478,320
Over 5 years ⁽¹⁾	14,083,126		13,758,195
Total	$	28,753,073	$	29,475,864


(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.

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.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 March 31, 2018 was 16.7 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 March 31, 2018 was $1.4 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 March 31, 2018. Management believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of the commitments, as has been the Company’s experience to date. As of March 31, 2018 and December 31, 2017, the liability related to these letters of credit was $3.5 million and $18.2 million, respectively, which is recorded within the reserve for unfunded lending commitments in Other liabilities on the Condensed Consolidated Balance Sheet. The credit risk associated with letters of credit is monitored using the same risk rating system utilized within the loan and financing lease portfolio. Also included within the reserve for unfunded lending commitments at March 31, 2018 and December 31, 2017 were lines of credit outstanding of $86.4 million and $90.9 million, respectively.

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



(in thousands)	March 31, 2018		December 31, 2017
1 year or less	$	702,190	$	918,191
Over 1 year to 3 years	328,062		286,505
Over 3 years to 5 years	329,005		312,881
Over 5 years	46,264		41,720
Total	$	1,405,521	$	1,559,297

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 $102.6 million as of March 31, 2018 and $136.0 million as of December 31, 2017. 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 $12.2 million as of March 31, 2018 and $12.2 million as of December 31, 2017 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.

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 specific internal information and an industry-based default curve with a range of estimated losses. At March 31, 2018 and December 31, 2017, the Company had $0.9 million and $1.3 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.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

SC Commitments

SC is party to agreements with Bluestem whereby 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 Bluestem's option. As of March 31, 2018, the total unused credit available to customers was $3.7 billion. In 2017, the Company purchased $1.2 billion of receivables out of the $4.0 billion of unused credit available to customers at December 31, 2016. During the three months ended March 31, 2018, the Company purchased $0.3 billion of receivables, out of the $3.9 billion unused credit available to customers as of December 31, 2017. In addition, SC purchased $17.4 million of receivables related to newly-opened customer accounts during the three months ended March 31, 2018. 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 March 31, 2018 and December 31, 2017, SC was obligated to purchase $10.3 million and $11.5 million, respectively, in receivables that had been originated by the retailer but not yet purchased by SC. SC also is required to make a profit-sharing payment to the retailer each month if performance exceeds a specified return threshold. 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 FCA, SC has the first opportunity to review for its own portfolio any credit applications turned down by the OEM's captive finance company. The agreement does not require SC to originate any loans, but for each loan originated SC will pay the OEM a referral fee.

In connection with the sale of RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of March 31, 2018, there were no loans that were the subject of a demand to repurchase or replace for breach of representations or warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s RIC sales agreements will not have a material adverse effect on SC’s consolidated financial position, results of operations, or cash flows.

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

Chrysler Agreement

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 $11.6 million and $6.6 million at March 31, 2018 and December 31, 2017, 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 March 31, 2018. 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.

Agreement with Bank of America

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 $7.5 million and $8.1 million at March 31, 2018 and December 31, 2017, respectively, related to this obligation.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Agreement with Citizens Bank of Pennsylvania ("CBP")

Until May 1, 2017, SC sold loans to 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 $5.5 million and $5.6 million at March 31, 2018 and December 31, 2017, respectively, related to this obligation.

Other Agreements

As of March 31, 2018, SC was party to a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell charged-off loan receivables in bankruptcy status on a quarterly basis until sales total at least $350.0 million. However, any sale of more than $275.0 million is subject to a market price check. As of March 31, 2018 and December 31, 2017, the remaining aggregate commitments were $88.0 million and $98.9 million, respectively.

Other Contingencies

SC is or may be subject to potential liability under various other contingent exposures. SC had accrued $3.4 million and $6.3 million at March 31, 2018 and December 31, 2017, respectively, for other miscellaneous contingencies.

Impact from Hurricanes

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

hurricanes. In Puerto Rico, there was significant damage to the infrastructure and the power grid on the entire island, which resulted in extended delays in BSPR returning to normal operations.

The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions. As a result, the Company's ALLL had approximately $110 million of reserves at March 31, 2018 related to the hurricanes. However, for credit exposures in Puerto Rico, given the current state of the region, the Company has had limited information with which to estimate probable credit losses. As of March 31, 2018, the Company has approximately $3.4 billion of loan exposures in Puerto Rico, consisting of $1.6 billion in consumer loans, $1.8 billion in commercial loans including $220 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses, and may establish additional reserves for losses in future periods.

See discussion under the "Puerto Rico FINRA Arbitrations" section of Note 16 below for further discussion.

Other Off-Balance Sheet Risk

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

NOTE 16. 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 a range of its potential exposure, if any, to these lawsuits, investigations, regulatory matters and other legal proceedings at this time. However, it is reasonably possible that actual outcomes or losses may differ materially from the Company's current assessments and estimates and any adverse resolution of any of these matters against it could have a material adverse effect on the Company's financial position, liquidity, and results of operations.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, investigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation, investigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency; the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.

As of March 31, 2018 and December 31, 2017, the Company accrued aggregate legal and regulatory liabilities of $167.2 million and $161.8 million, respectively. Further, the Company estimates the aggregate range of reasonably possible losses for legal and regulatory proceedings in excess of reserves of up to $260 million and $255 million as of March 31, 2018 and December 31, 2017, respectively. Descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject are set forth below.

OCC Identity Theft Protection Product ("SIP") Matter

On March 26, 2015, the Bank entered into a Cease and Desist Order (the "SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP, an identity theft protection product from the Bank's third party vendor. Pursuant to the SIP Consent Order, the Bank paid a civil monetary penalty ("CMP") of $6 million and agreed to remediate customers who paid for but may not have received certain benefits of SIP. Prior to entering into the SIP Consent Order, the Bank made $37.3 million in remediation payments to customers, representing the total amount paid for product enrollment.

Subsequently, the Bank commenced a further review in order to remediate checking account customers who may have been charged an overdraft fee and credit card customers who may have been charged an over limit fee and/or finance charge related to SIP product fees. The approximate amount of the expected additional remediation is $5.2 million. The Bank is currently implementing the actions and remediation set forth in the Bank’s action plans to reimburse customers.

CFPB Overdraft Coverage Consent Order

On April 1, 2014, the Bank received a civil investigative demand ("CID") from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for ATM and 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 automated teller machine ("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 currently implementing a remediation plan and working to meet the other consent order requirements. It is possible that additional litigation could be filed as a result of these issues.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Other Matters

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.

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.

Securities Class Action and Shareholder Derivative Lawsuits

Deka Lawsuit: SC is a defendant in a purported securities class action lawsuit (the "Deka Lawsuit") in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit is against SC, certain of its current and former directors and executive officers and certain institutions that served as underwriters in SC's initial public offering (the "IPO") , including SIS, on behalf of a class consisting of those who purchased or otherwise acquired SC securities between January 23, 2014 and June 12, 2014. The amended class action complaint alleges, among other things, that the IPO registration statement and prospectus and certain subsequent public disclosures violated federal securities laws by containing misleading statements concerning SC’s ability to pay dividends and the adequacy of SC’s compliance systems and oversight. On December 18, 2015, SC and the individual defendants moved to dismiss the lawsuit, which was denied. On December 2, 2016, the plaintiffs moved to certify the proposed classes. On July 11, 2017, the court entered 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).

Feldman Lawsuit: 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 certain 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 nonprime 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.

Jackie888 Lawsuit: 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.

Parmelee Lawsuits: Two purported securities class action lawsuits filed in March and April 2016 in the United States District Court, Northern District of Texas, were consolidated and are now captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783 (the "Parmelee Lawsuits"). The Parmelee Lawsuits 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 securities between February 3, 2015 and March 15, 2016. The complaint alleges, among other things, that SC violated federal securities laws by making false or misleading statements, as well as failing to disclose material adverse facts, in its periodic 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 the correction of such ACL for prior periods. On January 3, 2018, the court granted SC’s motion to dismiss the lawsuit as to defendant Ismail Dawood (SC’s former Chief Financial Officer) and denied the motion as to all other defendants.

Consumer Lending Cases

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.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Regulatory Proceedings

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 Bank of Boston (the "FRBB"), the CFPB, the Department of Justice (the “DOJ”), the SEC, the Federal Trade Commission and various state regulatory and enforcement agencies.

Currently, such matters include, but are not limited to, the following:

•

SC received a civil subpoena from the DOJ under Financial Institutions Reform, Recovery and Enforcement Act, requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans, and also from the SEC requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and has otherwise cooperated with the DOJ and the SEC with respect to these matters.

•

In October 2014, May 2015, July 2015 and February 2017, SC received 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 will serve as an executive committee on behalf of a group of 31 state Attorneys General. The subpoenas and/or CIDs from the executive committee states contain broad requests for information and the production of documents related to SC’s underwriting, securitization, servicing and collection of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and/or CIDs, and has otherwise cooperated with the Attorneys General with respect to this matter.

•

In February 2016, the CFPB issued a supervisory letter relating to its investigation of SC’s compliance systems, Board and senior management oversight, consumer complaint handling, marketing of guaranteed auto protection ("GAP") coverage and loan deferral disclosure practices. SC subsequently received a series of CIDs from the CFPB requesting information and testimony regarding SC’s marketing of GAP coverage and loan deferral disclosure practices. SC has responded to these requests within the deadlines specified in the CIDs, and has otherwise cooperated with the CFPB with respect to this matter.


•	In August 2017, SC received a CID from the CFPB. The stated purpose of the CID is to determine whether SC has complied with the Fair Credit Reporting Act and related regulations. SC has responded to these requests within the deadlines specified in the CID and has otherwise cooperated with the CFPB with respect to this matter.

2017 Written Agreement with the Federal Reserve

On March 21, 2017, SC and SHUSA entered into a written agreement with the FRBB. Under the terms of that 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.

Mississippi Attorney General Lawsuit

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, and subsequently filed a motion to stay the 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 September 25, 2017, the court granted the motion to stay and ordered a stay of all proceedings, excluding discovery and final briefing on motions to dismiss.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Servicemembers’ Civil Relief Act (“SCRA') Consent Order

In February 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 SC 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 SC’s SCRA compliance for a period of five years and requires SC to undertake certain additional remedial measures.

Intermediate Holding Company (“IHC') Matters

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

Puerto Rico FINRA Arbitrations

As of March 31, 2018, SSLLC had received 379 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds ("CEFs"). Most of these cases are based upon concerns regarding the local Puerto Rico securities market. The statements of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There were 267 arbitration cases that remained pending as of March 31, 2018.

As a result of Hurricane Maria impacting the Puerto Rico market including declines in Puerto Rico bond and CEF prices, it is possible that additional arbitration claims and/or increased claim amounts may be asserted in future periods.

Puerto Rico CEF Shareholder Derivative and Class Actions

Santander, Santander BanCorp, BSPR, SSLLC, Santander Asset Management, LLC and several directors and members of senior management of these entities are defendants in a purported class action and shareholder derivative suit pending in the United States District Court for the District of the Commonwealth of Puerto Rico captioned Dionisio Trigo Gonzalez et al. v. Banco Santander, S.A. et al., No. 3:2016cv02868 (the “Trigo Lawsuit”). Brought by customers of certain CEFs, 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 seeks unspecified damages but alleges damages to be at least tens of millions of dollars. The court denied plaintiffs’ motion to remand the case to Puerto Rico state court, and plaintiffs have sought reconsideration of that decision.

SSLLC, Santander BanCorp, BSPR, the Company and Santander are defendants in a putative class action alleging federal securities and common law claims relating to the solicitation and purchase of more than $180 million of Puerto Rico bonds and $101 million of CEFs during the period from December 2012 to October 2013. The case is pending in the United States District Court for the District of Puerto Rico and is captioned Jorge Ponsa-Rabell, et. al. v. SSLLC, Civ. No. 3:17-cv-02243 (the "Ponsa-Rabell Lawsuit"). The amended complaint alleges that defendants acted in concert to defraud purchasers in connection with the underwriting and sale of Puerto Rico municipal bonds, CEFs and open-end funds. The court denied a motion to consolidate the Trigo Lawsuit with the Ponsa-Rabell Lawsuit.

Mexican Government Bonds Purported Antitrust Class Action: On March 30, 2018, a purported antitrust class action was filed in the United States District Court, Southern District of New York, captioned Oklahoma Firefighters & Pension Retirement System, et al.v. Banco Santander, S.A. et al.,No. 1:18-cv-02830-JPO (the “MGB Lawsuit”). The MGB Lawsuit is against the Company, SIS, Santander, Banco Santander (Mexico), S.A. Institucion de Banca Multiple, Grupo Financiero Santander and Santander Investment Bolsa, Sociedad de Valores, S.A. on behalf of a class of persons who entered into Mexican government bond (“MGB”) transactions between January 1, 2006 and April 19, 2017, where such persons were either domiciled in the United States or, if domiciled outside the United States, transacted in the United States. The complaint alleges, among other things, that the Santander defendants and the other defendants violated U.S. antitrust laws by conspiring to rig auctions and/or fix prices of MGBs.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

These matters are ongoing and could in the future result in the imposition of damages, fines or other penalties. No assurance can be given that the ultimate outcome of these matters or any resulting proceedings would not materially and adversely affect the Company's business, financial condition and results of operations.

NOTE 17. RELATED PARTY TRANSACTIONS

The Company has various debt agreements with Santander. For a listing of these debt agreements, see Note 10 to the Condensed Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2017. 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.

Contributions from Santander that impact common stock and paid in capital within the Condensed Consolidated Statements of Stockholder's Equity are disclosed within the table below:



	Three-Month Period Ended March 31,
(in thousands)	2018		2017
Cash contribution	$	5,741	$	9,000
Adjustment to book value of assets purchased on January 1	277		—
Deferred tax asset on purchased assets	3,156		—
Contribution from shareholder	$	9,174	$	9,000

On January 1, 2018, the Company purchased certain assets and assumed certain liabilities of Produban Servicios Informaticos Generales S.L. and Ingenieria De Software Bancario S.L., both affiliates of Santander. The book value and fair value of the net assets acquired was $2.8 million and $15.3 million respectively. Related to this transaction, in 2017, the Company received a net capital contribution from Santander of $2.8 million, representing cash received of $15.3 million and a return of capital of $12.5 million for the difference between the fair value of the assets purchased and the book value on the balance sheets of the affiliates. The Companyre-evaluated the assets received on January 1, 2018 and recorded an additional $0.3 million to additional paid-in capital. The Company contributed these assets at book value of $3.1 million to SBNA, a subsidiary of the Company on January 1, 2018.

