Santander Holdings USA, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019



o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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)

Registrant’s telephone number including area code (617) 346-7200

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbols	Name of each exchange on which registered
Not Applicable	Not Applicable	Not Applicable

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 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 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	Emerging growth company o

Non-accelerated filer þ	Smaller reporting 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.

Number of shares of common stock Outstanding at October 31, 2019: 530,391,043 shares

Table of Contents

INDEX




	Page

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018	4

Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2019 and 2018	5

Condensed Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 30, 2019 and 2018	6

Condensed Consolidated Statements of Stockholder's Equity for the three-month and nine-month periods ended September 30, 2019 and 2018	7

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2019 and 2018	9

Notes to Condensed Consolidated Financial Statements	10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	71

Item 3. Quantitative and Qualitative Disclosures About Market Risk	113

Item 4. Controls and Procedures	113

PART II. OTHER INFORMATION	116

Item 1. Legal Proceedings	116

Item 1A. Risk Factors	116

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	117

Item 3. Defaults upon Senior Securities	117

Item 4. Mine Safety Disclosures	117

Item 5. Other Information	117

Item 6. Exhibits	118

SIGNATURES	120


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 policies that affect market interest rates and money supply, 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 and result in fines, penalties, restitution and other costs and expenses, changes in our business practice, and reputational harm;


•	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;


•	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;


•	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;


•	Santander Consumer USA Inc.'s ("SC's") agreement with Fiat Chrysler Automobiles US LLC ("FCA") may not result in currently anticipated levels of growth, is subject to performance conditions that could result in termination of the agreement, and is also subject to an option giving FCA the right to acquire an equity participation in the Chrysler Capital portion of SC's business;


•	the pursuit of protectionist trade or other related policies, including tariffs by the U.S., its global trading partners, and/or other countries;


•	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 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 success of our marketing efforts to customers, and the potential for new products and services to impose additional unexpected costs, losses, or other liabilities not anticipated at their initiation, and expose SHUSA to increased operational risk;


•	competitors of SHUSA may have greater financial resources or lower costs, or be subject to different regulatory requirements than SHUSA, may innovate more effectively, or may develop products and technology that enable those competitors to compete more successfully than SHUSA and cause SHUSA to lose business or market share;


•	consumers and small businesses may decide not to use banks for their financial transactions, which could impact our net income;


•	changes in customer spending, investment or savings behavior;


•	loss of customer deposits that could increase our funding costs;


•	the ability of SHUSA and its third-party vendors to convert, maintain and upgrade, as necessary, SHUSA’s data processing and other information technology ("IT") infrastructure on a timely and acceptable basis, within projected cost estimates and without significant disruption to our business;


•	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 cyberattacks, technological failure, human error, fraud or malice, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;

•

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, including economic instability and recessionary conditions in Europe and the eventual exit of the United Kingdom from the European Union;


•	changes to income tax laws and regulations and 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;


•	the costs and effects of regulatory or judicial proceedings, including possible business restrictions resulting from such proceedings;


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


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

Table of Contents

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		EPS: Enhanced Prudential Standards
ACL: Allowance for credit losses		ETR: Effective tax rate
AFS: Available-for-sale		Exchange Act: Securities Exchange Act of 1934, as amended
ALLL: Allowance for loan and lease losses		FASB: Financial Accounting Standards Board
ASC: Accounting Standards Codification		FBO: Foreign banking organization
ASU: Accounting Standards Update		FCA: Fiat Chrysler Automobiles US LLC
Bank: Santander Bank, National Association		FDIC: Federal Deposit Insurance Corporation
BHC: Bank holding company		Federal Reserve: Board of Governors of the Federal Reserve System
BOLI: Bank-owned life insurance		FHLB: Federal Home Loan Bank
BSI: Banco Santander International		FHLMC: Federal Home Loan Mortgage Corporation
BSPR: Banco Santander Puerto Rico		FICO^®: Fair Isaac Corporation credit scoring model
C&I: Commercial & industrial		Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CBP: Citizens Bank of Pennsylvania		FINRA: Financial Industrial Regulatory Authority
CCAR: Comprehensive Capital Analysis and Review		FNMA: Federal National Mortgage Association
CD: Certificate of deposit		FOB: Financial Oversight and Management Board of Puerto Rico
CEF: Closed-end fund		FRB: Federal Reserve Bank
CEO: Chief Executive Officer		FVO: Fair value option
CEVF: Commercial equipment vehicle financing		GAAP: Accounting principles generally accepted in the United States of America
CET1: Common equity Tier 1		GAP: Guaranteed auto protection
CFPB: Consumer Financial Protection Bureau		HFI: Held for investment
Change in Control: First quarter 2014 change in control and consolidation of SC		HTM: Held to maturity
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC		IHC: U.S. intermediate holding company
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement		IPO: Initial public offering
CIB: Corporate and Investment Banking		IRS: Internal Revenue Service
CID: Civil investigative demand		ISDA: International Swaps and Derivatives Association, Inc.
CLTV: Combined loan-to-value		IT: Information Technology
CMO: Collateralized mortgage obligation		LendingClub: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquires loans under flow agreements
CMP: Civil monetary penalty		LCR: Liquidity coverage ratio
CODM: Chief Operating Decision Maker		LHFI: Loans held-for-investment
Company: Santander Holdings USA, Inc.		LHFS: Loans held-for-sale
CPR: Constant prepayment rate		LIBOR: London Interbank Offered Rate
CRA: Community Reinvestment Act		LIHTC: Low Income Housing Tax Credit
CRE: Commercial real estate		LTD: Long-term debt
DCF: Discounted cash flow		LTV: Loan-to-value
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act		MBS: Mortgage-backed securities
DOJ: Department of Justice		MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations
DPD: Days past due		MSR: Mortgage servicing right
DTI: Debt-to-income		MVE: Market value of equity

Table of Contents



NCI: Non-controlling interest		SBNA: Santander Bank, National Association
NMTC: New market tax credits		SC: Santander Consumer USA Holdings Inc. and its subsidiaries
NPL: Non-performing loan		SC Common Stock: Common shares of SC
NSFR: Net stable funding ratio		SCF: Statement of cash flows
NYSE: New York Stock Exchange		SCRA: Servicemembers' Civil Relief Act
OCC: Office of the Comptroller of the Currency		SEC: Securities and Exchange Commission
OREO: Other real estate owned		Securities Act: Securities Act of 1933, as amended
OTTI: Other-than-temporary impairment		SHUSA: Santander Holdings USA, Inc.
Parent Company: the parent holding company of SBNA and other consolidated subsidiaries		SIS: Santander Investment Securities Inc.
REIT: Real estate investment trust		SPE: Special purpose entity
RIC: Retail installment contract		SSLLC: Santander Securities LLC
RV: Recreational vehicle		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.
RWA: Risk-weighted asset		TCJA: Tax Cut and Jobs Act of 2017
S&P: Standard & Poor's		TDR: Troubled debt restructuring
Santander: Banco Santander, S.A.		TLAC: Total loss-absorbing capacity
Santander BanCorp: Santander BanCorp and its subsidiaries		Trusts: Securitization trusts
Santander NY: New York branch of Santander		UPB: Unpaid principal balance
Santander UK: Santander UK plc		VIE: Variable interest entity
		VOE: Voting rights entity

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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)



	September 30, 2019			December 31, 2018
	(in thousands)
ASSETS
Cash and cash equivalents	$	7,736,777		$	7,790,593
Investment securities:
Available-for-sale ("AFS") at fair value	13,731,224			11,632,987
Held-to-maturity ("HTM") (fair value of $3,641,591 and $2,676,049 as of September 30, 2019 and December 31, 2018, respectively)	3,604,424			2,750,680
Other investments (includes Trading securities of $3,433 and $10 as of September 30, 2019 and December 31, 2018, respectively)	967,882			805,357
Loans held-for-investment ("LHFI")^{(1) (5)}	90,420,263			87,045,868
Allowance for loan and lease losses ("ALLL") ⁽⁵⁾	(3,735,860		)	(3,897,130		)
Net LHFI	86,684,403			83,148,738
Loans held-for-sale ("LHFS") ⁽²⁾	2,480,809			1,283,278
Premises and equipment, net ⁽³⁾	769,944			805,940
Operating lease assets, net(includes $74,219 and zero of operating lease assets held for sale as of September 30, 2019 and December 31, 2018, respectively) (5)(6)	16,151,424			14,078,793
Goodwill	4,444,389			4,444,389
Intangible assets, net	430,947			475,193
Bank-owned life insurance ("BOLI")	1,852,456			1,833,290
Restricted cash ⁽⁵⁾	3,665,680			2,931,711
Other assets ^{(4) (5)}	4,665,055			3,653,336
TOTAL ASSETS	$	147,185,414		$	135,634,285
LIABILITIES
Accrued expenses and payables	$	4,171,167		$	3,035,848
Deposits and other customer accounts	66,239,968			61,511,380
Borrowings and other debt obligations ⁽⁵⁾	49,159,832			44,953,784
Advance payments by borrowers for taxes and insurance	175,098			160,728
Deferred tax liabilities, net	1,499,573			1,212,538
Other liabilities ⁽⁵⁾	1,270,499			912,775
TOTAL LIABILITIES	122,516,137			111,787,053
Commitments and contingencies (Note 16)
STOCKHOLDER'S EQUITY
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both September 30, 2019 and December 31, 2018)	17,954,096			17,859,304
Accumulated other comprehensive loss	(53,159		)	(321,652		)
Retained earnings	4,318,263			3,783,405
TOTAL SANTANDER HOLDINGS USA, INC. ("SHUSA") STOCKHOLDER'S EQUITY	22,219,200			21,321,057
Noncontrolling interest ("NCI")	2,450,077			2,526,175
TOTAL STOCKHOLDER'S EQUITY	24,669,277			23,847,232
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	147,185,414		$	135,634,285

(1) LHFI includes $93.4 million and $126.3 million of loans recorded at fair value at September 30, 2019 and December 31, 2018, respectively.