During the first quarter of 2018, the Company recorded a $3.2 million deferred tax asset on the assets purchased by the Company to establish the intangible under Section 197 of the Internal Revenue Code.

On March 29, 2017, SC entered into a Master Securities Purchase Agreement ("MSPA") with Santander, under which it has the option to sell a contractually determined amount of eligible prime loans to Santander, through the Santander Prime Auto Issuing Note Trust (“SPAIN") securitization platform, for a term ending in December 2018. SC will provide servicing on all loans originated under this arrangement. For the three months ended March 31, 2017, the Company sold $700 million of loans at fair value under this MSPA. The MSPA was amended in March 2018 and under this amended agreement, SC sold $1.5 billion of prime loans to Santander at fair value during the three months ended March 31, 2018. Total losses of $16.9 million and $2.7 million were recognized for the three-months periods ended March 31, 2018 and March 31, 2017, respectively, which are included in Miscellaneous income, net in the Condensed Consolidated Statements of Operations. SC had $15.4 million and $13.0 million of collections due to Santander as of March 31, 2018 and December 31, 2017, respectively.

Beginning in 2018, SC agreed to provide SBNA with origination support services in connection with the processing, underwriting, and purchase of RICs, primarily from Chrysler dealers. In addition, SC agreed to perform the servicing for any RICs originated on SBNA's behalf. During the three-month period ended March 31, 2018, SC facilitated SBNA's purchase of $24 million of RICs. SC recognizes referral fee income and servicing fee income related to this agreement that eliminates in the consolidation of SHUSA.

NOTE 18. BUSINESS SEGMENT INFORMATION

Business Segment Products and Services

The Company’s reportable segments are focused principally around the customers the Company serves. During the first quarter of 2018, the Chief Operating Decision Maker ("CODM") made certain changes in its business lines that drove a reorganization of its business leadership to provide enhanced customer service to its clients and to better align management teams and resources with the manner in which the CODM allocates resources and assesses business performance. Accordingly, the following changes were made within the Company's reportable segments:


•	The Commercial Banking and the CRE reportable segments were combined into the Commercial Banking reportable segment.


•	SIS, a subsidiary of SHUSA, that was formerly located within the Other category was moved to the GCB reportable segment.


•	The Company's internal Funds Transfer Pricing ("FTP") methodologies and cost allocations were updated to align with Santander corporate criteria for internal management reporting. These FTP and cost allocation changes impact how certain costs are allocated for all reporting segments, excluding SC.

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

The Company has identified the following reportable segments:

•

The Consumer and Business 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 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 real estate loans and multifamily loans to customers, 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.

•

The GCB segment serves the needs of global commercial and institutional customers by leveraging the international footprint of Santander to provide financing and banking services to corporations with over $500 million in annual revenues. GCB also includes SIS, a registered broker-dealer located in New York that provides services in investment banking, institutional sales, and trading and offering research reports of Latin American and European equity and fixed income securities. 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. During 2015, SC announced its intention to exit the personal lending business.

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

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

NOTE 18. BUSINESS SEGMENT INFORMATION (continued)

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. 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.

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

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

The CODM, 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 the CODM. The adjustments column includes adjustments to reconcile SC's GAAP results to SHUSA's consolidated results.

Results of Segments

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



For the Three-Month Period Ended	SHUSA Reportable Segments
March 31, 2018	Consumer & Business Banking			Commercial Banking			GCB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	304,819		$	154,935		$	32,690		$	62,816		$	921,737	$	9,895		$	9,058		$	1,495,950
Total non-interest income	82,819			33,588			50,639			113,424			531,736		2,686			(11,528		)	803,364
Provision for / (release of) credit losses	38,389			(9,741		)	(2,055		)	6,337			458,995		10,609			—			502,534
Total expenses	368,639			84,396			58,143			228,368			694,870		11,729			(2,621		)	1,443,524
Income/(loss) before income taxes	(19,390		)	113,868			27,241			(58,465		)	299,608		(9,757		)	151			353,256
Intersegment revenue/(expense)⁽¹⁾	678			1,531			(2,281		)	72			—		—			—			—
Total assets	18,857,164			24,318,734			7,062,542			38,944,263			40,045,188		—			—			129,227,891


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


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


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


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

NOTE 18. BUSINESS SEGMENT INFORMATION (continued)



For the Three-Month Period Ended	SHUSA Reportable Segments
March 31, 2017	Consumer & Business Banking			Commercial Banking		GCB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	262,732		$	152,306	$	42,228		$	56,728		$	1,042,925	$	37,305		$	8,341		$	1,602,565
Total non-interest income	82,534			14,923		51,336			151,107			434,848		5,454			(11,784		)	728,418
Provision for / (release of) credit losses	22,451			5,386		(1,364		)	15,610			635,013		58,349			—			735,445
Total expenses	375,021			78,339		46,608			226,034			621,334		11,872			(6,316		)	1,352,892
Income/(loss) before income taxes	(52,206		)	83,504		48,320			(33,809		)	221,426		(27,462		)	2,873			242,646
Intersegment revenue/(expense)⁽¹⁾	878			1,301		(2,397		)	218			—		—			—			—
Total assets	17,680,926			25,854,624		9,717,228			43,776,451			39,061,940		—			—			136,091,169


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


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


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


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

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 68% 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 ("BSPR"); 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 other consumer finance products.

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.

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.

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:

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



	Program Year ⁽¹⁾
	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 ⁽²⁾	30%	29%	26%	19%	28%


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

(2) 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 December 31, 2017.

The target penetration rate as of April 30, 2018 was 65%. SC's actual penetration rate as of March 31, 2018 was 28%. The penetration rate has been constrained due to a more competitive landscape and low interest rates, causing SC's subvented loan offers not to be materially more attractive than other lenders' offers. While SC has not achieved the targeted penetration rates to date, Chrysler Capital continues to be a focal point of its strategy, SC continues to work with FCA to improve penetration rates, and SC remains committed to the Chrysler Agreement.

SC has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. SC has partnered with FCA to roll out two new pilot programs, including a dealer rewards program and a nonprime subvention program. During the three-month period ended March 31, 2018, SC originated more than $2.0 billion in Chrysler Capital loans, which represents approximately 46% of its total RIC originations, with an approximately even share between prime and non-prime, as well as more than $2.1 billion in Chrysler Capital leases. Since its May 1, 2013 launch, Chrysler Capital has originated more than $47.2 billion in retail loans and $25.7 billion in leases, and facilitated the origination of $3.0 billion in leases and dealer loans for the Bank. As of March 31, 2018, SC's auto RIC portfolio consisted of $7.0 billion of Chrysler Capital loans, which represents 31% of SC's auto RIC portfolio.

ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the first quarter of 2018, unemployment remained steady, while market results were mixed and the preliminary gross domestic product ("GDP") growth rate slowed from the prior quarter.

The unemployment rate at March 31, 2018 was unchanged at 4.1% compared to 4.1% at December 31, 2017 and was lower compared to 4.5% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose in health care, manufacturing, and professional and business services, while remaining unchanged across other sectors.

The Bureau of Economic Analysis ("BEA") advance estimate indicates that real GDP grew at an annualized rate of 2.3% for the first quarter of 2018, compared to 2.9% for the fourth quarter of 2017. According to the BEA, the deceleration in growth was affected by slowing in personal consumption expenditures, exports, residential fixed investment, and state and local government spending. This was partially offset by growth in private inventory investment.

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

Market year-to-date returns for the following indices based on closing prices at March 31, 2018 were:



		March 31, 2018
Dow Jones Industrial Average		(2.5)%
S&P 500		(1.2)%
NASDAQ Composite		2.3%

At its March 2018 meeting, the Federal Open Market Committee decided to raise the federal funds rate target to 1.50-1.75% , reflecting that the labor market has continued to strengthen and that economic activity has continued to expand at a solid pace. Overall inflation remains below the targeted rate of 2.0%.

The 10-year Treasury bond rate at March 31, 2018 was 2.74%, up from 2.40% at December 31, 2017. Within the industry, changes within this metric are often considered to correspond to changes in 15-year and 30-year mortgage rates.

At the time of filing this Form 10-Q, current quarter 2018 information was not available; however, for the fourth quarter of 2017, mortgage originations decreased approximately 11.89% over the prior quarter, and decreased 20.61% year-over-year. Similarly, refinancing activity showed an increase of approximately 1.32% over the prior quarter, but a decrease of 42.2% year-over- year.

The ratio of nonperforming loans ("NPLs") to total gross loans for U.S. banks declined for six consecutive years, to just under 1.5% in 2015. NPL trends have remained relatively flat since that time. NPLs for U.S. commercial banks were approximately 1.17% of loans using the latest available data which was as of the fourth quarter of 2017, compared to 1.17% for the prior quarter.

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

Credit Rating Actions

The following table presents Moody's, Standard & Poor's ("S&P") and Fitch credit ratings for the Bank, and BSPR, SHUSA, Santander, and the Kingdom of Spain, as of March 31, 2018:

BANK

BSPR⁽¹⁾

SHUSA

Moody's

S&P

Fitch ⁽²⁾

Moody's

S&P

Fitch⁽²⁾

Moody's

S&P

Fitch

Long-Term

Baa1

A-

BBB+

Baa1

N/A

BBB+

Baa3

BBB+

Short-Term

P-1

A-2

F-2

P-1/P-2

N/A

F-2

n/a

A-2

F-2

Outlook

Stable

N/A

Stable



	SANTANDER			SPAIN
	Moody's	S&P	Fitch	Moody's	S&P	Fitch
Long-Term	A-2	A	A-	Baa1	A-	A-
Short-Term	P-1	A-1	F-2	P-2	A-2	F-1
Outlook	Stable	Stable	Stable	Stable	Positive	Stable

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

(2) Short Term Debt and Short Term Deposit Ratings are both F-2.

On January 19, 2018, Fitch upgraded Spain's Long-term Foreign Currency and Local Currency rating to A- from BBB+ and upgraded Spain's Short-term Foreign Currency and Local Currency rating to F1 from F2.

On March 23, 2018, Standard & Poor's upgraded Spain's Long-term rating to A1- from BBB+.

On April 6, 2018, Standard & Poor's raised Santander's long- and short-term ratings by one notch to A and A-1, respectively. Standard & Poor's also raised the long term ratings of SHUSA by one notch to BBB+ and SBNA to A-. The short-term ratings for SHUSA and SBNA were not changed.

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

On April 13, 2018, Moody's upgraded Spain's rating to Baa1 from Baa2.

On April 17, 2018, Moody's upgraded Santander's long- and short-term ratings by one notch to A-2 and P-1, respectively.

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 of 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 March 31, 2018, 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 $220 million. As of March 31, 2018, municipalities had not been designated “covered” territorial instrumentalities subject to the requirements of PROMESA, and the municipalities were current on their debt obligations to SHUSA. Under PROMESA, the FOB has sole discretion to designate territorial instrumentalities such as municipalities as covered entities subject to PROMESA’s requirements. If the FOB determines to designate municipalities as covered entities under PROMESA, the FOB could initiate debt restructuring of municipalities that have debt obligations to SHUSA, if deemed necessary.

Impact from Hurricanes

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

The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions. As a result, the Company's ALLL has approximately $110 million of reserves at March 31, 2018 related to the hurricanes. However, for credit exposures in Puerto Rico, given the current state in the region, the Company has had limited information with which to estimate probable credit losses. As of March 31, 2018, the Company has approximately $3.4 billion of loan exposures in Puerto Rico consisting of $1.6 billion in consumer loans, $1.8 billion in commercial loans, including $220 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses, and may establish additional reserves for losses in future periods.

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 (the "FRB") of Boston, 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.

Payment of Dividends

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

During the three-month period ended March 31, 2018, the Company paid cash dividends on common stock of $5.0 million to its sole shareholder, Santander.

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

Foreign Banking Organizations ("FBOs")

In February 2014, the Federal Reserve issued the final rule implementing certain enhanced prudential standards (“EPS”) mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA") (“FBO Final Rule”). Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an intermediate holding company (an “IHC"). In addition, the FBO Final Rule required U.S. bank holding companies ("BHCs") and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to 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 has 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. A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a U.S. BHC with more than $50 billion in total consolidated assets, the Company became subject to the EPS on January 1, 2015. Other standards of the FBO Final Rule will be phased in through January 1, 2019.

Regulatory Capital Requirements

In July 2013, the Federal Reserve, the FDIC and the OCC released final U.S. Basel III regulatory capital rules implementing the global regulatory capital reforms of Basel III that are applicable to both SHUSA and the Bank. The final rules established a comprehensive capital framework that includes both the advanced approaches for the largest internationally active U.S. banks, formerly known as Basel II, and a standardized approach that applies to all banking organizations with over $500 million in assets. Subject to various transition periods, this rule became effective for SHUSA on January 1, 2015.

The rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios and prompt corrective action thresholds that, when fully phased in, require banking organizations, including the Company and the Bank, to maintain a minimum common equity tier 1 ("CET1") capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a minimum leverage ratio, calculated as the ratio of Tier 1 capital to average consolidated assets for the quarter, of 4.0%.

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

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

The U.S. Basel III regulatory capital rules include deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights ("MSRs"), deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities are deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 for the Company and the Bank began on January 1, 2015 and was initially planned over three years, with a fully phased-in requirement of January 1, 2018. However, during 2017, the regulatory agencies finalized changes to the capital rules that became effective on January 1, 2018. These changes extended the current treatment and will defer the final transition provision phase-in at non-advanced approach institutions for certain capital elements, and suspend the risk-weighting to 100 percent for deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent. In addition, the regulatory agencies issued a secondary proposal in 2017 to further revise the capital rule by introducing new treatment of high volatility acquisition, development and construction loans, and by modifying the calculation for minority interest includible within capital, for which the regulators have not released a final decision.

See the Bank Regulatory Capital section of this 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.

If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and, in critically undercapitalized situations, appointment of a receiver or conservator. Critically undercapitalized institutions generally may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt. All but well-capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Pursuant to the Federal Deposit Insurance Corporation Improvement Act (the “FDIA”) and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution.

At March 31, 2018, the Bank met the criteria to be classified as “well-capitalized.”

Stress Testing and Capital Planning

The Company is subject to the Federal Reserve's 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 Company is considered a large and non-complex BHC. 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. Large and non-complex BHCs such as the Company are no longer subject to the qualitative objection criteria of the capital plan rule which are applied to larger banks that fall outside the large and non-complex BHC definition.

Liquidity Rules

In September 2014, the Federal Reserve, the FDIC, and the OCC finalized a rule to implement the Basel III liquidity coverage ratio (the “LCR”) for certain internationally active banks and nonbank financial companies, and a modified version of the LCR for certain depository institution holding companies that are not internationally active. The 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. This rule implements a phased implementation approach under which the most globally important covered companies (more than $700 billion in assets) and large regional financial institutions ($250 billion to $700 billion in assets) were required to begin phasing-in the LCR requirements in January 2015. Smaller covered companies (more than $50 billion in assets), such as the Company, were required to calculate the LCR monthly beginning January 2016. In November 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. There is no requirement to submit the calculation to the Federal Reserve. The Company will be required to publicly disclose its US LCR results beginning October 1, 2018.

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

In October 2014, the Basel Committee on Banking Supervision issued the final standard for the net stable funding ratio (the “NSFR”). The 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 The NSFR requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities, thereby reducing the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity in a way that could increase the risk of its failure and potentially lead to broader systemic stress. In May 2016, the Federal Reserve issued a proposed rule for NSFR applicable to U.S. financial institutions. The proposed rule has not been finalized, and the Company is currently evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.

Resolution and Recovery Planning

The DFA requires all BHCs and FBOs with assets of $50 billion or more to prepare and regularly update resolution plans. The resolution plan must assume that the covered company is resolved under the U.S. Bankruptcy Code and that no “extraordinary support” is received from the U.S. or any other government. In addition, the insured depository resolution plan rule requires that a bank with assets of $50 billion or more develop a plan for its resolution in a manner that ensures that depositors receive rapid access to their insured deposits, maximizes the net present value return from the sale or disposition of its assets, and minimizes the amount of any loss realized by creditors in resolution. Santander and the Bank most recently submitted resolution plans in accordance with these rules in December 2015.

On January 29, 2018, the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”) completed their assessments of the 2015 resolution plans and provided their expectations for future resolution plans to the 19 foreign-based banking organizations, including Santander. The banking agencies did not object to Santander’s 2015 plan or provide any substantive feedback on the submission. Instead, the banking agencies clarified their expectations for how the 2018 resolution plan should build on the 2015 submission. Importantly, the 2018 resolution plan can incorporate, by reference, elements of the 2015 plan that have not materially changed. In addition, the banking agencies requested that the 2018 plan provide updated information on how any organizational changes as a result of forming an IHC impact the resolution strategy. The 2018 resolution plan is due by December 31, 2018.

In September 2016, the OCC issued final guidelines that requires a bank with consolidated assets of $50 billion to develop and maintain a recovery plan that is appropriate for its size, risk profile, activities, and complexity, including the complexity of its organizational and legal entity structure. As provided in the final rule, SBNA must complete its initial recovery plan by July 2018.

TLAC

The Federal Reserve adopted a final rule in December 2016 that requires certain U.S. organizations to maintain a minimum amount of loss-absorbing instruments, including a minimum amount of unsecured long-term debt ("LTD") (the “TLAC Rule”). The TLAC Rule applies to U.S. global systemically important banks ("G-SIB") and to IHCs with $50 billion or more in U.S. non-branch assets that are controlled by a global systemically important FBO. 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 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 the TLAC Rule, requires SHUSA to hold LTD of at least 6% of its RWAs or 3.5% of its total consolidated assets. The TLAC Rule is effective January 1, 2019.

Volcker Rule

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

Because the term “banking entity” includes an insured depository institution, a depository institution holding company and any of their affiliates, the Volcker Rule has sweeping worldwide application and covers entities such as Santander, the Company, and certain of the Company’s subsidiaries (including the Bank and SC), as well as other Santander subsidiaries in the United States and abroad.

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

The Company implemented certain policies and procedures, training programs, recordkeeping, internal controls and other compliance requirements that were necessary to comply with the Volcker Rule. As required by the Volcker Rule, the compliance infrastructure has been tailored to each banking entity based on its size and its level of trading and Covered Fund activities. SHUSA's compliance program includes, among other things, processes for prior approval of new activities and investments permitted under the Volcker Rule, testing and auditing for compliance and a process for attesting annually that the compliance program is reasonably designed to achieve compliance with the rule.

Transactions with Affiliates

Depository institutions must remain in compliance with Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve's Regulation W, which governs the activities of the Company and its banking subsidiaries with affiliated companies and individuals. Section 23A imposes limits on certain specified “covered transactions,” which include loans, lines, and letters of credit to affiliated companies or individuals, and 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 a depository institution from engaging in certain transactions with affiliates unless the transactions are considered arms'-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.

Regulation AB II

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

Community Reinvestment Act ("CRA")

SBNA and BSPR 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. BSPR’s current CRA rating is “Outstanding” and SBNA’s current CRA rating is "Satisfactory." 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.

Other Regulatory Matters

On April 1, 2014, the Bank received a civil investigative demand from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for automated teller machine ("ATM") and onetime debit card transactions through a third-party vendor. On July 14, 2016, the Bank entered into a consent order with the CFPB regarding these practices. Pursuant to the terms of the consent order, the Bank paid a civil money penalty (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 currently executing a remediation plan and working to meet the other consent order requirements. It is possible that additional litigation could be filed as a result of these issues.

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

On February 25, 2015, SC entered into a consent order with the Department of Justice (the "DOJ"), approved by the United States District Court for the Northern District of Texas, which resolves the DOJ’s claims against SC that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the Servicemembers’ Civil Relief Act (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 requires us to undertake additional remedial measures. The consent order also subjects SC to monitoring by the DOJ for compliance with the SCRA for a period of five years.

On March 26, 2015, the Bank entered into a cease and desist order (the "SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP, an identity theft protection product from the Bank’s third-party vendor. Pursuant to the SIP Consent Order, the Bank paid a CMP of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of the SIP. Prior to entering into the SIP Consent Order, the Bank made $37.3 million in remediation payments to customers, representing the total amount paid for product enrollment.

In July 2015, the CFPB notified SC that it had referred to the DOJ certain alleged violations by SC of the Equal Credit Opportunity Act (the “ECOA”) regarding (i) statistical disparities in mark-ups charged by automobile dealers to protected groups on loans originated by those dealers and purchased by SC and (ii) the treatment of certain types of income in SC's underwriting process. In September 2015, the DOJ notified SC that it had initiated an investigation under the ECOA of SC's pricing of automobile loans based on the referral from the CFPB. SC resolved the DOJ investigation pursuant to a confidential agreement with the CFPB.

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 annual report:

(a) Santander UK plc (“Santander UK”) holds two savings accounts and one current account for two customers resident in the UK who are currently designated by the U.S. under the Specially Designated Global Terrorist ("SDGT") sanctions program. Revenues and profits generated by Santander UK on these accounts in the first quarter of 2018 were negligible relative to the overall profits of Santander.

(b) 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 first quarter of 2018. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK's Collections & Recoveries Department. No revenues or profits were generated by Santander UK on this account in the first quarter of 2018.

(c) In addition, on September 6, 2017, Santander Brasil received a payment order in an amount of €1,603.00 in favor of a Brazilian recipient from an entity based in Turkey. Upon receipt of the supporting documentation, Santander Brasil became aware of the fact that the ultimate payer was actually Iran Water and Electrical Equipments Engineering Co., an entity based in Iran and controlled by the Iranian government. Santander Brasil therefore declined to process the transaction. The intended recipient of the funds obtained an order from the Court of Justice of the State of São Paulo (Tribunal de Justiça Estado de São Paulo) requiring Santander Brasil to process the payment. Santander Brasil complied with the court order and processed the payment accordingly. Revenues and profits generated by Santander Brasil on this transaction were negligible relative to the overall profits of Santander.

The Santander Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations - either under tender documents or under contracting agreements - of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.

In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the first quarter of 2018, 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 and issuing export letters of credit, except for the legacy transactions described above. Santander 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). As such, Santander intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

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

RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2018 AND 2017



	Three-Month Period Ended March 31,						YTD Change
(dollars in thousands)	2018			2017			Dollar			Percentage
Net interest income	$	1,495,950		$	1,602,565		$	(106,615	)	(6.7	)%
Provision for credit losses	(502,534		)	(735,445		)	232,911			31.7	%
Total non-interest income	803,364			728,418			74,946			10.3	%
General and administrative expenses	(1,405,662		)	(1,309,816		)	(95,846		)	(7.3	)%
Other expenses	(37,862		)	(43,076		)	5,214			12.1	%
Income before income taxes	353,256			242,646			110,610			45.6	%
Income tax provision (benefit)	95,321			78,937			16,384			(20.8	)%
Net income	257,935			163,709			94,226			57.6	%
Net income attributable to NCI	74,397			50,628			23,769			46.9	%
Net income attributable to SHUSA	$	183,538		$	113,081		$	70,457		62.3	%

The Company reported pre-tax income of $353.3 million for the three-month period ended March 31, 2018, compared to pre-tax income of $242.6 million for the three-month period ended March 31, 2017. Factors contributing to this increase were as follows:


•	Net interest income decreased $106.6 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This decrease was primarily due to a decrease in interest income earned on loans due to declining yields on consumer loans and an increase in interest expense on Other borrowings due to the rates paid on new debt issuances.


•	The provision for credit losses decreased $232.9 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This decrease was primarily due to a decline in loan balances, improved credit performance and stable recovery rates for the auto loan portfolio and a decrease in the Corporate Banking and Middle Market Commercial Real Estate ("CRE") portfolio provisions.

•

Total non-interest income increased $74.9 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was primarily due to lease income associated with the continued growth of the lease portfolio, an increase in gain on sale of assets coming off lease, and an increase in the gain on sale of Bank branches. These were offset by a decrease in consumer and commercial loan fees due to a reduction in loans serviced by the Company for the three-month period ended March 31, 2018.

•

Total general and administrative expenses increased $95.8 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was primarily due to an increase in lease depreciation expense due to the growth of the Company's leased vehicle portfolio and an increase in compensation expense. These increases were offset by a decrease in outside service costs for consulting and processing services and a decrease in loan servicing expense.


•	Other expenses decreased $5.2 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This was primarily due to a decrease in expenses associated with loss on debt repurchases.

•

The income tax provision increased $16.4 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. There was an increase in the income tax provision as a result of the increase in income before income tax provision partially offset by a decrease in the effective tax rate for the three-month period ended March 31, 2018 due to the reduction in the Federal corporate income tax rate provided for by the TCJA as enacted on December 22, 2017 and effective January 1, 2018.

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




CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	THREE-MONTH PERIODS ENDED MARCH 31, 2018 AND 2017
	2018 ⁽¹⁾							2017 ⁽¹⁾										Change due to
(dollars in thousands)	Average Balance			Interest		Yield/ Rate⁽²⁾		Average Balance			Interest		Yield/ Rate⁽²⁾		Increase/(Decrease)			Volume			Rate
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	22,641,814		$	128,330	2.27	%	$	27,912,404		$	116,655	1.67	%	$	11,675		$	(12,934	)	$	24,609
LOANS⁽³⁾:
Commercial loans	30,469,522			305,396		4.01	%	34,644,293			297,608		3.44	%	7,788			(208,007		)	215,795
Multifamily	8,166,086			79,234		3.88	%	8,546,919			76,198		3.57	%	3,036			(3,200		)	6,236
Total commercial loans	38,635,608			384,630		3.98	%	43,191,212			373,806		3.46	%	10,824			(211,207		)	222,031
Consumer loans:
Residential mortgages	9,279,002			92,576		3.99	%	8,160,399			80,735		3.96	%	11,841			11,221			620
Home equity loans and lines of credit	5,769,698			61,291		4.25	%	5,970,331			54,481		3.65	%	6,810			(1,750		)	8,560
Total consumer loans secured by real estate	15,048,700			153,867		4.09	%	14,130,730			135,216		3.83	%	18,651			9,471			9,180
RICs and auto loans	26,112,393			1,038,885		15.91	%	26,908,340			1,149,154		17.08	%	(110,269		)	(33,257		)	(77,012		)
Personal unsecured	2,349,472			159,837		27.21	%	2,293,984			163,523		28.51	%	(3,686		)	4,164			(7,850		)
Other consumer⁽⁴⁾	596,406			10,515		7.05	%	770,804			17,239		8.95	%	(6,724		)	(3,469		)	(3,255		)
Total consumer	44,106,971			1,363,104		12.36	%	44,103,858			1,465,132		13.29	%	(102,028		)	(23,091		)	(78,937		)
Total loans	82,742,579			1,747,734		8.45	%	87,295,070			1,838,938		8.43	%	(91,204		)	(234,298		)	143,094
Intercompany investments	4,640			43		3.71	%	14,640			232		6.34	%	(189		)	(118		)	(71		)
TOTAL EARNING ASSETS	105,389,033			1,876,107		7.12	%	115,222,114			1,955,825		6.79	%	(79,718		)	(247,350		)	167,632
Allowance for loan losses⁽⁵⁾	(3,901,549		)					(3,837,740		)
Other assets⁽⁶⁾	27,902,385							26,037,135
TOTAL ASSETS	$	129,389,869						$	137,421,509
INTEREST-BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	9,287,019		$	7,342	0.32	%	$	10,846,729		$	5,226	0.19	%	$	2,116		$	(563	)	$	2,679
Savings	5,827,687			2,623		0.18	%	6,002,756			2,902		0.19	%	(279		)	(99		)	(180		)
Money market	25,327,111			47,750		0.75	%	25,971,334			32,409		0.50	%	15,341			(801		)	16,142
Certificates of deposit ("CDs")	5,499,654			17,709		1.29	%	8,402,468			21,456		1.02	%	(3,747		)	(16,028		)	12,281
TOTAL INTEREST-BEARING DEPOSITS	45,941,471			75,424		0.66	%	51,223,287			61,993		0.48	%	13,431			(17,491		)	30,922
BORROWED FUNDS:
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements	1,714,444			9,581		2.24	%	5,127,222			16,418		1.28	%	(6,837		)	53,932			(60,769		)
Other borrowings	37,307,453			295,109		3.16	%	38,137,956			274,617		2.88	%	20,492			(5,914		)	26,406
TOTAL BORROWED FUNDS ⁽⁷⁾	39,021,897			304,690		3.12	%	43,265,178			291,035		2.69	%	13,655			48,018			(34,363		)
TOTAL INTEREST-BEARING FUNDING LIABILITIES	84,963,368			380,114		1.79	%	94,488,465			353,028		1.49	%	27,086			30,527			(3,441		)
Noninterest bearing demand deposits	15,337,560							15,435,381
Other liabilities⁽⁸⁾	5,169,285							4,817,268
TOTAL LIABILITIES	105,470,213							114,741,114
STOCKHOLDER’S EQUITY	23,919,656							22,680,395
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	129,389,869						$	137,421,509

NET INTEREST SPREAD ⁽⁹⁾						5.33	%						5.30	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.68	%						5.56	%
NET INTEREST INCOME				$	1,495,950						$	1,602,565


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


(2)	Yields calculated using taxable equivalent net interest income.