(2) Includes $437.9 million and $209.5 million of loans recorded at the fair value option ("FVO") at September 30, 2019 and December 31, 2018, respectively.

(3) Net of accumulated depreciation of $1.5 billion and $1.4 billion at September 30, 2019 and December 31, 2018, respectively.

(4) Includes mortgage servicing rights ("MSRs") of $126.5 million and $149.7 million at September 30, 2019 and December 31, 2018, respectively, for which the Company has elected the FVO. See Note 14 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 September 30, 2019 and December 31, 2018, LHFI included $25.1 billion and $24.1 billion, Operating leases assets, net included $16.0 billion and $14.0 billion, restricted cash included $1.7 billion and $1.6 billion, other assets included $592.9 million and $685.4 million, Borrowings and other debt obligations included $33.0 billion and $31.9 billion, and Other liabilities included $179.5 million and $122.0 million 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 $3.9 billion and $3.5 billion at September 30, 2019 and December 31, 2018, respectively.

See accompanying unaudited 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 September 30,					Nine-Month Period Ended September 30,
	2019		2018			2019		2018
	(in thousands)					(in thousands)
INTEREST INCOME:
Loans	$	2,050,667	$	1,914,528		$	6,085,153	$	5,584,979
Interest-earning deposits	46,944		32,202			138,861		98,655
Investment securities:
AFS	64,777		75,136			210,344		225,673
HTM	16,319		16,931			49,429		51,176
Other investments	6,400		4,141			18,451		13,989
TOTAL INTEREST INCOME	2,185,107		2,042,938			6,502,238		5,974,472
INTEREST EXPENSE:
Deposits and other customer accounts	152,953		103,265			428,386		271,020
Borrowings and other debt obligations	413,044		340,912			1,230,134		962,259
TOTAL INTEREST EXPENSE	565,997		444,177			1,658,520		1,233,279
NET INTEREST INCOME	1,619,110		1,598,761			4,843,718		4,741,193
Provision for credit losses	603,635		621,014			1,684,478		1,608,697
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	1,015,475		977,747			3,159,240		3,132,496
NON-INTEREST INCOME:
Consumer and commercial fees	133,049		144,505			412,566		420,843
Lease income	735,783		610,324			2,116,503		1,720,526
Miscellaneous income, net^{(1) (2)}	130,033		68,915			327,849		302,998
TOTAL FEES AND OTHER INCOME	998,865		823,744			2,856,918		2,444,367
Net gain/(loss) on sale of investment securities	2,267		(1,688		)	2,646		(1,931		)
TOTAL NON-INTEREST INCOME	1,001,132		822,056			2,859,564		2,442,436
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES:
Compensation and benefits	485,920		436,202			1,432,730		1,332,708
Occupancy and equipment expenses	156,603		169,595			441,643		492,106
Technology, outside service, and marketing expense	178,053		146,652			482,183		454,944
Loan expense	98,639		83,190			308,139		277,683
Lease expense	523,900		455,344			1,516,984		1,316,404
Other expenses	190,129		159,404			536,366		467,652
TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES	1,633,244		1,450,387			4,718,045		4,341,497
INCOME BEFORE INCOME TAX PROVISION	383,363		349,416			1,300,759		1,233,435
Income tax provision	112,927		109,949			384,467		374,162
NET INCOME INCLUDING NCI	270,436		239,467			916,292		859,273
LESS: NET INCOME ATTRIBUTABLE TO NCI	66,831		72,491			250,086		251,770
NET INCOME ATTRIBUTABLE TO SHUSA	$	203,605	$	166,976		$	666,206	$	607,503

(1) Includes impact of $67.0 million and $239.1 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to $86.8 million and $236.5 million for the corresponding periods in 2018 of lower of cost or market adjustments on a portion of the Company's LHFS portfolio.

(2) Includes equity investment (income)/expense, net.

See accompanying unaudited 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 September 30,					Nine-Month Period Ended September 30,
	2019		2018			2019		2018
	(in thousands)					(in thousands)
NET INCOME INCLUDING NCI	$	270,436	$	239,467		$	916,292	$	859,273
OTHER COMPREHENSIVE INCOME ("OCI"), NET OF TAX
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments, net of tax ^{(1) (2)}	8,217		(3,822		)	16,354		(16,297		)
Net unrealized gains/(losses) on AFS and HTM investment securities, net of tax ⁽²⁾	34,601		(50,345		)	239,395		(211,044		)
Pension and post-retirement actuarial gains, net of tax ⁽²⁾	542		626			12,744		1,876
TOTAL OTHER COMPREHENSIVE GAIN / (LOSS), NET OF TAX	43,360		(53,541		)	268,493		(225,465		)
COMPREHENSIVE INCOME	313,796		185,926			1,184,785		633,808
NET INCOME ATTRIBUTABLE TO NCI	66,831		72,491			250,086		251,770
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA	$	246,965	$	113,435		$	934,699	$	382,038

(1) Excludes $(3.2) million, and $(19.7) million of OCI attributable to NCI for the three-month and nine-month periods ended September 30, 2019, respectively, compared to $(1.9) million and $3.9 million for the corresponding periods in 2018.

(2) Excludes $39.1 million impact of OCI reclassified to Retained earnings as a result of the adoption of Accounting Standards Update ("ASU 2018-02") for the nine-month period ended September 30, 2018.

See accompanying unaudited notes to Condensed Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(unaudited) (In thousands)



	Common Shares Outstanding	Preferred Stock		Common Stock and Paid-in Capital			Accumulated Other Comprehensive (Loss)/Income			Retained Earnings		Noncontrolling Interest			Total Stockholder's Equity
Balance, July 1, 2019	530,391	—		17,945,636			(96,519		)	4,114,658		2,541,044			24,504,819
Comprehensive income attributable to SHUSA	—	—		—			43,360			203,605		—			246,965
Other comprehensive (OCI) income attributable to NCI	—	—		—			—			—		(3,195		)	(3,195		)
Net income attributable to NCI	—	—		—			—			—		66,831			66,831
Impact of SC stock option activity	—	—		—			—			—		3,949			3,949
Contribution from shareholder (Note 17)	—	—		13,026			—			—		—			13,026
Dividends paid to NCI	—	—		—			—			—		(22,099		)	(22,099		)
Stock repurchase attributable to NCI	—	—		(4,566		)	—			—		(136,453		)	(141,019		)
Balance, September 30, 2019	530,391	$	—	$	17,954,096		$	(53,159	)	$	4,318,263	$	2,450,077		$	24,669,277



	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, July 1, 2018	530,391	195,445			17,732,184		(409,449		)	3,924,734			2,697,467			24,140,381
Comprehensive income attributable to SHUSA	—	—			—		(53,541		)	166,976			—			113,435
OCI attributable to NCI	—	—			—		—			—			(1,881		)	(1,881		)
Net income attributable to NCI	—	—			—		—			—			72,491			72,491
Impact of SC stock option activity	—	—			—		—			—			4,160			4,160
Contribution of Santander Asset Management, LLC ("SAM") from Shareholder (Note 1)	—	—			4,396		—			—			—			4,396
Redemption of preferred stock	—	(195,445		)	—		—			(4,555		)	—			(200,000		)
Dividends declared and paid on common stock	—	—			—		—			(325,000		)	—			(325,000		)
Dividends paid to NCI	—	—			—		—			—			(23,222		)	(23,222		)
Stock repurchase attributable to NCI	—	—			—		—			—			(50,211		)	(50,211		)
Dividends paid on preferred stock	—	—			—		—			(3,650		)	—			(3,650		)
Balance, September 30, 2018	530,391	$	—		$	17,736,580	$	(462,990	)	$	3,758,505		$	2,698,804		$	23,730,899