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


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


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


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


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


(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.

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

NET INTEREST INCOME



	Three-Month Period Ended March 31,				YTD Change
(dollars in thousands)	2018		2017		Dollar increase/(decrease)			Percentage
INTEREST INCOME:
Interest-earning deposits	$	32,513	$	18,433	$	14,080		76.4	%
Investments available-for-sale ("AFS")	73,505		81,427		(7,922		)	(9.7	)%
Investments held-to-maturity ("HTM")	17,064		10,632		6,432			60.5	%
Other investments	5,248		6,163		(915		)	(14.8	)%
Total interest income on investment securities and interest-earning deposits	128,330		116,655		11,675			10.0	%
Interest on loans	1,747,734		1,838,938		(91,204		)	(5.0	)%
Total Interest Income	1,876,064		1,955,593		(79,529		)	(4.1	)%
INTEREST EXPENSE:
Deposits and customer accounts	75,424		61,993		13,431			21.7	%
Borrowings and other debt obligations	304,690		291,035		13,655			4.7	%
Total Interest Expense	380,114		353,028		27,086			7.7	%
NET INTEREST INCOME	$	1,495,950	$	1,602,565	$	(106,615	)	(6.7	)%

Net interest income decreased $106.6 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This decrease was primarily due to a decrease in yield on interest income earned on loans and an increase in interest expense on borrowings due to higher borrowing rate.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $11.7 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. The average balance of investment securities and interest-earning deposits for the three-month period ended March 31, 2018 was $22.6 billion with an average yield of 2.27%, compared to an average balance of $27.9 billion with an average yield of 1.67% for the first quarter of 2017. The increase in interest income on investment securities and interest-earning deposits for the three-month period ended March 31, 2018 was primarily attributable to an increase of $6.4 million in interest income on investments HTM due to increased volume, and an increase of $14.1 million in interest-earning deposits due to an increased yield of 2.19% for the three-month period ended March 31, 2018 compared to 0.93% for the first quarter of 2017.

Interest Income on Loans

Interest income on loans decreased $91.2 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017, primarily due to declines in RIC rates, which comprised $110.3 million of the decrease. The average balance of total loans was $82.7 billion with an average yield of 8.45% for the three-month period ended March 31, 2018, compared to $87.3 billion with an average yield of 8.43% for the first quarter of 2017. The decrease in the average balance of total loans of $4.6 billion was primarily due to a decline in the balance of the commercial loan portfolio. The average balance of commercial loans was $38.6 billion with an average yield of 3.98% for the three-month period ended March 31, 2018, compared to $43.2 billion with an average yield of 3.46% for the first quarter of 2017.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts increased $13.4 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017, primarily due to a increase in average cost of interest rates. The average balance of total interest-bearing deposits was $45.9 billion with an average cost of 0.66% for the three-month period ended March 31, 2018 compared to an average balance of $51.2 billion with an average cost of 0.48% for the first quarter of 2017.

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

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $13.7 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. The increase in interest expense on borrowed funds was due to interest paid at higher rate during the three-month period ended March 31, 2018. The average balance of total borrowings was $39.0 billion with an average cost of 3.12% for the three-month period ended March 31, 2018, compared to an average balance of $43.3 billion with an average cost of 2.69% for the first quarter of 2017. The average balance of borrowed funds decreased from March 31, 2017 to March 31, 2018, primarily due to the decrease in Federal Home Loan Bank ("FHLB") advances as a result of maturities and terminations.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the portfolio. The provision for credit losses for the three-month period ended March 31, 2018 was $502.5 million, compared to $735.4 million for 2017. The decrease for the three-month period ended March 31, 2018 was primarily due to decreases in the overall loan portfolio resulting in a decreased allowance for loan and lease losses ("ALLL") and a decline in originations, stabilizing credit performance for non-troubled debt restructuring ("TDR") loans, and recovery rates for the RIC and auto loan portfolio.



	Three-Month Period Ended March 31,						YTD Change
(in thousands)	2018			2017			Dollar			Percentage
ALLL, beginning of period	$	3,911,575		$	3,814,464		$	97,111		2.5	%
Charge-offs:
Commercial	(32,960		)	(26,173		)	(6,787		)	25.9	%
Consumer	(1,218,936		)	(1,237,280		)	18,344			(1.5	)%
Total charge-offs	(1,251,896		)	(1,263,453		)	11,557			(0.9	)%
Recoveries:
Commercial	10,006			10,580			(574		)	(5.4	)%
Consumer	661,744			623,937			37,807			6.1	%
Total recoveries	671,750			634,517			37,233			5.9	%
Charge-offs, net of recoveries	(580,146		)	(628,936		)	48,790			(7.8	)%
Provision for loan and lease losses ⁽¹⁾	521,780			737,335			(215,555		)	(29.2	)%
ALLL, end of period	$	3,853,209		$	3,922,863		$	(69,654	)	(1.8	)%
Reserve for unfunded lending commitments, beginning of period	$	109,111		$	122,419		$	(13,308	)	(10.9	)%
Release of reserves for unfunded lending commitments ⁽¹⁾	(19,246		)	(1,890		)	(17,356		)	918.3	%
Loss on unfunded lending commitments	—			(133		)	133			(100.0	)%
Reserve for unfunded lending commitments, end of period	89,865			120,396			(30,531		)	(25.4	)%
Total allowance for credit losses ("ACL"), end of period	$	3,943,074		$	4,043,259		$	(100,185	)	(2.5	)%


(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 decreased $48.8 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.

Consumer charge-offs decreased $18.3 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. The decrease was comprised of a $15.3 million decrease in consumer auto loan charge-offs, and a $5.3 million increase in consumer loans held in Puerto Rico offset by an $2.2 million increase in home mortgage charge-offs.

Consumer recoveries increased $37.8 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. This increase was comprised of a $38.7 million increase in consumer auto loan recoveries, offset by a $1.2 million decrease in other consumer loan recoveries.

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

Consumer net charge-offs as a percentage of average consumer loans were 1.3% for the three-month period ended March 31, 2018, compared to 1.4% for the corresponding period in 2017.

Commercial charge-offs increased $6.8 million for the three-month period ended March 31, 2018 compared to corresponding period in 2017. This increase was comprised of a $14.8 million increase in Commercial Banking charge-offs, offset by a $3.5 million decrease in commercial fleet charge-offs, a $3.5 million decrease in Middle Market CRE charge-offs, and a $1.5 million decrease in charge-offs for commercial loans in Puerto Rico.

Commercial recoveries decreased $0.6 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. This decrease was primarily due to a $1.2 million decrease in recoveries for continuing care retirement communities, and a $1.4 million decrease in commercial fleet recoveries, offset by a $2.2 million increase in corporate banking recoveries.

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, was 0.06% for the three-month period ended March 31, 2018, compared to 0.04% for the three-month period ended March 31, 2017.

NON-INTEREST INCOME



	Three-Month Period Ended March 31,					YTD Change
(dollars in thousands)	2018			2017		Dollar increase/(decrease)			Percentage
Consumer fees	$	101,288		$	112,066	$	(10,778	)	(9.6	)%
Commercial fees	37,273			42,283		(5,010		)	(11.8	)%
Lease income	540,896			496,045		44,851			9.0	%
Net (losses)/gains recognized in earnings	(663		)	519		(1,182		)	(227.7	)%
Miscellaneous income	124,570			77,505		47,065			60.7	%
Total non-interest income	$	803,364		$	728,418	$	74,946		10.3	%

Total non-interest income increased $74.9 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. The increase for the three-month period ended March 31, 2018 was primarily due to the increase in lease income associated with the continued growth of the lease portfolio and increases in miscellaneous income. These increases were offset by decreases in consumer and commercial loan fees due to the reduction of loans serviced by the Company as well as a decrease in net gains recognized in earnings for the three-month period ended March 31, 2018.

Consumer Fees

Consumer fees decreased $10.8 million for the three-month period ended March 31, 2018, compared to the first quarter of 2017. This decrease was primarily due to a $21.6 million decrease in loan fee income, which was attributable to a reduction in loans serviced by the Company due to loan sales and payoffs and lower reserve recourse releases in 2018. This was partially offset by an increase of $2.5 million in consumer deposit fees for the three-month period ended March 31, 2018.

Commercial Fees

Commercial fees consists of deposit overdraft fees, deposit ATM fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $5.0 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This decrease was primarily due to lower capital markets income.

Lease income

Lease income increased $44.9 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $10.3 billion for the three-month period ended March 31, 2018, compared to $9.8 billion at March 31, 2017.

Net (losses)/gains recognized in earnings

The Company recognized $0.7 million in net losses on sale of investment securities for the three-month period ended March 31, 2018 compared to the net gains of $0.5 million for the three-month period ended March 31, 2017.

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

Miscellaneous Income/(loss)



	Three-Month Period Ended March 31,						YTD Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Net gain on sale of operating leases	$	53,200		$	22,715		$	30,485		134.2	%
Trust and wealth management	43,337			36,501			6,836			18.7	%
Loss on sale of non-mortgage loans	(69,804		)	(74,302		)	4,498			(6.1	)%
Net gain/(loss) on sale of fixed assets	1,730			(183		)	1,913			(1,045.4	)%
Re-valuation adjustments for fair value option ("FVO")	(321		)	7,425			(7,746		)	(104.3	)%
Mortgage banking income, net	16,345			13,174			3,171			24.1	%
BOLI	14,568			17,299			(2,731		)	(15.8	)%
Capital markets revenue	56,613			45,817			10,796			23.6	%
Other miscellaneous income	8,902			9,059			(157		)	(1.7	)%
Total miscellaneous income/(loss)	$	124,570		$	77,505		$	47,065		60.7	%

Miscellaneous income increased $47.1 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. Factors contributing to this change were as follows:


•	An increase in the net gain on sale of operating leases of $30.5 million.


•	An increase in trust and wealth management income of $6.8 million


•	A decrease in the loss on the sale of non-mortgage loans of $4.5 million.


•	Net gain/(loss) on sale of fixed assets increased by $1.9 million.


•	A decrease of $7.7 million in re-valuation adjustments relating primarily to the change in the fair value of the loan portfolio compared to the first quarter of 2017. For further discussion, see Note 14 to the Condensed Consolidated Financial Statements.


•	A decrease in BOLI income of $2.7 million as a result of a decrease in death benefits received. 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.


•	An increase in capital markets revenue of $10.8 million due to favorable market conditions resulting in increased activity.

Mortgage Banking Revenue



	Three-Month Period Ended March 31,						YTD Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Mortgage and multifamily servicing fees	$	10,193		$	10,624		$	(431	)	(4.1	)%
Net gains on sales of residential mortgage loans and related securities	6,224			4,351			1,873			43.0	%
Net gains on sales of multifamily mortgage loans	400			300			100			33.3	%
Net gains/(losses) on hedging activities	(11,628		)	1,047			(12,675		)	(1,210.6	)%
Net gains/(losses) from changes in MSR fair value	15,043			1,457			13,586			932.5	%
MSR principal reductions	(3,887		)	(4,605		)	718			(15.6	)%
Total mortgage banking income, net	$	16,345		$	13,174		$	3,171		24.1	%

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 $3.2 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase for the period ended March 31, 2018 was primarily attributable to $13.6 million of gains related to MSR valuation and $1.9 million of higher gains related to residential mortgage sales. These gains were partially offset by $12.7 million of losses from hedging activities.

Interest rates continued to rise in the three-month period ended March 31, 2018.

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

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, 2016	4.38	%	3.63	%
March 31, 2017	4.25	%	3.50	%
June 30, 2017	4.13	%	3.38	%
September 30, 2017	3.99	%	3.25	%
December 31, 2017	4.13	%	3.63	%
March 31, 2018	4.50	%	3.99	%

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

Mortgage and multifamily loan servicing fees decreased $0.4 million for the three-month period ended March 31, 2018, compared to the first quarter of 2017. At March 31, 2018 and 2017, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $198.2 million and $556.6 million, respectively. The decrease in loans serviced for others was primarily due to pay-downs received during the remainder of 2017 and 2018.

Net gains on sales of residential mortgage loans and related securities increased $1.9 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. For the three-month period ended March 31, 2018, the Company sold $0.3 billion of mortgage loans for gains of $6.2 million, compared to $0.6 billion of loans sold for gains of $4.4 million for the first quarter of 2017.

The Company periodically sells qualifying mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA") 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 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 March 31, 2018, the Company serviced loans with a principal balance of $102.6 million for FNMA, compared to $136.0 million at December 31, 2017. These loans had a credit loss exposure of $12.2 million as of March 31, 2018, compared to $12.2 million as of December 31, 2017. 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 is fully amortized.

The Company has established a liability related to the fair value of the retained credit exposure for multifamily loans sold to FNMA. This liability represents the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses the portfolio is projected to incur based upon specific internal information and an industry-based default curve with a range of estimated losses. As of March 31, 2018 and December 31, 2017, the Company had a liability of $0.9 million and $1.3 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA under this program.

Net loss from hedging activities for the three-month period ended March 31, 2018 was $11.6 million compared to the gain of $1.0 million in the first quarter of 2017. This variance for the period ended March 31, 2018 was primarily due to the decrease in the mortgage loan pipeline valuation and the Company's hedging strategy in the current mortgage rate environment.

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

Net gains/losses from changes in MSR fair value were a net gain of $15.0 million for the three-month period ended March 31, 2018 as compared to a net gain of $1.5 million for the corresponding period in 2017. The value of the related MSRs carried at fair value at March 31, 2018 and December 31, 2017 was $160.1 million and $146.0 million, respectively. The MSR asset fair value change for the three-month period ended March 31, 2018 was the result of fluctuations in interest rates.

The Company recognized $3.9 million of principal reductions for the three-month period ended March 31, 2018, compared to $4.6 million for the first quarter of 2017. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing.

GENERAL AND ADMINISTRATIVE EXPENSES



	Three-Month Period Ended March 31,				YTD Change
(dollars in thousands)	2018		2017		Dollar			Percentage
Compensation and benefits	$	469,406	$	452,241	$	17,165		3.8	%
Occupancy and equipment expenses	159,340		162,712		(3,372		)	(2.1	)%
Technology expense	152,282		135,509		16,773			12.4	%
Loan expense	96,814		98,324		(1,510		)	(1.5	)%
Lease expense	424,266		358,792		65,474			18.2	%
Other administrative expenses	103,554		102,238		1,316			1.3	%
Total general and administrative expenses	$	1,405,662	$	1,309,816	$	95,846		7.3	%

Total general and administrative expenses increased $95.8 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. Factors contributing to this increase were as follows:

•

Compensation and benefits expense increased $17.2 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was primarily the result of salary expense increase of $17.9 million, bonus expense increase of $22.8 million and commission expense increase of $5.4 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. These increases were offset by decreases in benefits expense of $30.5 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017.

•

Occupancy and equipment expenses decreased $3.4 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This was primarily due to a decrease in depreciation expense of $2.5 million, a decrease in other expense of $1.2 million and a decrease in telecommunication expense of $0.9 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. These decreases were offset by an increase of $1.8 million in maintenance and repair expense for the three-month period ended March 31, 2018 compared to the first quarter of 2017.

•

Technology, outside services, and marketing expenses increased $16.8 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was primarily due to an increase in technology services of $17.7 million and an increase in outside processing service expense of $0.2 million during 2018. This was offset by a decrease of $1.1 million in marketing expenses.

•

Loan expense decreased $1.5 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This decrease was primarily due to decreases of $1.9 million in loan servicing expenses and $2.1 million in other loan expense. These decreases were offset by increases in origination expense of $0.4 million and loan collection expense of $2.0 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017.


•	Lease expense increased $65.5 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio and depreciation associated with that portfolio.

•

Other administrative expenses increased $1.3 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was primarily attributable to an increase in operational risk expenses of $8.1 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was offset by decreases in legal expense of $5.1 million and recruiting expense of $1.5 million for three-month period ended March 31, 2018.

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

OTHER EXPENSES



	Three-Month Period Ended March 31,				YTD Change
(dollars in thousands)	2018		2017		Dollar (decrease)/increase			Percentage
Amortization of intangibles	$	15,288	$	15,491	$	(203	)	(1.3	)%
Deposit insurance premiums and other expenses	16,761		17,830		(1,069		)	(6.0	)%
Loss on debt extinguishment	2,212		6,749		(4,537		)	(67.2	)%
Other miscellaneous expenses	3,601		3,006		595			19.8	%
Total other expenses	$	37,862	$	43,076	$	(5,214	)	(12.1	)%

Total other expenses decreased $5.2 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. The primary factors contributing to this decrease were:


•	Amortization of intangibles decreased $0.2 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017.


•	Deposit insurance premiums and other expenses decreased $1.1 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This decrease was primarily attributable to decreases in FDIC insurance premiums and assessments.

•

Losses on debt extinguishment decreased $4.5 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. The Company recorded loss on debt extinguishment related to debt repurchases and early repayments of $2.2 million for the three-month period ended March 31, 2018. A tender offer on bank debt resulted in a charge of $6.7 million during the three-month period ended March 31, 2017,


•	Other miscellaneous expenses increased $0.6 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. Impairment on long-lived assets increased $0.5 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was primarily related to impairment on capitalized software assets.

INCOME TAX PROVISION

An income tax provision of $95.3 million was recorded for the three-month period ended March 31, 2018, compared to an income tax provision of $78.9 million for the corresponding period in 2017. This resulted in an effective tax rate ("ETR") of 27.0% for the three-month period ended March 31, 2018, compared to 32.5% for the corresponding period in 2017.

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 March 31, 2018 consisted of Consumer and Business Banking, Commercial Banking, Global Corporate Banking ("GCB"), and SC. For additional information with respect to the Company's reporting segments and changes to the segments beginning in the first quarter of 2018, see Note 18 to the Condensed Consolidated Financial Statements.

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

Results Summary

Consumer and Business Banking



	Three-Month Period Ended March 31,						YTD Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Net interest income	$	304,819		$	262,732		$	42,087		16.0	%
Total non-interest income	82,819			82,534			285			0.3	%
Provision for credit losses	38,389			22,451			15,938			71.0	%
Total expenses	368,639			375,021			(6,382		)	(1.7	)%
Loss before income taxes	(19,390		)	(52,206		)	32,816			62.9	%
Intersegment revenue	678			878			(200		)	(22.8	)%
Total assets	18,857,164			17,680,926			1,176,238			6.7	%

Consumer and Business Banking reported a loss before income taxes of $19.4 million for the three-month period ended March 31, 2018 compared to a loss before income taxes of $52.2 million for the three-month period ended March 31, 2017. Factors contributing to this change were as follows:


•	Net interest income increased $42.1 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. This increase was primarily driven by deposit product margin where despite rising interest rates, costs have been managed down.


•	Total non-interest income increased $0.3 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017 driven by a change in the shared services agreement between the Bank and SSLLC made effective in the middle of 2017.


•	The provision for credit losses increased by $15.9 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017, driven by the absence of reserve releases in 2017 for home equity and increased delinquency in the credit cards and personal loan portfolios.

Commercial Banking



	Three-Month Period Ended March 31,					YTD Change
(dollars in thousands)	2018			2017		Dollar increase/(decrease)			Percentage
Net interest income	$	154,935		$	152,306	$	2,629		1.7	%
Total non-interest income	33,588			14,923		18,665			125.1	%
(Release of) /provision for credit losses	(9,741		)	5,386		(15,127		)	(280.9	)%
Total expenses	84,396			78,339		6,057			7.7	%
Income before income taxes	113,868			83,504		30,364			36.4	%
Intersegment revenue	1,531			1,301		230			17.7	%
Total assets	24,318,734			25,854,624		(1,535,890		)	(5.9	)%

Commercial Banking reported income before income taxes of $113.9 million for the three-month period ended March 31, 2018, compared to income before income taxes of $83.5 million for the three-month period ended March 31, 2017. Factors contributing to this change were as follows:

•

Net interest income increased $2.6 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. Total average gross loans were $24.9 billion for the three-month period ended March 31, 2018 compared to $26.1 billion for the first quarter of 2017. The decline in average gross loans is primarily related to the sale of the Mortgage Warehouse portfolio and decreases in the Middle Market and Energy Lending portfolios.


•	The provision for credit losses decreased $15.1 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. The decrease in provision for the three-month period ended March 31, 2018 was due to releases totaling $6.2 million for the Mortgage Warehouse portfolio as well as other general releases.

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

GCB



	Three-Month Period Ended March 31,						YTD Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Net interest income	$	32,690		$	42,228		$	(9,538	)	(22.6	)%
Total non-interest income	50,639			51,336			(697		)	(1.4	)%
Release of provision for credit losses	(2,055		)	(1,364		)	(691		)	(50.7	)%
Total expenses	58,143			46,608			11,535			24.7	%
Income before income taxes	27,241			48,320			(21,079		)	(43.6	)%
Intersegment expense	(2,281		)	(2,397		)	116			4.8	%
Total assets	7,062,542			9,717,228			(2,654,686		)	(27.3	)%

GCB reported income before income taxes of $27.2 million for the three-month period ended March 31, 2018 compared to income before income taxes of $48.3 million for the three-month period ended March 31, 2017. Factors contributing to this change were as follows:

•

Net interest income decreased $9.5 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. The average balance of this segment's gross loans was $4.5 billion for the three-month period ended March 31, 2018 compared to $7.3 billion for the corresponding period in 2017. The average balance of deposits was $2.0 billion for the three-month period ended March 31, 2018 compared to $2.4 billion for the corresponding period in 2017. The decrease in loan balances is attributed to the strategic goal of building a less capital-intensive U.S. franchise, which was attained by exiting less profitable relationships across all sectors, and by pro-actively reducing exposures related to the commodities and oil and gas sectors.


•	Total non-interest income decreased $0.7 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.


•	The provision for credit losses decreased $0.7 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. The provision decreased for the three-month period ended March 31, 2018 due to higher reserves required for oil and gas clients and higher reserves on a renewable energy investment that was substantially damaged by Hurricane Maria in 2017.


•	Total expenses increased $11.5 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017, driven by higher support and personnel expenses.

Other



	Three-Month Period Ended March 31,						YTD Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Net interest income	$	62,816		$	56,728		$	6,088		10.7	%
Total non-interest income	113,424			151,107			(37,683		)	(24.9	)%
Provision for credit losses	6,337			15,610			(9,273		)	(59.4	)%
Total expenses	228,368			226,034			2,334			1.0	%
Loss before income taxes	(58,465		)	(33,809		)	(24,656		)	(72.9	)%
Intersegment revenue/(expense)	72			218			(146		)	NM¹
Total assets	38,944,263			43,776,451			(4,832,188		)	(11.0	)%

¹- not meaningful

The Other category reported losses before income taxes of $58.5 million for the three-month period ended March 31, 2018, compared to losses before income taxes of $33.8 million for the three-month period ended March 31, 2017. Factors contributing to this change were as follows:


•	Net interest income increased $6.1 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.


•	Total non-interest income decreased $37.7 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.

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


•	The provision for credit losses decreased $9.3 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.


•	Total expenses increased $2.3 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.



	Three-Month Period Ended March 31,				YTD Change
(dollars in thousands)	2018		2017		Dollar increase/(decrease)			Percentage
Net interest income	$	921,737	$	1,042,925	$	(121,188	)	(11.6	)%
Total non-interest income	531,736		434,848		96,888			22.3	%
Provision for credit losses	458,995		635,013		(176,018		)	(27.7	)%
Total expenses	694,870		621,334		73,536			11.8	%
Income before income taxes	299,608		221,426		78,182			35.3	%
Intersegment revenue	—		—		—			0.0%
Total assets	40,045,188		39,061,940		983,248			2.5	%

SC reported income before income taxes of $299.6 million for the three-month period ended March 31, 2018, compared to income before income taxes of $221.4 million for the three-month period ended March 31, 2017. Factors contributing to this change were as follows:


•	Net interest income decreased $121.2 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. This decrease was primarily related to an increase in interest expense during the period. SC's cost of funds increased during 2018 due to higher market rates and increased spreads.


•	Total non-interest income increased $96.9 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017, due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.


•	The provision for credit losses decreased $176.0 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. This decrease was primarily due to a lower build of the ACL as a result of the decline in originations during the three-month period ended March 31, 2018 compared to the first quarter of 2017.


•	Total expenses increased $73.5 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017, primarily due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

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

FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's loans held for investment ("LHFI") portfolioconsisted of the following at the dates indicated:



	March 31, 2018				December 31, 2017				March 31, 2017
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Commercial LHFI:
Commercial real estate loans	$	9,072,529	11.3	%	$	9,279,225	11.5	%	$	9,883,926	11.8	%
Commercial and industrial loans	13,712,573		17.1	%	14,438,311		17.9	%	17,218,865		20.6	%
Multifamily	8,081,924		10.1	%	8,274,435		10.1	%	8,462,464		10.1	%
Other commercial	7,337,433		9.2	%	7,174,739		8.9	%	6,746,717		8.0	%
Total Commercial Loans ⁽¹⁾	38,204,459		47.7	%	39,166,710		48.4	%	42,311,972		50.5	%

Consumer loans secured by real estate:
Residential mortgages	9,198,059		11.5	%	8,846,765		11.0	%	7,801,175		9.3	%
Home equity loans and lines of credit	5,788,682		7.2	%	5,907,733		7.3	%	5,941,340		7.1	%
Total consumer loans secured by real estate	14,986,741		18.7	%	14,754,498		18.3	%	13,742,515		16.4	%

Consumer loans not secured by real estate:
RICs and auto loans - originated	23,583,727		29.4	%	23,081,424		28.6	%	22,729,892		27.2	%
RICs and auto loans - purchased	1,515,086		1.9	%	1,834,868		2.3	%	2,976,567		3.6	%
Total RICs and auto loans	25,098,813		31.3	%	24,916,292		30.9	%	25,706,459		30.8	%

Personal unsecured loans	1,261,238		1.6	%	1,285,677		1.6	%	1,211,922		1.4	%
Other consumer	567,077		0.7	%	617,675		0.8	%	742,032		0.9	%

Total consumer loans	41,913,869		52.3	%	41,574,142		51.6	%	41,402,928		49.5	%
Total LHFI	$	80,118,328	100.0	%	$	80,740,852	100.0	%	$	83,714,900	100.0	%

Total LHFI with:
Fixed	$	51,066,020	63.7	%	$	50,653,790	62.7	%	$	50,822,537	60.7	%
Variable	29,052,308		36.3	%	30,087,062		37.3	%	32,892,363		39.3	%
Total LHFI	$	80,118,328	100.0	%	$	80,740,852	100.0	%	$	83,714,900	100.0	%

(1)As of March 31, 2018, the Company had $214.0 million of commercial loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans decreased approximately $962.3 million, or 2.5%, from December 31, 2017 to March 31, 2018. This decrease was primarily due to a decrease in commercial and industrial loans of $725.7 million. Additionally, there was a decrease in multifamily loans of $192.5 million as the Company switches its focus from CRE loans. CRE loans decreased $206.7 million.