Table of Contents

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(unaudited) (In thousands)



	Common Shares Outstanding	Preferred Stock		Common Stock and Paid-in Capital		Accumulated Other Comprehensive (Loss)/Income			Retained Earnings			Noncontrolling Interest			Total Stockholder's Equity
Balance, January 1, 2019	530,391	—		17,859,304		(321,652		)	3,783,405			2,526,175			23,847,232
Cumulative-effect adjustment upon adoption of ASU 2016-02	—	—		—		—			18,652			—			18,652
Comprehensive income attributable to SHUSA	—	—		—		268,493			666,206			—			934,699
OCI attributable to NCI	—	—		—		—			—			(19,718		)	(19,718		)
Net income attributable to NCI	—	—		—		—			—			250,086			250,086
Impact of SC stock option activity	—	—		—		—			—			9,555			9,555
Contribution from shareholder (Note 17)	—	—		88,927		—			—			—			88,927
Dividends declared and paid on common stock	—	—		—		—			(150,000		)	—			(150,000		)
Dividends paid to NCI	—	—		—		—			—			(64,493		)	(64,493		)
Stock repurchase attributable to NCI	—	—		5,865		—			—			(251,528		)	(245,663		)
Balance, September 30, 2019	530,391	$	—	$	17,954,096	$	(53,159	)	$	4,318,263		$	2,450,077		$	24,669,277



	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, 2018	530,391	195,445			17,723,010		(198,431		)	3,453,957			2,516,851			23,690,832
Cumulative-effect adjustment upon adoption of new ASUs and other (Note 1)	—	—			—		(39,094		)	47,550			—			8,456
Comprehensive income attributable to SHUSA	—	—			—		(225,465		)	607,503			—			382,038
OCI attributable to NCI	—	—			—		—			—			3,916			3,916
Net income attributable to NCI	—	—			—		—			—			251,770			251,770
Impact of SC stock option activity	—	—			—		—			—			11,235			11,235
Contribution from shareholder and related tax impact (Note 17)	—	—			9,174		—			—			—			9,174
Contribution of SAM from Shareholder (Note 1)	—	—			4,396		—			—			—			4,396
Redemption of preferred stock	—	(195,445		)	—		—			(4,555		)	—			(200,000		)
Dividends declared and paid on common stock	—	—			—		—			(335,000		)	—			(335,000		)
Dividends paid to NCI	—	—			—		—			—			(34,757		)	(34,757		)
Stock repurchase attributable to NCI	—	—			—		—			—			(50,211		)	(50,211		)
Dividends paid on preferred stock	—	—			—		—			(10,950		)	—			(10,950		)
Balance, September 30, 2018	530,391	$	—		$	17,736,580	$	(462,990	)	$	3,758,505		$	2,698,804		$	23,730,899

See accompanying unaudited notes to Condensed Consolidated Financial Statements.

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	Nine-Month Period Ended September 30,
	2019			2018
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including NCI	$	916,292		$	859,273
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	1,684,478			1,608,697
Deferred tax expense	275,303			332,297
Depreciation, amortization and accretion	1,749,531			1,411,482
Net loss on sale of loans	244,274			233,977
Net (gain)/loss on sale of investment securities	(2,646		)	1,931
Loss on debt extinguishment	1,133			3,470
Net (gain)/loss on real estate owned and premises and equipment	(24,411		)	10,300
Stock-based compensation	308			704
Equity loss/(income) on equity method investments	478			(5,051		)
Originations of LHFS, net of repayments	(1,138,406		)	(2,683,847		)
Purchases of LHFS	(387		)	(1,301		)
Proceeds from sales of LHFS	1,060,708			3,925,429
Net change in:
Revolving personal loans	(144,411		)	(147,975		)
Other assets, BOLI and trading securities	(552,053		)	(293,565		)
Other liabilities	566,705			384,524
NET CASH PROVIDED BY OPERATING ACTIVITIES	4,636,896			5,640,345

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of AFS investment securities	1,044,645			968,487
Proceeds from prepayments and maturities of AFS investment securities	3,270,469			2,060,524
Purchases of AFS investment securities	(5,999,028		)	(1,900,147		)
Proceeds from prepayments and maturities of HTM investment securities	256,152			266,616
Purchases of HTM investment securities	(965,966		)	(135,898		)
Proceeds from sales of other investments	237,537			94,053
Proceeds from maturities of other investments	13,673			—
Purchases of other investments	(329,598		)	(120,692		)
Proceeds from sales of LHFI	1,446,205			935,471
Distributions from equity method investments	3,506			3,316
Contributions to equity method and other investments	(176,114		)	(81,132		)
Proceeds from settlements of BOLI policies	26,318			16,434
Purchases of LHFI	(818,024		)	(776,059		)
Net change in loans other than purchases and sales	(7,104,936		)	(5,958,162		)
Purchases and originations of operating leases	(6,778,636		)	(7,717,157		)
Proceeds from the sale and termination of operating leases	2,733,172			2,979,649
Manufacturer incentives	633,991			781,752
Proceeds from sales of real estate owned and premises and equipment	51,944			42,130
Purchases of premises and equipment	(135,060		)	(105,530		)
Net cash paid for branch disposition	(329,328		)	—
Upfront fee paid to FCA	(60,000		)	—
NET CASH USED IN INVESTING ACTIVITIES	(12,979,078		)	(8,646,345		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	5,199,415			110,894
Net change in short-term borrowings	448,736			1,014,519
Net proceeds from long-term borrowings	34,591,061			33,477,492
Repayments of long-term borrowings	(32,239,459		)	(32,007,516		)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)	3,875,000			1,400,000
Repayments of FHLB advances (with terms greater than 3 months)	(2,500,000		)	(1,400,000		)
Net change in advance payments by borrowers for taxes and insurance	14,370			25,321
Cash dividends paid to preferred stockholders	—			(10,950		)
Dividends paid on common stock	(150,000		)	(335,000		)
Dividends paid to NCI	(64,493		)	(34,757		)
Stock repurchase attributable to NCI	(245,663		)	(50,211		)
Proceeds from the issuance of common stock	4,441			7,906
Capital contribution from shareholder	88,927			5,741
Redemption of preferred stock	—			(200,000		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	9,022,335			2,003,439

NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	680,153			(1,002,561		)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	10,722,304			10,338,774
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD ⁽¹⁾	$	11,402,457		$	9,336,213

NON-CASH TRANSACTIONS
Loans transferred to/(from) other real estate owned	16,205			57,482
Loans transferred from/(to) held-for-investment ("HFI") (from)/to held-for-sale, net ("HFS")	2,657,598			732,527
Unsettled purchases of investment securities	256,685			4,523
Unsettled sales of investment securities	—			58,311
Contribution of SAM from shareholder ⁽²⁾	—			4,396
AFS investment securities transferred to HTM investment securities	—			1,167,189
Adoption of lease accounting standard:
Right-of-use assets	664,057			—
Accrued expenses and payables	705,650			—

(1) The nine-month periods ended September 30, 2019 and 2018 include cash and cash equivalents balances of $7.7 billion and $6.5 billion, respectively, and restricted cash balances of $3.7 billion and $2.8 billion, respectively.

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

See accompanying unaudited 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; 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 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. SSLLC, SIS, and another SHUSA subsidiary, Santander Asset Management, LLC (“SAM”), are registered investment advisers with the Securities and Exchange Commission (the “SEC”). 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 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 and delivering superior service to dealers and customers across the full credit spectrum. SC's primary business is the indirect origination and servicing of retail installment contracts ("RICs") and leases, principally, through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. Additionally, SC sells consumer RICs through flow agreements and, when market conditions are favorable, it accesses the ABS market through securitizations of consumer RICs.

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 has operated as FCA's preferred provider for consumer loans, leases, and dealer loans 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.

On June 28, 2019, SC entered into an amendment to the Chrysler Agreement, with FCA, which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. The amendment also terminated the previously disclosed tolling agreement dated July 11, 2018, between SC and FCA.

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 other relationships through which it provides other consumer finance products.

As of September 30, 2019, SC was owned approximately 71.6% by SHUSA and 28.4% by other shareholders. SC Common Stock is listed on the New York Stock Exchange (the "NYSE") under the trading symbol "SC."

During the third quarter of 2019, SBNA completed the sale of 14 bank branches and four automated teller machines ("ATMs") located in central Pennsylvania, together with approximately $471 million of deposits and $102 million of retail and business loans, to First Commonwealth Bank for a gain of $30.9 million. This transaction aligns with SHUSA’s strategy to reallocate capital to investments in core markets that will drive growth.