Commercial loans decreased approximately $4.1 billion, or 9.7%, from March 31, 2017 to March 31, 2018. This decrease was primarily due to a decrease in commercial and industrial loans of $3.5 billion due mainly to a decrease in Global Commercial Banking driven by strategy to reduce exposure. Additionally, there was a decrease in multifamily loans of $380.5 million as the Company switches its focus from CRE loans to place emphasis on core commercial business. CRE loans decreased $811.4 million.

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



	At March 31, 2018, Maturing
(in thousands)	In One Year Or Less		One to Five Years		After Five Years		Total⁽¹⁾
CRE loans	$	2,483,343	$	5,072,140	$	1,517,046	$	9,072,529
Commercial and industrial loans and other	8,049,650		11,308,603		1,887,474		21,245,727
Multifamily loans	802,017		6,139,109		1,140,798		8,081,924
Total	$	11,335,010	$	22,519,852	$	4,545,318	$	38,400,180
Loans with:
Fixed rates	$	3,731,787	$	11,143,780	$	2,120,255	$	16,995,822
Variable rates	7,603,223		11,376,072		2,425,063		21,404,358
Total	$	11,335,010	$	22,519,852	$	4,545,318	$	38,400,180

(1) Includes LHFS.

Consumer Loans Secured By Real Estate

Consumer loans secured by real estate increased $232.2 million, or 1.6%, from December 31, 2017 to March 31, 2018. This increase was comprised of an increase in the residential mortgage portfolio of $351.3 million due to an increase in new loan originations, offset by a decrease in the home equity loans and lines of credit portfolio of $119.1 million.

Consumer loans secured by real estate increased $1.2 billion, or 9.1%, from March 31, 2017 to March 31, 2018. This increase was comprised of an increase in the residential mortgage portfolio of $1.4 billion due to an increase in new loan originations, offset by a decrease in the home equity loans and lines of credit portfolio of $152.7 million.

Consumer Loans Not Secured By Real Estate

RICs

RICs increased $182.5 million, or 0.7%, from December 31, 2017 to March 31, 2018. The increase in the RIC and auto loan portfolio was primarily due to an increase in new originations of $502.3 million, which was partially offset by a $319.8 million decrease in RICs and auto loan portfolio-purchased. The decrease in the RIC and auto loan portfolio-purchased was due to run-off of the portfolio from normal paydown and chargeoff activity.

RICs decreased $607.6 million, or 2.4%, from March 31, 2017 to March 31, 2018. The decrease in the RIC and auto loan portfolio was primarily due to a decrease in RICs and auto loan portfolio-purchased of $1.5 billion, which was partially offset by a $853.8 million increase in new originations. The decrease in the RIC and auto loan portfolio-purchased was due to run-off of the portfolio from normal paydown and chargeoff activity.

Other Consumer Loans

Other consumer loans remained relatively flat from December 31, 2017 to March 31, 2018, with a decrease of $75.0 million and from March 31, 2017 to March 31, 2018 with a decrease of $125.6 million.

As of March 31, 2018, 83.0% of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a Fair Isaac Corporation 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.

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

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.

At March 31, 2018, a typical RIC was originated with an average annual percentage rate of 16.1% 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 March 31, 2018, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.

As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. In connection with this review, on October 9, 2015, SC delivered a 90-day notice of termination of its loan purchase agreement with LendingClub. On February 1, 2016, SC completed the sale of substantially all of its LendingClub loans to a third-party buyer at an immaterial premium to par value. On April 14, 2017, SC sold the remaining portfolio, comprised of personal installment loans, to a third-party buyer.

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

CREDIT RISK MANAGEMENT

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

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

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

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.

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.

100

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:



	Three-Month Period Ended						YTD Change
(dollars in thousands)	March 31, 2018			December 31, 2017			Dollar			Percentage
Non-accrual loans:
Commercial:
CRE	$	132,941		$	139,236		$	(6,295	)	(4.5	)%
Commercial and industrial loans	203,738			230,481			(26,743		)	(11.6	)%
Multifamily	10,569			11,348			(779		)	(6.9	)%
Other commercial	79,474			83,468			(3,994		)	(4.8	)%
Total commercial loans	426,722			464,533			(37,811		)	(8.1	)%

Consumer loans secured by real estate:
Residential mortgages	257,995			265,436			(7,441		)	(2.8	)%
Home equity loans and lines of credit	131,036			134,162			(3,126		)	(2.3	)%
Consumer loans not secured by real estate:
RICs and auto loans - originated	1,644,605			1,816,226			(171,621		)	(9.4	)%
RICs - purchased	207,328			256,617			(49,289		)	(19.2	)%
Total RICs and Auto loans	1,851,933			2,072,843			(220,910		)	(10.7	)%

Personal unsecured loans	2,820			2,366			454			19.2	%
Other consumer	11,118			10,657			461			4.3	%
Total consumer loans	2,254,902			2,485,464			(230,562		)	(9.3	)%
Total non-accrual loans	2,681,624			2,949,997			(268,373		)	(9.1	)%

Other real estate owned	126,714			130,777			(4,063		)	(3.1	)%
Repossessed vehicles	171,359			210,692			(39,333		)	(18.7	)%
Other repossessed assets	1,324			2,190			(866		)	(39.5	)%
Total other real estate owned ("OREO") and other repossessed assets	299,397			343,659			(44,262		)	(12.9	)%
Total non-performing assets	$	2,981,021		$	3,293,656		$	(312,635	)	(9.5	)%

Past due 90 days or more as to interest or principal and accruing interest	$	81,455		$	96,461		n/a			n/a
Annualized net loan charge-offs to average loans ⁽¹⁾	2.8		%	3.0		%	n/a			n/a
Non-performing assets as a percentage of total assets	2.3		%	2.6		%	n/a			n/a
NPLs as a percentage of total loans	3.3		%	3.5		%	n/a			n/a
ALLL as a percentage of total NPLs	143.7		%	132.6		%	n/a			n/a

(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 March 31, 2018.

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 $186.9 million and $112.3 million at March 31, 2018 and December 31, 2017, respectively. Potential problem consumer loans amounted to $3.3 billion and $4.2 billion at March 31, 2018 and December 31, 2017, 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 $3.0 billion, or 2.3% of total assets, at March 31, 2018, compared to $3.3 billion, or 2.6% of total assets, at December 31, 2017, primarily attributable to an increase in NPLs in the commercial and industrial and RIC portfolios. The increase in the non-accrual commercial and industrial NPL portfolio was driven by obligors that experienced credit difficulties during the year. The increase in the other commercial NPL portfolio was primarily driven by one obligor located in Puerto Rico that experienced business disruptions due to Hurricane Maria.

101

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

The increase in RIC non-accrual loans as of March 31, 2018 was the result of the Company classifying $837.3 million of RIC TDR loans that were less than 60 days past due, but for which repayment was not reasonably assured, as non-accrual. Until repayment is reasonably assured, the Company is applying the cost recovery method to this RIC portfolio, which accelerated the reduction of the outstanding RIC balance and correspondingly reduced the required allowance and decreased the allowance for loan losses as a percentage of the NPL ratio. In addition, the purchased RIC ALLL/NPL portfolio decreased primarily due to a $0.3 billion, or 17.4%, decline in the portfolio as it is in run-off.

General

Non-performing assets consist of NPLs, which represent loans and leases no longer accruing interest, 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 when the RICs are more than 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.

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

Commercial

Commercial NPLs decreased $37.8 million from December 31, 2017 to March 31, 2018. Commercial NPLs accounted for 1.1% and 1.2% of commercial LHFI at March 31, 2018 and December 31, 2017, respectively. The decrease in commercial NPLs was comprised of a $30.7 million decrease in commercial and industrial NPLs, and a $6.3 million decrease in the CRE portfolio.

Consumer Loans Not Secured by Real Estate

RICs and amortizing personal loans are classified as non-performing when they are greater than 60 days past due (i.e., 61 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 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.

RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans on non-accrual status, interest income is recognized on a cash basis, however, the Company continues to assess the recognition of cash received on those loans in order to identify whether certain of those loans should also be placed on a cost recovery basis. For TDR loans on non-accrual status, the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on cost recovery basis, the Company returns to accrual when a sustained period of repayment performance has been achieved. Based on deteriorating TDR vintage performance, beginning January 1, 2017, the Company believes repayment under the revised terms is not reasonably assured for a RIC that is already on non-accrual status (i.e., more than 60 days past due) and has received a modification or deferment that qualifies as a TDR event. In addition, any TDR that subsequently receives a third deferral is placed on non-accrual status. Further, the Company has determined that certain of these loans should also be placed on a cost recovery basis.

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

102

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

NPLs in the RIC and auto loan portfolio decreased $220.9 million from December 31, 2017 to March 31, 2018. At March 31, 2018, non-performing RICs and auto loans accounted for 7.4% of total RIC and auto LHFI, compared to 8.3% of total RICs and auto loans at December 31, 2017.

NPLs in the unsecured and other consumer loan portfolio increased $0.9 million from December 31, 2017 to March 31, 2018. At March 31, 2018 and December 31, 2017, non-performing personal unsecured and other consumer loans accounted for 0.8% and 0.7% of total unsecured and other consumer loans, respectively.

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 March 31, 2018 and December 31, 2017, respectively:



	March 31, 2018						December 31, 2017
(dollars in thousands)	Residential mortgages			Home equity loans and lines of credit			Residential mortgages			Home equity loans and lines of credit
NPLs	$	257,995		$	131,036		$	265,436		$	134,162
Total LHFI	9,198,059			5,788,682			8,846,765			5,907,733
NPLs as a percentage of total LHFI	2.8		%	2.3		%	3.0		%	2.3		%
NPLs in foreclosure status	48.3		%	51.5		%	48.8		%	52.2		%

The NPL ratio is 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.

Foreclosure Activity

The percentage of NPLs in foreclosure status decreased from 48.8% at December 31, 2017 to 48.3% at March 31, 2018 for residential mortgages and decreased from 52.2% at December 31, 2017 to 51.5% at March 31, 2018 for home equity loans.

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

Puerto Rico’s economy remains in an economic and fiscal crisis that has already extended for 11 years. The island’s economy continues experiencing adjustments related to the aftermath of the housing market crisis, the banking industry consolidation in 2010 and multiple rounds of austerity measures implemented in recent years in an attempt to stabilize the public sector fiscal crisis. These circumstances have eroded confidence and prolonged the contraction in economic activity prior to the impact of 2017's hurricanes. Refer to the "Economic and Business Environment" section of this MD&A for additional information on the impact of Hurricane Maria on Puerto Rico.

The following table represents the concentration of foreclosures by state and U.S. territory for the Company as a percentage of total foreclosures at March 31, 2018 and December 31, 2017, respectively:



	March 31, 2018	December 31, 2017
Puerto Rico	54.1%	53.5%
New Jersey	10.0%	13.7%
New York	9.7%	6.4%
Pennsylvania	5.5%	10.9%
Massachusetts	10.9%	5.8%
All other states⁽¹⁾	9.8%	9.7%

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

103

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

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 53.5% 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 March 31, 2018 and December 31, 2017, the residential mortgage portfolio included the following Alt-A loans:



(dollars in thousands)	March 31, 2018			December 31, 2017
Alt-A loans	$	366,724		$	386,412
Alt-A loans as a percentage of the residential mortgage portfolio⁽¹⁾	3.9		%	4.3		%
Alt-A loans in NPL status	$	30,050		$	33,534
Alt-A loans in NPL status as a percentage of residential mortgage NPLs	11.6		%	12.6		%


(1)	Includes residential mortgage held for sale

The performance of the Alt-A segment has remained poor, averaging an 8.2% NPL ratio in 2018. Alt-A mortgage originations were discontinued in 2008. 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 11.6% at March 31, 2018. 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 as a percentage of the residential mortgage portfolio.

Delinquencies

At March 31, 2018 and December 31, 2017, the Company's delinquencies consisted of the following:



	March 31, 2018					December 31, 2017
(dollars in thousands)	Consumer Loans Secured by Real Estate	RICs and auto loans	Personal unsecured and Other Consumer Loans	Commercial Loans	Total	Consumer Loans Secured by Real Estate	RICs and auto loans	Personal unsecured and Other Consumer Loans	Commercial Loans	Total
Total delinquencies	$515,717	$3,217,540	$224,357	$349,851	$4,307,465	$571,229	$4,225,517	$229,547	$295,138	$5,321,431
Total loans⁽¹⁾	$15,163,758	$25,718,981	$2,796,104	$38,400,180	$82,079,023	$14,964,668	$26,017,340	$2,965,442	$39,315,888	$83,263,338
Delinquencies as a % of Loans	3.4%	12.5%	8.0%	0.9%	5.2%	3.8%	16.2%	7.7%	0.8%	6.4%


(1)	Includes LHFS.

Overall, total delinquencies decreased by $1.0 billion, or 19.1%, from December 31, 2017 to March 31, 2018 primarily driven by RICs and auto loan delinquencies which decreased $1.0 billion. Delinquencies in the RIC and auto loan portfolio at December 31, 2017 were primarily a result of a decline in the credit quality of the 2015 vintage RICs, which have a higher percentage of loans with no FICO scores. Due to payments and charge-offs on 2015 vintage RICs that continued in 2018, the 2015 vintage RICs had a lower impact on delinquencies at March 31, 2018 than December 31, 2017. Commercial loan delinquencies increased by $54.7 million from December 31, 2017 to March 31, 2018, primarily related to commercial and industrial loans located in Puerto Rico due to overall economic conditions on the island.

104

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

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:



	As of March 31, 2018
(in thousands)	Commercial			%		Consumer loans secured by real estate			%		RICs and auto loans			%		Other consumer			%		Total TDRs
Performing	$	145,800		51.9	%	$	273,604		69.5	%	$	5,264,200		91.5	%	$	127,797		75.7	%	$	5,811,401
Non-performing	135,265			48.1	%	120,314			30.5	%	489,414			8.5	%	40,965			24.3	%	785,958
Total	$	281,065		100.0	%	$	393,918		100.0	%	$	5,753,614		100.0	%	$	168,762		100.0	%	$	6,597,359

% of loan portfolio	0.7		%	n/a		2.6		%	n/a		22.4		%	n/a		6.0		%	n/a		8.0		%
(1) Includes LHFS

	As of December 31, 2017
(in thousands)	Commercial			%		Consumer loans secured by real estate			%		RICs and auto loans			%		Other consumer			%		Total TDRs
Performing	$	146,808		54.4	%	$	292,634		70.8	%	$	5,270,507		88.3	%	$	114,355		74.7	%	$	5,824,304
Non-performing	123,266			45.6	%	120,458			29.2	%	700,461			11.7	%	38,683			25.3	%	982,868
Total	$	270,074		100.0	%	$	413,092		100.0	%	$	5,970,968		100.0	%	$	153,038		100.0	%	$	6,807,172

% of loan portfolio	0.7		%	n/a		2.8		%	n/a		22.9		%	n/a		5.2		%	n/a		8.2		%

(1) Includes LHFS.

The following table provides a summary of TDR activity:



	Three-Month Period Ended March 31, 2018						Three-Month Period Ended March 31, 2017
(in thousands)	RICs and auto loans			All other loans			RICs and auto loans			All other loans⁽¹⁾
TDRs, beginning of period	$	5,975,512		$	831,660		$	5,161,935		$	944,980
New TDRs⁽¹⁾	518,317			52,028			1,127,860			47,688
Charged-Off TDRs	(455,031		)	(16,537		)	(579,097		)	(24,814		)
Sold TDRs	(190		)	(2,255		)	—			(3,223		)
Payments on TDRs	(284,994		)	(21,151		)	(289,696		)	(6,440		)
TDRs, end of period	$	5,753,614		$	843,745		$	5,421,002		$	958,191


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

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.

105

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

At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account. TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved.

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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts used in the determination of the adequacy of the ALLL for loans classified as TDRs are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the ALLL and related provision for loan and lease losses. Changes in these ratios and periods are considered in determining the appropriate level of the ALLL and related provision for loan and lease losses. For loans that are classified as TDRs, the Company generally compares the present value of expected cash flows to the outstanding recorded investment of TDRs to determine the amount of allowance and related provision for credit losses that should be recorded. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated costs to sell.

ACL

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

The following table presents the allocation of the ALLL and the percentage of each loan type to total LHFI at the dates indicated:



	March 31, 2018				December 31, 2017
(dollars in thousands)	Amount		% of Loans to Total LHFI		Amount		% of Loans to Total LHFI
Allocated allowance:
Commercial loans	$	462,074	47.7	%	$	443,796	48.4	%
Consumer loans	3,344,112		52.3	%	3,420,756		51.6	%
Unallocated allowance	47,023		n/a		47,023		n/a
Total ALLL	3,853,209		100.0	%	3,911,575		100.0	%
Reserve for unfunded lending commitments	89,865				109,111
Total ACL	$	3,943,074			$	4,020,686

General

The ACL decreased $77.6 million from December 31, 2017 to March 31, 2018. The increase in the overall ACL was primarily attributable to the increased amount of TDR's within 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.

106

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

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

The risk factors inherent in the ACL are continuously reviewed and revised by management when conditions indicate that the estimates initially applied are different from actual results. The Company also performs a comprehensive analysis of the ACL on a quarterly basis. In addition, the Company performs a review each quarter of allowance levels and trends by major portfolio against the levels of peer banking institutions to benchmark our allowance and industry norms.

Commercial

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

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g., less than 90 days) or insignificant shortfall in the amount of payments does not necessarily result in the loan being identified as impaired. Impaired commercial loans are comprised of all TDRs plus non-accrual loans in excess of $1 million that are not TDRs. In addition, the Company may perform a specific reserve analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant. The Company performs a specific reserve analysis on certain loans regardless of loan size. If a loan is identified as impaired and is collateral-dependent, an initial appraisal is obtained to provide a baseline to determine the property’s fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of the asset, obsolescence, etc.), an appraisal is obtained more frequently. At a minimum, updated appraisals for impaired loans are obtained within a 12-month period if the loan remains outstanding for that period of time.

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

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 $462.1 million at March 31, 2018 (1.2% of commercial LHFI) and $443.8 million at December 31, 2017 (1.1% of commercial LHFI). The primary factor resulting in the increased ACL allocated to the commercial portfolio is, in part, due to a decline in the overall balance of the commercial loan portfolio.

107

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

Consumer

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

Residential mortgages not adequately secured by collateral are generally charged-off to fair value less cost to sell when deemed to be uncollectible or are delinquent 180 days or more, whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment likelihood include a loan that is secured by collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate.

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

A home equity loan or line of credit not adequately secured by collateral is treated similarly to 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 25.0% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.5% 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.

108

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

For RICs and personal unsecured loans at SC, the Company maintains an ALLL for the Company's held-for-investment portfolio not classified as TDRs at a level estimated to be adequate to absorb credit losses of the recorded investment inherent in the portfolio, based on a holistic assessment, including both quantitative and qualitative considerations. For TDR loans, the allowance is comprised of impairment measured 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.

The quantitative framework is supported by credit models that consider several credit quality indicators including, but not limited to, historical loss experience and current portfolio trends. The transition-based Markov model provides data on a granular and disaggregated/segment basis as it utilizes recently observed loan transition rates from various loan statuses to forecast future losses. Transition matrices in the Markov model are categorized based on account characteristics such as delinquency status, TDR type (e.g., deferment, modification, etc.), internal credit risk, origination channel, months on book, thin/thick file and time since TDR event. The credit models utilized differ among the Company's RIC and personal loan portfolios. The credit models are adjusted by management through qualitative reserves to incorporate information reflective of the current business environment.

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 allowance for consumer loans was $3.3 billion and $3.4 billion at March 31, 2018 and December 31, 2017, respectively. The allowance as a percentage of held-for-investment consumer loans was 8.0% at March 31, 2018 and 8.2% at December 31, 2017. 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.

Unallocated

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 and to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated ALLL positions are considered in light of these factors. The unallocated ALLL was $47.0 million at both March 31, 2018 and December 31, 2017.

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 Sheets. 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 $109.1 million at December 31, 2017 to $89.9 million at March 31, 2018. During the three-month period ended March 31, 2018, SBNA transferred $6.3 billion of unfunded commitments to extend credit to an unconsolidated related party, which reduced the required reserve for unfunded commitments. The net impact of the change in the reserve for unfunded lending commitments to the overall ACL was immaterial.

INVESTMENT SECURITIES

Investment securities consist primarily of U.S. Treasuries, MBS, ABS and stock in the FHLB and FRB. MBS consist of pass-through, collateralized mortgage obligations (“CMOs"), and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s Investor Service at the date of issuance. The Company’s AFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.

109

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

Total investment securities AFS decreased $1.1 billion to $13.3 billion at March 31, 2018, compared to $14.4 billion at December 31, 2017. During the three-month period ended March 31, 2018, the composition of the Company's investment portfolio changed due to a decrease in MBS and ABS, offset by an increase in U.S Treasury Securities. MBS decreased by $1.4 billion primarily due to a transfer to HTM for $1.2 billion and $563.7 million of principal paydowns and maturities. U.S. Treasuries increased by $377.0 million primarily due to investment purchases of $350 million. ABS decreased $19.9 million, primarily due to $17.5 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 HTM securities. HTM securities are reported at cost and adjusted for amortization of premium and accretion of discount. Total investment securities HTM were $2.9 billion at March 31, 2018. The Company had 66 investment securities classified as HTM as of March 31, 2018.

Total gross unrealized losses on investments in debt securities - AFS increased by $143.6 million to $361.1 million during the three-month period ended March 31, 2018 compared to the three-month period ended March 31, 2017. The increase is comprised of increases in unrealized losses of $36.7 million on GNMA residential securities and $87.2 million on FNMA/FHLMC residential securities primarily due to rising interest rates.

Other investments, which consists primarily of FHLB stock and FRB stock, increased from $658.9 million at December 31, 2017 to $765.0 million at March 31, 2018, primarily due to an increase in CDs greater than 90 days to maturity of $99.4 million. Also, the Company redeemed $25.9 million of FHLB stock at par, that was partially offset by the Company's purchase of $10.2 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the period ended March 31, 2018, the Company did not purchase any FRB stock.

The average life of the AFS investment portfolio (excluding certain ABS) at March 31, 2018 was approximately 4.69 years. The average effective duration of the investment portfolio (excluding certain ABS) at March 31, 2018 was approximately 3.40 years. The actual maturities of MBS AFS will differ from contractual maturities because borrowers 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:



(in thousands)	March 31, 2018		December 31, 2017
Investment securities AFS:
U.S. Treasury securities and government agencies	$	6,158,655	$	7,042,828
FNMA and FHLMC securities	6,672,963		6,840,696
State and municipal securities	21		23
Other securities ⁽¹⁾	489,955		529,636
Total investment securities AFS	13,321,594		14,413,183
Investment securities HTM:
U.S. government agencies	2,877,357		1,799,808
Total investment securities HTM⁽²⁾	2,877,357		1,799,808
Other investments	765,041		658,863
Total investment portfolio	$	16,963,992	$	16,871,854


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


(2)	HTM securities are measured and presented at amortized cost.

110

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

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 March 31, 2018:



	March 31, 2018
(in thousands)	Amortized Cost		Fair Value
FNMA	$	3,776,113	$	3,008,203
FHLMC	3,125,761		3,664,760
GNMA ⁽¹⁾	7,772,192		7,581,248
Government - Treasuries	1,388,611		1,375,105
Total	$	16,062,677	$	15,629,316


(1)	Includes U.S. government agency MBS.

GOODWILL

The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At March 31, 2018, goodwill totaled $4.4 billion and represented 3.4% of total assets and 18.6% of total stockholder's equity. The following table shows goodwill by reporting units at March 31, 2018:



(in thousands)	Consumer and Business Banking		Commercial Banking		GCB		SC		Total
Goodwill at March 31, 2018	$	1,880,304	$	1,412,995	$	131,130	$	1,019,960	$	4,444,389

During the first quarter of 2018, the reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. Refer to Note 18 for further discussion on the change in reportable segments. There were no additions or removals of underlying lines of business in connection with the reporting change. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million, for Commercial Banking and CRE, respectively, have been combined. There were no additions or impairments of goodwill for the three-month period ended March 31, 2018.

The Company conducted its annual goodwill impairment tests as of October 1, 2017 using generally accepted valuation methods. 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 first 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 had a net deferred tax liability balance of $238.5 million at March 31, 2018 (consisting of a deferred tax asset balance of $799.4 million and a deferred tax liability balance of $1.0 billion), compared to a net deferred tax liability balance of $198.3 million at December 31, 2017 (consisting of a deferred tax asset balance of $771.7 million and a deferred tax liability balance of $970.0 million). The $40.2 million increase in net deferred liabilities for the three-month period ended March 31, 2018 was primarily due to a decrease in deferred tax assets related to net operating losses; a decrease in deferred tax assets on loans marked to market for income tax purposes and an increase in the deferred tax asset valuation allowance offset by a decrease in deferred tax liabilities related to accelerated depreciation from leasing transactions.

111

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

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 (the “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.

In November 2015, the Federal District Court granted the Company’s motions for summary judgment and later ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed and the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court, finding that 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 case has been remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off the deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.8 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 $36.8 million to no change.

OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 6 and Note 16 to the Condensed Consolidated Financial Statements, and the Liquidity and Capital Resources section of this MD&A.

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 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 March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, 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. During the three-month period ended March 31, 2018, the Company paid cash dividends of $5.0 million to its common stock shareholder and cash dividends to preferred shareholders of $3.7 million.

112

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

The following schedule summarizes the actual capital balances of SHUSA and the Bank at March 31, 2018:



	SHUSA

	March 31, 2018		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽¹⁾
CET1 capital ratio	16.65	%	6.50	%	4.50	%
Tier 1 capital ratio	18.25	%	8.00	%	6.00	%
Total capital ratio	19.92	%	10.00	%	8.00	%
Leverage ratio	14.36	%	5.00	%	4.00	%


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



	BANK

	March 31, 2018		Well-capitalized Requirement⁽²⁾		Minimum Requirement⁽²⁾
CET1 capital ratio	18.71	%	6.50	%	4.50	%
Tier 1 capital ratio	18.71	%	8.00	%	6.00	%
Total capital ratio	19.90	%	10.00	%	8.00	%
Leverage ratio	14.23	%	5.00	%	4.00	%


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

In June 2017, the Company announced that the Federal Reserve did not object to the planned capital actions described in the Company’s capital plan submitted as part of the CCAR process. That capital plan included planned capital distributions across the following categories: (1) common stock dividends from SHUSA to Santander, (2) common stock dividends from SC, (3) redemption of the remaining balance of SHUSA’s 7.908% trust preferred securities, and (4) dividends on the Company’s preferred stock and payments on its trust preferred securities.

LIQUIDITY AND CAPITAL RESOURCES

Overall

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

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

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

Sources of Liquidity

Company and Bank

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

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

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 $6.7 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the three-month period ended March 31, 2018, SC completed on-balance sheet funding transactions totaling approximately $3.8 billion, including:


•	a securitization on its Santander Drive Auto Receivables Trust ("SDART") platform for $1.1 billion;


•	issuance of a retained bond on its SDART platform for $92.0 million;


•	a securitization on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform for $880.0 million;


•	issuance of a retained bond on its DRIVE platform for $58.0 million;


•	one private amortizing lease facility for $650.0 million; and


•	one lease securitization on its Santander Retail Auto Lease Trust ("SRT") platform for $1.0 billion.

SC also completed $1.5 billion in asset sales to Santander.

In addition, SC completed another on-balance sheet securitization on the SDART platform for approximately $1.1 billion in April 2018.

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

IHC

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

As needed, SIS will draw down from another subordinated loan with Santander in order to enable SIS to underwrite certain large transactions in excess of the foregoing subordinated loan. At March 31, 2018, there was no outstanding balance on the subordinated loan.

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

BSPR's primary sources of liquidity include core deposits, FHLB borrowings, wholesale and broker deposits, and liquid investment securities.

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

Institutional borrowings

The Company regularly projects its funding needs under various stress scenarios, and maintains contingency plans consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash, unencumbered liquid assets, and capacity to borrow at the FHLB and the FRB’s discount window.

Available Liquidity

As of March 31, 2018, the Bank had approximately $20.8 billion in committed liquidity from the FHLB and the FRB. Of this amount, $18.8 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At March 31, 2018 and December 31, 2017, liquid assets (cash and cash equivalents and LHFS), and securities AFS exclusive of securities pledged as collateral) totaled approximately $19.0 billion and $18.4 billion, respectively. These amounts represented 30.7% and 30.3% of total deposits at March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018, the Bank, BSI and BSPR had $1.1 billion, $1.8 billion, and $1.4 billion, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.