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

Intermediate Holding Company ("IHC")

The enhanced prudential standards ("EPS") mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA")(the “Final Rule") were enacted by the Federal Reserve to strengthen regulatory oversight of foreign banking organizations ("FBOs"). Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as several other subsidiaries. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. Additionally, effective July 2, 2018, Santander transferred SAM to the IHC. The contribution of SAM to the Company transferred approximately $5.4 million of assets, $1.0 million of liabilities, and $4.4 million of equity to the Company.

Although SAM is an entity under common control, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company elected to report the results of SAM on a prospective basis beginning July 2, 2018. As a result of the contribution of SAM, SHUSA's net income is understated by $1.0 million for the nine-month period ended September 30, 2018. These amounts are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.

Basis of Presentation

These Condensed Consolidated Financial Statements include accounts of the Company and its consolidated subsidiaries, and certain special purpose financing trusts that are considered VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and 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 Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and pursuant to SEC regulations for interim financial information. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and Statements of Cash Flows ("SCF") for the periods indicated, and contain adequate disclosure of this interim financial information to make the information presented not misleading. 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, 2018.

Significant Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities, as of the date of the financial statements, and the amount of revenue and expenses during the reporting periods. Actual results could differ from those estimates, and those differences may be material.

Management has identified (i) the allowance for loan losses and the reserve for unfunded lending commitments, (ii) estimates of expected residual values of leases vehicles subject to operating leases, (iii) accretion of discounts and subvention on RICs, (iv) goodwill, (v) fair value of financial instruments, and (vi) 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.

As of September 30, 2019, 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 its Annual Report on Form 10-K for the year ended December 31, 2018.

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

Recently Adopted Accounting Standards

Since January 1, 2019, the Company adopted the following Financial Accounting Standards Board ("FASB") Accounting Standards Updates (“ASUs"):

•

ASU 2016-02, Leases (Topic 842). The Company adopted this standard as of January 1, 2019, resulting in the recognition of a right of-use (“ROU”) asset ($664.1 million) and lease liability ($705.7 million) in the Consolidated Balance Sheet for all operating leases with a term greater than 12 months. The Company adopted this ASU using the modified retrospective approach, with application at the adoption date and a cumulative-effect adjustment to the opening balance of retained earnings. Under this approach, comparative periods were not adjusted. We elected the package of practical expedients permitted under transition guidance, which allowed us to carry forward the historical lease classification. We also elected not to recognize a lease liability and associated ROU asset for short-term leases. We did not elect (1) the hindsight practical expedient when determining the lease term and (2) the practical expedient to not separate non-lease components from lease components. The ASU required the Company to accelerate the recognition of $18.7 million of previously deferred gains on sale-leaseback transactions, with such impact recorded to the opening balance of Retained earnings.

The ROU asset and lease liability will subsequently be de-recognized in a manner that effectively yields a straight-line lease expense over the lease term. Lessee accounting requirements for finance leases (previously described as capital leases) and lessor accounting requirements for operating, sales-type, and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. This standard did not materially affect our Consolidated Statements of Operations or SCF.

•

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized costs will be presented with Other assets on the balance sheet, and the amortization expense will be presented in the Technology, outside service, and marketing expense line of the Statement of Operations. The Company has early adopted this standard effective January 1, 2019 and it did not have a material impact on the Company's Condensed Consolidated Financial Statements or related disclosures.

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


•	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.


•	ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.


•	ASU 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.

Subsequent Events

On October 21, 2019, the Company entered into an agreement to sell the stock of Santander BanCorp (the holding company that includes BSPR) for total consideration of approximately $1.1 billion, subject to adjustment based on the consolidated Santander BanCorp balance sheet at closing. At September 30, 2019, BSPR had 27 branches, approximately 1,000 employees, and total assets of approximately $6.2 billion. Among other conditions precedent to the closing, the transaction requires the Company to transfer all of BSPR's non-performing assets and the equity of SAM to the Company or one of its affiliates prior to closing. In addition, the transaction requires review and approval of various regulators, whose input is uncertain. Subject to satisfaction of the closing conditions, the transaction is expected to close in the middle of 2020. Completion of the transaction is not expected to result in any material gain or loss.

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

The Company evaluated events from the date of the Condensed Consolidated Financial Statements on September 30, 2019 through the issuance of these Condensed Consolidated Financial Statements, and has determined that there have been no material events that would require recognition in its Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements for the three-month and nine-month periods ended September 30, 2019 other than the events disclosed above, Note 4, and Note 10.

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This 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 amendment introduces a new credit reserving framework known as "Current Expected Credit Loss" (“CECL”), which replaces the incurred loss impairment framework in current GAAP with one that reflects expected credit losses over the full remaining life of financial assets and commitments and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. For AFS debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the OTTI framework. The standard also simplifies the accounting framework for purchased credit-impaired debt securities and loans. The Company will adopt the new guidance on January 1, 2020.

The Company established a cross-functional working group for implementation of this standard. Our implementation process includes data sourcing and validation, development and validation of loss forecasting methodologies and models, including determining the length of the reasonable and supportable forecast period and selecting macroeconomic forecasting methodologies to comply with the new guidance, updating the design of our established governance, financial reporting, and internal control frameworks, updating accounting policies and procedures, and determining future expanded disclosures on aspects such as credit quality. The status of our implementation is periodically presented to the Audit Committee and the Risk Committee. The Company continues to test and refine its CECL models to satisfy the requirements of the new standard. Oversight and testing, as well as efforts to meet expanded disclosure requirements, will extend through the remainder of 2019.

The Company currently expects an increase in the allowance for credit losses ("ACL") for loans in the range of 55% to 70% and a decrease (net of tax) in our regulatory capital amounts and ratios. The Company expects to leverage relief provided by federal banking regulatory agencies for an initial capital decrease by phasing in the adoption over four years on a straight-line basis in its calculation of regulatory capital amounts and ratios. The Company does not expect a material impact on its other financial instruments.

The increase in the ACL will be reflected as a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase will take into account forecasts of expected future economic conditions and is primarily driven by the fact that the allowance will cover expected credit losses over the full expected life of the loan portfolios. This estimate is subject to further refinement based on continuing reviews and approvals of models, methodologies and judgments. The impact at January 1, 2020 will depend upon the nature and characteristics of our financial instruments at the adoption date, the macroeconomic conditions and forecasts at that date, and other management judgments.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. This ASU requires disclosure of changes in unrealized gains and losses for the period included in OCI (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect the new guidance will have on its Consolidated Financial Statements and related disclosures.

In addition to those described in detail above, the Company is in the process of evaluating ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, but does not expect it to have a material impact on the Company's financial position, results of operations, or disclosures.

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:



	September 30, 2019									December 31, 2018
(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	$	5,061,127	$	4,361	$	(1,942	)	$	5,063,546	$	1,815,914	$	560	$	(11,729	)	$	1,804,745
Corporate debt securities	136,530		51		(42		)	136,539		160,164		12		(62		)	160,114
Asset-backed securities (“ABS”)	154,501		1,537		(1,500		)	154,538		435,464		3,517		(2,144		)	436,837
State and municipal securities	11		—		—			11		16		—		—			16
Mortgage-backed securities (“MBS”):
GNMA - Residential ⁽¹⁾	2,858,083		12,806		(9,770		)	2,861,119		2,829,075		861		(85,675		)	2,744,261
GNMA - Commercial	725,851		12,228		(64		)	738,015		954,651		1,250		(19,515		)	936,386
FHLMC and FNMA - Residential ⁽²⁾	4,706,518		25,327		(28,206		)	4,703,639		5,687,221		267		(188,515		)	5,498,973
FHLMC and FNMA - Commercial	70,103		3,719		(5		)	73,817		51,808		384		(537		)	51,655
Total investments in debt securities AFS	$	13,712,724	$	60,029	$	(41,529	)	$	13,731,224	$	11,934,313	$	6,851	$	(308,177	)	$	11,632,987

(1) Government National Mortgage Association ("GNMA")

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

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



	September 30, 2019									December 31, 2018
(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	$	2,005,105	$	16,345	$	(6,270	)	$	2,015,180	$	1,718,687	$	1,806	$	(54,184	)	$	1,666,309
GNMA - Commercial	1,599,319		28,813		(1,721		)	1,626,411		1,031,993		1,426		(23,679		)	1,009,740
Total investments in debt securities HTM	$	3,604,424	$	45,158	$	(7,991	)	$	3,641,591	$	2,750,680	$	3,232	$	(77,863	)	$	2,676,049

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

As of September 30, 2019 and December 31, 2018, the Company had investment securities with an estimated carrying value of $7.2 billion and $6.6 billion, respectively, pledged as collateral, which were comprised of the following: $2.6 billion and $3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the Federal Reserve Bank (the "FRB"); $3.7 billion and $2.7 billion, respectively, were pledged to secure public fund deposits; $186.2 million and $78.0 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $424.5 million and $423.3 million, respectively, were pledged to deposits with clearing organizations; and $306.4 million and $415.1 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At September 30, 2019 and December 31, 2018, the Company had $40.7 million and $40.2 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 AFS debt securities at September 30, 2019 were as follows:



(in thousands)	Amortized Cost		Fair Value
Due within one year	$	4,521,398	$	4,522,519
Due after 1 year but within 5 years	772,942		775,836
Due after 5 years but within 10 years	385,224		389,593
Due after 10 years	8,033,160		8,043,276
Total	$	13,712,724	$	13,731,224

NOTE 3. INVESTMENT SECURITIES (continued)

Contractual maturities of the Company’s HTM debt securities at September 30, 2019 were as follows:




(in thousands)	Amortized Cost		Fair Value
Due after 10 years	$	3,604,424	$	3,641,591
Total	$	3,604,424	$	3,641,591

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

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

The following tables present the aggregate amount of unrealized losses as of September 30, 2019 and December 31, 2018 on securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:



	September 30, 2019										December 31, 2018
	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	$	274,697	$	(484	)	$	848,723	$	(1,458	)	$	288,660	$	(315	)	$	914,212	$	(11,414	)
Corporate debt securities	99,290		(42		)	—		—			152,247		(62		)	13		—
ABS	10,030		(9		)	51,230		(1,491		)	31,888		(249		)	77,766		(1,895		)
MBS:
GNMA - Residential	689,549		(2,009		)	1,092,168		(7,761		)	102,418		(2,014		)	2,521,278		(83,661		)
GNMA - Commercial	9,485		(24		)	16,743		(40		)	199,495		(2,982		)	622,989		(16,533		)
FHLMC and FNMA - Residential	540,890		(1,727		)	1,773,272		(26,479		)	237,050		(5,728		)	5,236,028		(182,787		)
FHLMC and FNMA - Commercial	—		—			432		(5		)	—		—			21,819		(537		)
Total investments in debt securities AFS	$	1,623,941	$	(4,295	)	$	3,782,568	$	(37,234	)	$	1,011,758	$	(11,350	)	$	9,394,105	$	(296,827	)

The following tables present the aggregate amount of unrealized losses as of September 30, 2019 and December 31, 2018 on debt securities in the Company’s HTM investment portfolios classified according to the amount of time those securities have been in a continuous loss position:



	September 30, 2019										December 31, 2018
	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
GNMA - Residential	$	151,326	$	(494	)	$	701,895	$	(5,776	)	$	205,573	$	(4,810	)	$	1,295,554	$	(49,374	)
GNMA - Commercial	194,827		(1,721		)	—		—			221,250		(5,572		)	629,847		(18,107		)
Total investments in debt securities HTM	$	346,153	$	(2,215	)	$	701,895	$	(5,776	)	$	426,823	$	(10,382	)	$	1,925,401	$	(67,481	)

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.

NOTE 3. INVESTMENT SECURITIES (continued)

The Company did not record any OTTI related to its investment securities for the three-month and nine-month periods ended September 30, 2019 or 2018.

Management has concluded that the unrealized losses on its debt securities for which it has not recognized OTTI (which were comprised of 557 individual securities at September 30, 2019) 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 Investment Securities

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



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
(in thousands)	2019			2018			2019			2018
Proceeds from the sales of AFS securities	$	416,981		$	987,352		$	1,044,645		$	1,026,798

Gross realized gains	$	2,667		$	156		$	6,007		$	316
Gross realized losses	(400		)	(1,844		)	(3,361		)	(2,247		)
OTTI	—			—			—			—
Net realized gains/(losses) ⁽¹⁾	$	2,267		$	(1,688	)	$	2,646		$	(1,931	)


(1)	Includes net realized gain/(losses) on trading securities of $(0.3) million and $(0.6) million for the three-month and nine-month periods ended September 30, 2019, respectively, and $(1.1) million and $(1.3) million for the three-month and nine-month periods ended September 30, 2018, respectively.

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

Other Investments

Other Investments consisted of the following as of:



(in thousands)	September 30, 2019		December 31, 2018
FHLB of Pittsburgh and FRB stock	$	704,387	$	631,239
Low Income Housing Tax Credit investments ("LIHTC")	247,407		163,113
Equity securities not held for trading	12,655		10,995
Trading securities	3,433		10
Total	$	967,882	$	805,357

Other investments primarily include the Company's investment in the stock of the 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 and nine-month periods ended September 30, 2019, the Company purchased $87.8 million and $258.9 million of FHLB stock at par, respectively, and redeemed $89.5 million and $185.5 million of FHLB stock at par, respectively. There was no gain or loss associated with these redemptions. During the nine-month period ended September 30, 2019, the Company did not purchase FRB stock.

The Company's LIHTC investments are accounted for using the proportional amortization method. Equity securities are measured at fair value as of September 30, 2019, with changes in fair value recognized in net income, and consist primarily of Community Reinvestment Act (“CRA") mutual fund investments.

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. 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 $50.2 billion at September 30, 2019 and $49.5 billion at December 31, 2018.

Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at September 30, 2019 was $2.5 billion, compared to $1.3 billion at December 31, 2018. LHFS in the residential mortgage portfolio that were originated with the intent to sell were $437.9 million as of September 30, 2019 and are reported at either estimated fair value (if 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, net on the Condensed Consolidated Statements of Operations. As of September 30, 2019, the carrying value of the personal unsecured HFS portfolio was $1.0 billion.

During the second quarter of 2019, the Company entered into an agreement to sell approximately $1.4 billion of performing residential loans to FNMA and approximately $566 million of this loan portfolio was sold during the second quarter for a gain of approximately $7 million. The remaining loans were sold during the third quarter of 2019 for an immaterial gain.

In October 2019, SBNA agreed to sell from its portfolio certain restructured residential mortgage and home equity loans (with approximately $187 million of principal balances outstanding) to two unrelated third parties. This transaction is expected to settle in the fourth quarter with an immaterial impact on the Condensed Consolidated Statement of Operations. The loans will be sold with servicing released to the purchasers. This portfolio was classified as held for sale as of September 30, 2019.

On October 4, 2019, SBNA agreed to sell approximately $768 million of equipment finance loans and approximately $74 million of operating leases to an unrelated third party. This transaction is expected to settle in the fourth quarter with an immaterial gain on the sale. SBNA will not retain servicing of the assets. This portfolio was classified as held for sale as of September 30, 2019.

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 September 30, 2019 and December 31, 2018, accrued interest receivable on the Company's loans was $499.5 million and $524.0 million, respectively.

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

Loan and Lease Portfolio Composition

The following presents the composition of gross loans and leases HFI by portfolio and by rate type:



	September 30, 2019				December 31, 2018
(dollars in thousands)	Amount		Percent		Amount		Percent
Commercial LHFI:
Commercial real estate ("CRE") loans	$	8,725,162	9.6	%	$	8,704,481	10.0	%
Commercial and industrial ("C&I") loans	16,087,269		17.8	%	15,738,158		18.1	%
Multifamily loans	8,465,070		9.4	%	8,309,115		9.5	%
Other commercial⁽²⁾	7,441,572		8.2	%	7,630,004		8.8	%
Total commercial LHFI	40,719,073		45.0	%	40,381,758		46.4	%
Consumer loans secured by real estate:
Residential mortgages	8,917,656		9.9	%	9,884,462		11.4	%
Home equity loans and lines of credit	4,919,207		5.4	%	5,465,670		6.3	%
Total consumer loans secured by real estate	13,836,863		15.3	%	15,350,132		17.7	%
Consumer loans not secured by real estate:
RICs and auto loans - originated ⁽⁴⁾	33,832,932		37.4	%	28,532,085		32.8	%
RICs and auto loans - purchased	363,224		0.4	%	803,135		0.9	%
Personal unsecured loans	1,325,875		1.5	%	1,531,708		1.8	%
Other consumer⁽³⁾	342,296		0.4	%	447,050		0.4	%
Total consumer loans	49,701,190		55.0	%	46,664,110		53.6	%
Total LHFI⁽¹⁾	$	90,420,263	100.0	%	$	87,045,868	100.0	%
Total LHFI:
Fixed rate	$	59,122,407	65.4	%	$	56,696,491	65.1	%
Variable rate	31,297,856		34.6	%	30,349,377		34.9	%
Total LHFI⁽¹⁾	$	90,420,263	100.0	%	$	87,045,868	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 $1.7 billion and $1.4 billion as of September 30, 2019 and December 31, 2018, 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.

(4)Beginning in 2018, the Bank has an agreement with SC by which SC provides the Bank with origination support services in connection with the processing, underwriting and purchase of RICs, primarily from Chrysler dealers.