BSPR has $812.5 million in committed liquidity from the FHLB, all of which was unused as of March 31, 2018, as well as $385.0 million in liquid assets aside from cash unused as of March 31, 2018.

Cash, cash equivalents, and restricted cash

As of January 1, 2018, the classification of restricted cash within the Company's SOCF has changed. Refer to Note 1 for additional details.



	Three-Month Period Ended March 31,
(in thousands)	2018			2017
Net cash flows from operating activities	$	1,963,089		$	1,615,055
Net cash flows from investing activities	(979,224		)	(169,177		)
Net cash flows from financing activities	388,930			(2,644,840		)

Cash flows from operating activities

Net cash flow from operating activities was $2.0 billion for the three-month period ended March 31, 2018, which was primarily comprised of net income of $257.9 million, $1.8 billion in proceeds from sales of LHFS, $437.5 million in depreciation, amortization and accretion, and $502.5 million of provision for credit losses, partially offset by $1.2 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $1.6 billion for the three-month period ended March 31, 2017, which was comprised of net income of $163.7 million, $1.6 billion in proceeds from sales of LHFS, $349.7 million in depreciation, amortization and accretion, and $735.4 million of provisions for credit losses, partially offset by $1.2 billion of originations of LHFS, net of repayments.

Cash flows from investing activities

For the three-month period ended March 31, 2018, net cash flow from investing activities was $(979.2) million, primarily due to $421.2 million in normal loan activity, $840.9 million of purchases of investment securities AFS, and $2.2 billion in operating lease purchases and originations, partially offset by $644.7 million of AFS investment securities sales, maturities and prepayments, $681.8 million in proceeds from sales of LHFI, and $1.2 billion in proceeds from sales and terminations of operating leases.

For the three-month period ended March 31, 2017, net cash flow from investing activities was $(169.2) million, primarily due to $2.8 billion of purchases of investment securities AFS and $1.6 billion in operating lease purchases and originations, partially offset by $1.3 billion of AFS investment securities sales, maturities and prepayments, $1.4 billion in normal loan activity, $940.9 million in proceeds from sales and terminations of operating leases, and $257.9 million in proceeds from sales of LHFI.

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

Cash flows from financing activities

For the three-month period ended March 31, 2018, net cash flow from financing activities was $388.9 million, which was primarily due to a $1.0 billion increase in deposits, partially offset by a decrease in net borrowing activity of $664.2 million.

Net cash flow from financing activities for the three-month period ended March 31, 2017 was $(2.6) billion, which was primarily due to a decrease in net borrowing activity of $2.1 billion and a $639.5 million decrease in deposits.

See the Condensed Consolidated Statements of Cash Flows ("SCF") for further details on the Company's sources and uses of cash.

Credit Facilities

Third-Party Revolving Credit Facilities

Warehouse Facilities

SC uses warehouse lines to fund its originations. Each line specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. SC's warehouse lines generally are backed by auto RICs and, in some cases, leases or personal loans. These credit lines generally have one- or two-year commitments, staggered maturities and floating interest rates. SC maintains daily funding forecasts for originations, acquisitions, and other large outflows, such as tax payments in order to balance the desire to minimize funding costs with its liquidity needs.

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

SC has two credit facilities with seven banks providing an aggregate commitment of $4.2 billion for the exclusive use of supplying short-term liquidity needs to support Chrysler Capital retail financing. As of March 31, 2018 and December 31, 2017, there were outstanding balances on these facilities of $2.1 billion and $2.0 billion, respectively. 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 March 31, 2018 and December 31, 2017, there were outstanding balances of $709.6 million and $744.5 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 $1.8 billion of long-term committed revolving credit facilities.

The facilities offered through Santander NY are structured as three- and five-year floating rate facilities, with a current maturity date of December 31, 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 also 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 $3.0 billion in various term loans with maturities ranging from March 2019 to December 2022. These loans eliminate in the consolidation of SHUSA.

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

Santander also serves as the counterparty for many of SC's derivative financial instruments, with outstanding notional amounts of $2.5 billion and $3.7 billion at March 31, 2018 and December 31, 2017, respectively.

Under an agreement with Santander, SC pays Santander a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee is paid against each month's ending balance. The guarantee fee only applies to additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by a duly executed counter-guaranty agreement. SC recognized guarantee fee expense of $2.0 million and $1.5 million for the three-month periods ended March 31, 2018 and 2017, respectively.

Secured Structured Financings

SC's secured structured financings primarily consist of public, SEC-registered securitizations. SC also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and privately issues amortizing notes. SC has completed five securitizations year-to-date in 2018, and currently has 34 securitizations outstanding in the market with a cumulative ABS balance of approximately $17.0 billion.

Flow Agreements

In addition to SC's credit facilities and secured structured financings, SC has a flow agreement in place with a third party for charged-off assets.

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 had the option to sell a contractually determined amount of eligible prime loans to Santander, through securitization platforms. As all of the notes and residual interests in the securitizations are acquired by Santander, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Condensed Consolidated Balance Sheets.

SC also continues to periodically execute Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Upon transferring all of the notes and residual interests in these securitizations to third parties, SC records these transactions as true sales of the RICs securitized, and removes the sold assets from its Condensed Consolidated Balance Sheets.

Uses of Liquidity

The Company uses liquidity for debt service and repayment of borrowings, as well as for funding loan commitments and satisfying deposit withdrawal requests.

SIS uses liquidity primarily to support underwriting transactions.

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

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

Dividends and Stock Issuances

At March 31, 2018, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.

During the three-month period ended March 31, 2018, the Company paid dividends of $5.0 million to its sole shareholder, Santander.

During the three-month period ended March 31, 2018, Santander contributed $5.7 million to the Company.

As of March 31, 2018, the Company had 530,391,043 shares of common stock outstanding.

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

During the three-month period ended March 31, 2018 the Company paid dividends of $3.7 million, on its preferred stock.

On April 3, 2018, SHUSA’s Board of Directors declared a cash dividend on the Company’s preferred stock of $0.45625 per share, which is payable on May 15, 2018 to shareholders of record as of the close of business on May 1, 2018.

SC has declared a cash dividend of $0.05 per share, to be paid on May 14, 2018, to shareholders of record as of the close of business on May 4, 2018.

During 2018, SHUSA's subsidiaries had the following dividend activity which eliminated in consolidation:


•	The Bank declared and paid $50.0 million in dividends to SHUSA; and


•	BSI declared and paid $5.0 million in dividends to SHUSA; and


•	SHUSA contributed $20.0 million to SSLLC.

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
(in thousands)	Total		Less than 1 year		Over 1 yr to 3 yrs		Over 3 yrs to 5 yrs		Over 5 yrs
FHLB advances ⁽¹⁾	$	1,521,819	$	1,219,840	$	301,979	$	—	$	—
Notes payable - revolving facilities	5,438,558		1,385,197		4,053,361		—		—
Notes payable - secured structured financings	22,921,443		481,731		7,219,787		10,866,345		4,353,580
Other debt obligations ^{(1) (2)}	11,364,724		1,741,538		4,141,735		2,994,031		2,487,420
Junior subordinated debentures due to capital trust entities ^{(1) (2)}	151,957		151,731		48		49		129
CDs ⁽¹⁾	5,754,909		3,266,982		1,943,622		536,479		7,826
Non-qualified pension and post-retirement benefits	131,197		13,918		26,123		26,330		64,826
Operating leases⁽³⁾	726,008		128,751		220,337		174,362		202,558
Total contractual cash obligations	$	48,010,615	$	8,389,688	$	17,906,992	$	14,597,596	$	7,116,339


(1)	Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at March 31, 2018. 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 $56.3 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 12 and Note 16 to the Condensed Consolidated Financial Statements.

Lending Arrangements

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

As a result of the strategic evaluation of its personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting the personal loan portfolios. On April 14, 2017, SC sold another portfolio comprised of personal installment loans to a third-party buyer.

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

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 Consolidated Financial Statements. Accordingly, SC recorded $70.5 million and $66.1 million during the first quarter of 2018 and 2017, respectively, 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 $1.0 billion at March 31, 2018.

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 March 31, 2018 and December 31, 2017:



	The following estimated percentage increase/(decrease) to net interest income would result
If interest rates changed in parallel by the amounts below	March 31, 2018		December 31, 2017
Down 100 basis points	(3.15	)%	(3.33	)%
Up 100 basis points	2.75	%	2.88	%
Up 200 basis points	5.29	%	5.48	%

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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 March 31, 2018 and December 31, 2017.



	The following estimated percentage increase/(decrease) to MVE would result
If interest rates changed in parallel by the amounts below	March 31, 2018		December 31, 2017
Down 100 basis points	(1.80	)%	(2.55	)%
Up 100 basis points	(0.37	)%	(0.04	)%
Up 200 basis points	(1.77	)%	(1.62	)%

As of March 31, 2018, the Company’s MVE profile showed a decrease of 1.80% for downward parallel interest rate shocks of 100 basis points and a decrease of 0.37% 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

The Company's derivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, 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 12 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 — "Asset and Liability Management" above.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls

Our management, with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of March 31, 2018, 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 SC'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.

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•	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.

This material weakness in control environment contributes to each of the following identified material weaknesses emanating from SC:

3. Development, Approval, and Monitoring of Models Used to Estimate the Credit Loss Allowance

Various deficiencies were identified in the credit loss allowance process related to review, monitoring and approval processes over models and model changes that aggregated to a material weakness. The following controls did not operate effectively:


•	Review controls over completeness and accuracy of data, inputs and assumptions in models and spreadsheets used for estimating credit loss allowance and related model changes were not effective and management did not adequately challenge significant assumptions.


•	Review and approval controls over the development of new models to estimate credit loss allowance and related model changes were ineffective.


•	Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.

This material weakness relates to the following financial statement line items: the allowance for loan and lease losses, provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

4. Identification, Governance, and Monitoring of Models Used to Estimate Accretion

Various deficiencies were identified in the accretion process related to review, monitoring and governance processes over models 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 (loss)/income, net and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

In addition to the above items emanating from SC, the following material weakness was identified at the SHUSA level:

5. 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.

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 to ensure strict compliance with GAAP.

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To address the material weakness in the control environment (material weakness 1, noted above), the Company is in the process of strengthening its processes and controls as follows:


•	Established regular working group meetings, with appropriate oversight by management, to review and challenge complex accounting matters, 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, material estimates, and regular reporting and review of changes in the control environment and related accounting processes.


•	Reallocated additional Company resources to improve the oversight of subsidiary operations and to ensure sufficient staffing to conduct enhanced financial reporting reviews.


•	Collaborated with other departments, such as Accounting Policy and Legal, to ensure entity information/data is shared and reviewed accordingly.

To address the material weakness in SC’s control environment, risk assessment, control activities and monitoring (material weakness 2, noted above), the Company is in the process of strengthening its processes and controls as follows:


•	Appointed an additional independent director to the Audit Committee of the Board with extensive experience as a financial expert in our industry to provide further experience on the Committee.


•	Established regular working group meetings, with appropriate oversight by management of both SC and SHUSA to strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.


•	Hired a Chief Accounting Officer and other key personnel with significant public company financial reporting experience and the requisite skillsets in areas important to financial reporting.


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


•	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 activities 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.


•	Developed and implemented additional documentation, controls and governance for the credit loss allowance and accretion processes.

To address the material weaknesses related to the development, approval, and monitoring of models used to estimate the credit loss allowance (material weakness 3, noted above), the Company has taken the following measures:


•	Completed a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.


•	Implemented a more comprehensive monitoring plan for the credit loss allowance 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.


•	Implemented improved controls over the development of new models or changes to models used to estimate credit loss allowance.


•	Implemented enhanced on-going performance monitoring procedures.


•	Developed comprehensive model documentation.


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


•	Increased resources dedicated to the analysis, review and documentation to ensure compliance with GAAP and the Company’s policies.

To address the material weaknesses related to the identification, governance and monitoring of models used to estimate accretion (material weakness 4, noted above), the Company has taken the following measures:


•	Developed a comprehensive accretion model documentation manual and implemented on-going performance monitoring to ensure compliance with required standards.

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•	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 in the review of statement of cash flows and footnotes (material weakness 5, noted above), the Company is in the process of strengthening its controls as follows:


•	Improved 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.


•	Strengthening the review controls, reconciliations and supporting documentation related to the classification of cash flows between operating activities and investing activities in the SCF.


•	Implementing additional reviews at a detailed level at the statement preparation and data provider levels.

While progress has been made to remediate all of these areas, as of March 31, 2018, we are still in the process of implementing the enhanced processes and procedures and testing the operating effectiveness of these improved controls. We believe our actions will be effective in remediating the material weaknesses, and we continue to devote significant time and attention to these efforts. In addition, the material weaknesses will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weaknesses are not remediated as of March 31, 2018.

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 March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Refer to Note 13 to the Condensed Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service (“IRS”) and Note 16 to the Condensed Consolidated Financial Statements for SHUSA’s litigation disclosures, 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, 2017.

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



(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 Annual Report on Form 10-K. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request.

(10.1	)	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)

(10.2	)	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)

(10.3	)	Written Agreement, dated as of March 21, 2017, by and among Santander Holdings USA, Inc., Santander Consumer USA Inc., and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.'s Current Report on Form 8-K filed March 23, 2017) (Commission File Number 001-16581)

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

(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.INS)		XBRL Instance Document (Filed herewith)

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(101.SCH)		XBRL Taxonomy Extension Schema (Filed herewith)

(101.CAL)		XBRL Taxonomy Extension Calculation Linkbase (Filed herewith)

(101.DEF)		XBRL Taxonomy Extension Definition Linkbase (Filed herewith)

(101.LAB)		XBRL Taxonomy Extension Label Linkbase (Filed herewith)

(101.PRE)		XBRL Taxonomy Extension Presentation Linkbase (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:	May 9, 2018	/s/ Madhukar Dayal
		Madhukar Dayal
		Chief Financial Officer and Senior Executive Vice President


Date:	May 9, 2018	/s/ David L. Cornish
		David L. Cornish
		Chief Accounting Officer, Controller and Executive Vice President

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