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

Portfolio segments and classes

GAAP requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes,” based on management’s systematic methodology for determining the ACL. The Company utilizes 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 C&I 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. "C&I" includes non-real estate-related C&I 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 portfolio.

The Company's portfolio classes are substantially the same as its financial statement categorization of loans for 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.

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 to 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)	September 30, 2019			December 31, 2018

RICs - Purchased HFI:
Unpaid principal balance ("UPB") ⁽¹⁾	$	371,700		$	844,582
UPB - FVO ⁽²⁾	4,403			9,678
Total UPB	376,103			854,260
Purchase marks ⁽³⁾	(12,879		)	(51,125		)
Total RICs - Purchased HFI	363,224			803,135

RICs - Originated HFI:
UPB ⁽¹⁾	28,528,963			27,049,875
Net discount	(17,997		)	(135,489		)
Total RICs - Originated	28,510,966			26,914,386
SBNA auto loans	5,321,966			1,617,699
Total RICs - originated post-Change in Control	33,832,932			28,532,085
Total RICs and auto loans HFI	$	34,196,156		$	29,335,220


(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 $1.0 million and $2.1 million related to purchase loan portfolios on which we elected to apply the FVO at September 30, 2019 and December 31, 2018, respectively.

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

During the nine-month periods September 30, 2019 and 2018, SC originated $9.5 billion and $6.5 billion, respectively, in Chrysler Capital loans (including the SBNA originations program), which represented 56% and 48%, respectively, of the UPB of SC's total RIC originations (including the SBNA originations program). As of September 30, 2019 and December 31, 2018, the carrying value of the auto RIC portfolio consisted of $9.9 billion and $9.0 billion, respectively, of Chrysler Capital loans, which represented 38% and 36%, respectively, of SC's auto RIC portfolio.

ACL Rollforward by Portfolio Segment

The activity in the ACL by portfolio segment for the three-month and nine-month periods ended September 30, 2019, and 2018 was as follows:



	Three-Month Period Ended September 30, 2019
(in thousands)	Commercial			Consumer			Unallocated			Total
ALLL, beginning of period	$	447,078		$	3,290,007		$	46,748		$	3,783,833
Provision for loan and lease losses	14,251			583,640			—			597,891
Charge-offs ⁽²⁾	(57,276		)	(1,367,404		)	—			(1,424,680		)
Recoveries	18,393			760,423			—			778,816
Charge-offs, net of recoveries	(38,883		)	(606,981		)	—			(645,864		)
ALLL, end of period	$	422,446		$	3,266,666		$	46,748		$	3,735,860

Reserve for unfunded lending commitments, beginning of period	$	83,346		$	6,060		$	—		$	89,406
Provision for reserve for unfunded lending commitments	5,907			(163		)	—			5,744
Reserve for unfunded lending commitments, end of period	89,253			5,897			—			95,150
Total ACL, end of period	$	511,699		$	3,272,563		$	46,748		$	3,831,010

	Nine-Month Period Ended September 30, 2019
(in thousands)	Commercial			Consumer			Unallocated			Total
ALLL, beginning of period	$	441,086		$	3,409,021		$	47,023		$	3,897,130
Provision for loan and lease losses	59,895			1,624,933			—			1,684,828
Charge-offs	(117,591		)	(4,020,570		)	(275		)	(4,138,436		)
Recoveries	39,056			2,253,282			—			2,292,338
Charge-offs, net of recoveries	(78,535		)	(1,767,288		)	(275		)	(1,846,098		)
ALLL, end of period	$	422,446		$	3,266,666		$	46,748		$	3,735,860
Reserve for unfunded lending commitments, beginning of period	$	89,472		$	6,028		$	—		$	95,500
(Release of) / Provision for reserve for unfunded lending commitments	(219		)	(131		)	—			(350		)
Reserve for unfunded lending commitments, end of period	89,253			5,897			—			95,150
Total ACL, end of period	$	511,699		$	3,272,563		$	46,748		$	3,831,010
Ending balance, individually evaluated for impairment⁽¹⁾	$	71,241		$	1,096,563		$	—		$	1,167,804
Ending balance, collectively evaluated for impairment	351,205			2,170,103			46,748			2,568,056

Financing receivables:
Ending balance	$	41,564,256		$	51,336,816		$	—		$	92,901,072
Ending balance, evaluated under the FVO or lower of cost or fair value	845,184			1,716,626			—			2,561,810
Ending balance, individually evaluated for impairment⁽¹⁾	364,390			4,667,358			—			5,031,748
Ending balance, collectively evaluated for impairment	40,354,682			44,952,832			—			85,307,514


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

(2) Includes impact for RICs transferred back from held for sale.

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



	Three-Month Period Ended September 30, 2018
(in thousands)	Commercial			Consumer			Unallocated		Total
ALLL, beginning of period	$	426,820		$	3,515,033		$	47,023	$	3,988,876
Provision for loan and lease losses	10,637			602,933			—		613,570
Charge-offs	(21,353		)	(1,258,144		)	—		(1,279,497		)
Recoveries	17,325			616,699			—		634,024
Charge-offs, net of recoveries	(4,028		)	(641,445		)	—		(645,473		)
ALLL, end of period	$	433,429		$	3,476,521		$	47,023	$	3,956,973

Reserve for unfunded lending commitments, beginning of period	$	81,525		$	5,448		$	—	$	86,973
(Release of) / Provision for unfunded lending commitments	7,401			43			—		7,444
Loss on unfunded lending commitments	(96		)	—			—		(96		)
Reserve for unfunded lending commitments, end of period	88,830			5,491			—		94,321
Total ACL, end of period	$	522,259		$	3,482,012		$	47,023	$	4,051,294

	Nine-Month Period Ended September 30, 2018
(in thousands)	Commercial			Consumer			Unallocated		Total
ALLL, beginning of period	$	443,796		$	3,504,068		$	47,023	$	3,994,887
Provision for loan and lease losses	18,658			1,604,733			—		1,623,391
Charge-offs	(70,978		)	(3,524,081		)	—		(3,595,059		)
Recoveries	41,953			1,891,801			—		1,933,754
Charge-offs, net of recoveries	(29,025		)	(1,632,280		)	—		(1,661,305		)
ALLL, end of period	$	433,429		$	3,476,521		$	47,023	$	3,956,973

Reserve for unfunded lending commitments, beginning of period	$	103,835		$	5,276		$	—	$	109,111
Release of unfunded lending commitments	(14,909		)	215			—		(14,694		)
Loss on unfunded lending commitments	(96		)	—			—		(96		)
Reserve for unfunded lending commitments, end of period	88,830			5,491			—		94,321
Total ACL, end of period	$	522,259		$	3,482,012		$	47,023	$	4,051,294
Ending balance, individually evaluated for impairment⁽¹⁾	$	88,625		$	1,605,101		$	—	$	1,693,726
Ending balance, collectively evaluated for impairment	344,804			1,871,420			47,023		2,263,247
Financing receivables:
Ending balance	$	39,788,670		$	46,420,276		$	—	$	86,208,946
Ending balance, evaluated under the FVO or lower of cost or fair value	152			1,266,263			—		1,266,415
Ending balance, individually evaluated for impairment⁽¹⁾	479,710			6,177,635			—		6,657,345
Ending balance, collectively evaluated for impairment	39,308,808			38,976,378			—		78,285,186


(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 RICs acquired in the Change in Control and those originated by SC subsequent to the Change in Control:



	Three-Month Period Ended									Nine-Month Period Ended
	September 30, 2019									September 30, 2019
(in thousands)	Purchased			Originated			Total			Purchased			Originated			Total
ALLL, beginning of period	$	118,040		$	2,946,957		$	3,064,997		$	193,742		$	2,992,576		$	3,186,318
(Release of) / Provision for loan and lease losses	(17,667		)	576,621			558,954			(66,227		)	1,593,236			1,527,009
Charge-offs⁽¹⁾	(32,967		)	(1,283,124		)	(1,316,091		)	(119,230		)	(3,757,525		)	(3,876,755		)
Recoveries	22,135			724,837			746,972			81,256			2,137,004			2,218,260
Charge-offs, net of recoveries	(10,832		)	(558,287		)	(569,119		)	(37,974		)	(1,620,521		)	(1,658,495		)
ALLL, end of period	$	89,541		$	2,965,291		$	3,054,832		$	89,541		$	2,965,291		$	3,054,832



	Three-Month Period Ended									Nine-Month Period Ended
	September 30, 2018									September 30, 2018
(in thousands)	Purchased			Originated			Total			Purchased			Originated			Total
ALLL, beginning of period	$	266,221		$	2,993,354		$	3,259,575		$	384,167		$	2,862,356		$	3,246,523
(Release of) / Provision for loan and lease losses	(15,312		)	614,696			599,384			(61,173		)	1,604,603			1,543,430
Charge-offs	(71,969		)	(1,142,162		)	(1,214,131		)	(253,744		)	(3,152,911		)	(3,406,655		)
Recoveries	38,330			569,394			607,724			148,020			1,721,234			1,869,254
Charge-offs, net of recoveries	(33,639		)	(572,768		)	(606,407		)	(105,724		)	(1,431,677		)	(1,537,401		)
ALLL, end of period	$	217,270		$	3,035,282		$	3,252,552		$	217,270		$	3,035,282		$	3,252,552

(1) Includes loans transferred to held for sale.

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)	September 30, 2019		December 31, 2018

Non-accrual loans:
Commercial:
CRE	$	101,042	$	88,500
C&I	160,835		189,827
Multifamily	3,298		13,530
Other commercial	29,814		72,841
Total commercial loans	294,989		364,698
Consumer:
Residential mortgages	185,891		216,815
Home equity loans and lines of credit	110,092		115,813
RICs and auto loans - originated	1,405,829		1,455,406
RICs - purchased	37,615		89,916
Personal unsecured loans	3,470		3,602
Other consumer	9,686		9,187
Total consumer loans	1,752,583		1,890,739
Total non-accrual loans	2,047,572		2,255,437

Other real estate owned ("OREO")	80,760		107,868
Repossessed vehicles	223,831		224,046
Foreclosed and other repossessed assets	2,325		1,844
Total OREO and other repossessed assets	306,916		333,758
Total non-performing assets	$	2,354,488	$	2,589,195

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

Age Analysis of Past Due Loans

The Company generally considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date.

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:
		September 30, 2019
(in thousands)		30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
Commercial:
CRE		$	22,434	$	63,920	$	86,354	$	8,638,808	$	8,725,162	$	—
C&I ⁽¹⁾		86,513		67,818		154,331		16,009,942		16,164,273		—
Multifamily		8,502		1,703		10,205		8,454,865		8,465,070		—
Other commercial ⁽²⁾		19,414		30,376		49,790		8,159,961		8,209,751		—
Consumer:
Residential mortgages⁽³⁾		156,658		177,988		334,646		9,177,670		9,512,316		—
Home equity loans and lines of credit ⁽⁴⁾		43,864		80,248		124,112		4,835,387		4,959,499		—
RICs and auto loans - originated		3,887,285		342,102		4,229,387		29,603,545		33,832,932		—
RICs and auto loans - purchased		117,427		8,890		126,317		236,907		363,224		—
Personal unsecured loans⁽⁵⁾		92,435		92,641		185,076		2,141,474		2,326,550		87,520
Other consumer		11,534		10,829		22,363		319,932		342,295		—
Total		$	4,446,066	$	876,515	$	5,322,581	$	87,578,491	$	92,901,072	$	87,520

(1) C&I loans includes $77.0 million of LHFS at September 30, 2019.

(2) Other commercial includes $768.2 million of LHFS at September 30, 2019.

(3) Residential mortgages includes $594.7 million of LHFS at September 30, 2019.

(4) Home equity loans and lines of credit includes $40.3 million of LHFS at September 30, 2019.

(5) Personal unsecured loans includes $1.0 billion of LHFS at September 30, 2019.



	As of
		December 31, 2018
(in thousands)		30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
Commercial:
CRE		$	20,179	$	49,317	$	69,496	$	8,634,985	$	8,704,481	$	—
C&I		61,495		74,210		135,705		15,602,453		15,738,158		—
Multifamily		1,078		4,574		5,652		8,303,463		8,309,115		—
Other commercial		16,081		5,330		21,411		7,608,593		7,630,004		6
Consumer:
Residential mortgages⁽¹⁾		186,222		171,265		357,487		9,741,496		10,098,983		—
Home equity loans and lines of credit		58,507		79,860		138,367		5,327,303		5,465,670		—
RICs and auto loans - originated		4,076,015		419,819		4,495,834		24,036,251		28,532,085		—
RICs and auto loans - purchased		242,604		21,923		264,527		538,608		803,135		—
Personal unsecured loans⁽²⁾		93,675		102,463		196,138		2,404,327		2,600,465		98,973
Other consumer		16,261		13,782		30,043		417,007		447,050		—
Total		$	4,772,117	$	942,543	$	5,714,660	$	82,614,486	$	88,329,146	$	98,979


(1)	Residential mortgages included $214.5 million of LHFS at December 31, 2018.


(2)	Personal unsecured loans included $1.1 billion of LHFS at December 31, 2018.

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

Impaired Loans by Class of Financing Receivable

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

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



	September 30, 2019
(in thousands)	Recorded Investment⁽¹⁾		UPB		Related Specific Reserves		Average Recorded Investment
With no related allowance recorded:
Commercial:
CRE	$	74,090	$	79,893	$	—	$	76,573
C&I	20,675		22,445		—		23,267
Multifamily	4,692		5,581		—		11,476
Other commercial	3,274		3,291		—		5,311
Consumer:
Residential mortgages	130,222		180,404		—		137,561
Home equity loans and lines of credit	43,031		45,206		—		44,550
RICs and auto loans - originated	—		—		—		1
RICs and auto loans - purchased	3,387		4,352		—		5,224
Personal unsecured loans	3		3		—		4
Other consumer	3,131		3,131		—		3,361
With an allowance recorded:
Commercial:
CRE	79,453		88,366		22,199		69,157
C&I	150,641		194,830		47,019		165,410
Other commercial	18,855		18,855		2,023		39,385
Consumer:
Residential mortgages	240,473		276,231		27,164		247,219
Home equity loans and lines of credit	63,421		74,401		4,314		61,981
RICs and auto loans - originated	3,850,726		3,851,881		971,193		4,240,670
RICs and auto loans - purchased	310,601		351,029		88,137		462,336
Personal unsecured loans	15,125		15,367		4,658		15,654
Other consumer	10,626		13,563		1,097		10,343
Total:
Commercial	$	351,680	$	413,261	$	71,241	$	390,579
Consumer	4,670,746		4,815,568		1,096,563		5,228,904
Total	$	5,022,426	$	5,228,829	$	1,167,804	$	5,619,483


(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.

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

The Company recognized interest income, not including the impact of purchase accounting adjustments, of $492.9 million for the nine-month period ended September 30, 2019 on approximately $4.1 billion of TDRs that were in performing status as of September 30, 2019.



	December 31, 2018
(in thousands)	Recorded Investment⁽¹⁾		UPB		Related Specific Reserves		Average Recorded Investment
With no related allowance recorded:
Commercial:
CRE	$	79,056	$	88,960	$	—	$	102,731
C&I	25,859		36,067		—		54,200
Multifamily	18,260		19,175		—		14,074
Other commercial	7,348		7,380		—		4,058
Consumer:
Residential mortgages	144,899		201,905		—		126,110
Home equity loans and lines of credit	46,069		48,021		—		49,233
RICs and auto loans - originated	1		1		—		1
RICs and auto loans - purchased	7,061		9,071		—		11,627
Personal unsecured loans	4		4		—		42
Other consumer	3,591		3,591		—		6,574
With an allowance recorded:
Commercial:
CRE	58,861		66,645		6,449		78,271
C&I	180,178		197,937		66,329		178,474
Multifamily	—		—		—		3,101
Other commercial	59,914		59,914		21,342		68,813
Consumer:
Residential mortgages	253,965		289,447		29,156		288,029
Home equity loans and lines of credit	60,540		71,475		4,272		62,684
RICs and auto loans - originated	4,630,614		4,652,013		1,231,164		4,742,820
RICs and auto loans - purchased	614,071		694,000		184,545		890,274
Personal unsecured loans	16,182		16,446		6,875		16,330
Other consumer	10,060		13,275		1,162		10,826
Total:
Commercial	$	429,476	$	476,078	$	94,120	$	503,722
Consumer	5,787,057		5,999,249		1,457,174		6,204,550
Total	$	6,216,533	$	6,475,327	$	1,551,294	$	6,708,272


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

The Company recognized interest income, not including the impact of purchase accounting adjustments, of $761.0 million for the year ended December 31, 2018 on approximately $5.0 billion of TDRs that were in performing status as of December 31, 2018.

Commercial Lending Asset Quality Indicators

The Company's Risk Department performs a credit analysis and classifies certain loans over an internal threshold based on the commercial lending classifications described below:

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

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

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

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

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

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

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



September 30, 2019	CRE		C&I		Multifamily		Remaining commercial		Total⁽¹⁾
			(in thousands)
Rating:
Pass	$	7,757,692	$	14,356,417	$	8,208,885	$	7,877,207	$	38,200,201
Special mention	503,424		716,502		234,240		263,749		1,717,915
Substandard	419,570		402,184		21,945		68,310		912,009
Doubtful	1,730		47,331		—		485		49,546
N/A⁽²⁾	42,746		641,839		—		—		684,585
Total commercial loans	$	8,725,162	$	16,164,273	$	8,465,070	$	8,209,751	$	41,564,256


(1)	Financing receivables include LHFS.


(2)	Consists of loans that have not been assigned a regulatory rating.



December 31, 2018	CRE		C&I		Multifamily		Remaining commercial		Total⁽¹⁾
			(in thousands)
Rating:
Pass	$	7,655,627	$	14,003,134	$	8,072,407	$	7,466,419	$	37,197,587
Special mention	628,097		772,704		204,262		67,313		1,672,376
Substandard	373,356		408,515		32,446		36,255		850,572
Doubtful	4,655		38,373		—		60,017		103,045
N/A⁽²⁾	42,746		515,432		—		—		558,178
Total commercial loans	$	8,704,481	$	15,738,158	$	8,309,115	$	7,630,004	$	40,381,758


(1)	Financing receivables include LHFS.


(2)	Consists of loans that have not been assigned a regulatory rating.

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⁾	September 30, 2019				December 31, 2018
(dollars in thousands)	RICs and auto loans		Percent		RICs and auto loans		Percent
No FICO^®(1)	$	3,205,955	9.4	%	$	3,136,449	10.7	%
<600	15,495,142		45.3	%	14,884,385		50.7	%
600-639	5,974,294		17.5	%	5,185,412		17.7	%
640-679	5,723,096		16.7	%	4,758,394		16.2	%
680-719	794,847		2.3	%	289,270		1.0	%
720-759	831,836		2.4	%	283,052		1.0	%
>=760	2,170,986		6.4	%	798,258		2.7	%
Total	$	34,196,156	100.0	%	$	29,335,220	100.0	%


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


(2)	Credit scores updated quarterly.

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⁾
September 30, 2019	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⁾	$	150,167	$	4,699	$	817	$	—	$	—	$	—	$	—	$	155,683
<600	34		171,317		42,793		36,151		25,047		991		319		276,652
600-639	—		125,017		41,663		34,522		34,026		1,146		1,312		237,686
640-679	428		273,782		95,861		80,680		90,581		1,157		3,363		545,852
680-719	832		522,679		222,693		129,263		149,188		1,534		2,706		1,028,895
720-759	3,315		979,460		435,027		190,525		192,564		1,781		2,918		1,805,590
>=760	5,067		3,378,231		946,154		340,551		186,729		4,633		5,933		4,867,298
Grand Total	$	159,843	$	5,455,185	$	1,785,008	$	811,692	$	678,135	$	11,242	$	16,551	$	8,917,656

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



	Home Equity Loans and Lines of Credit⁽²⁾
September 30, 2019	N/A⁽¹⁾		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A⁽¹⁾	$	161,320	$	1,321	$	440	$	—	$	—	$	163,081
<600	514		216,875		46,576		7,874		4,274		276,113
600-639	385		156,619		35,032		5,109		2,632		199,777
640-679	1,699		286,979		82,090		7,583		3,643		381,994
680-719	4,710		510,948		156,561		13,597		10,333		696,149
720-759	7,099		692,508		221,333		14,447		10,347		945,734
>=760	17,373		1,755,329		431,733		32,130		19,794		2,256,359
Grand Total	$	193,100	$	3,620,579	$	973,765	$	80,740	$	51,023	$	4,919,207

(1) Excludes 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)	ALLL model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.



	Residential Mortgages⁽¹⁾⁽³⁾
December 31, 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⁾	$	87,808	$	4,465	$	—	$	—	$	423	$	—	$	—	$	92,696
<600	69		225,647		54,101		35,625		26,863		2,450		4,604		349,359
600-639	35		157,281		47,712		34,124		37,901		943		1,544		279,540
640-679	—		308,780		112,811		76,512		101,057		1,934		1,767		602,861
680-719	—		560,920		266,877		148,283		175,889		3,630		3,593		1,159,192
720-759	50		1,061,969		535,840		210,046		218,177		4,263		6,704		2,037,049
>=760	213		3,518,916		1,253,733		354,629		220,695		6,477		9,102		5,363,765
Grand Total	$	88,175	$	5,837,978	$	2,271,074	$	859,219	$	781,005	$	19,697	$	27,314	$	9,884,462


(1)	Excludes 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)	ALLL 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)



	Home Equity Loans and Lines of Credit⁽²⁾
December 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⁾	$	133,436	$	841	$	197	$	—	$	5	$	134,479
<600	1,130		209,536		64,202		14,948		5,988		295,804
600-639	398		166,384		48,543		7,932		2,780		226,037
640-679	919		305,642		112,937		10,311		6,887		436,696
680-719	869		527,374		215,824		17,231		13,482		774,780
720-759	1,139		732,467		292,516		20,812		14,677		1,061,611
>=760	2,280		1,844,830		614,221		46,993		27,939		2,536,263
Grand Total	$	140,171	$	3,787,074	$	1,348,440	$	118,227	$	71,758	$	5,465,670


(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)	September 30, 2019		December 31, 2018

Performing	$	4,058,093	$	5,014,224
Non-performing	719,290		908,128
Total⁽¹⁾	$	4,777,383	$	5,922,352

(1) Excludes LHFS.

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 particular 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.

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 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 or an extension of the maturity date.

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

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/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 and nine-month periods ended September 30, 2019 and 2018, respectively:



	Three-Month Period Ended September 30, 2019
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
CRE	12	$	15,388	$	(5,335	)	$	8		$	10,061
C&I	23	651		4			—			655
Consumer:							—
Residential mortgages⁽³⁾	29	3,822		14			21			3,857
Home equity loans and lines of credit	30	2,676		—			637			3,313
RICs and auto loans - originated	21,345	375,848		(86		)	1,631			377,393
RICs - purchased	208	672		3			(5		)	670
Personal unsecured loans	40	633		(4		)	30			659
Other consumer	28	1,049		—			(6		)	1,043
Total	21,715	$	400,739	$	(5,404	)	$	2,316		$	397,651

	Nine-Month Period Ended September 30, 2019
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
CRE	37	$	60,520	$	(4,935	)	$	706		$	56,291
C&I	61	1,589		4			—			1,593
Consumer:
Residential mortgages⁽³⁾	74	10,497		126			144			10,767
Home equity loans and lines of credit	107	10,684		—			1,357			12,041
RICs and auto loans - originated	57,887	997,963		(682		)	3,571			1,000,852
RICs - purchased	837	3,495		6			(17		)	3,484
Personal unsecured loans	161	1,938		(4		)	38			1,972
Other consumer	39	1,406		—			(9		)	1,397
Total	59,203	$	1,088,092	$	(5,485	)	$	5,790		$	1,088,397

(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)



	Three-Month Period Ended September 30, 2018
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
CRE	15	$	5,069	$	—		$	(123	)	$	4,946
C&I	37	1,235		(57		)	(1		)	1,177
Consumer:
Residential mortgages⁽³⁾	45	8,163		—			(13		)	8,150
Home equity loans and lines of credit	39	2,513		18			566			3,097
RICs and auto loans - originated	27,421	465,362		(853		)	(114		)	464,395
RICs - purchased	794	4,676		(17		)	(1		)	4,658
Personal unsecured loans	4,053	5,503		—			1,127			6,630
Other consumer	3	166		—			(17		)	149
Total	32,407	$	492,687	$	(909	)	$	1,424		$	493,202


	Nine-Month Period Ended September 30, 2018
	Number of Contracts	Pre-TDR Recorded Investment⁽¹⁾		Term Extension			Other⁽⁴⁾			Post-TDR Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
CRE	62	$	32,372	$	(547	)	$	(1,512	)	$	30,313
C&I	186	7,136		(61		)	(134		)	6,941
Consumer:
Residential mortgages⁽³⁾	136	23,108		—			(693		)	22,415
Home equity loans and lines of credit	132	7,939		18			449			8,406
RICs and auto loans - originated	101,883	1,733,592		(2,264		)	(199		)	1,731,129
RICs - purchased	3,596	24,628		(82		)	(23		)	24,523
Personal unsecured loans	9,838	14,194		—			2,894			17,088
Other consumer	6	214		—			(20		)	194
Total	115,839	$	1,843,183	$	(2,936	)	$	762		$	1,841,009

(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.

TDRs Which Have Subsequently Defaulted

A TDR is generally considered to have subsequently defaulted if, after modification, the loan becomes 90 days past due ("DPD"). For RICs, a TDR is considered to have subsequently defaulted after modification at the earlier of the date of repossession or 120 DPD. The following table details period-end recorded investment balances of TDRs that became TDRs during the past twelve-month period and have subsequently defaulted during the three-month and nine-month periods ended September 30, 2019, and 2018, respectively.



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2019			2018			2019			2018
	Number of Contracts	Recorded Investment⁽¹⁾		Number of Contracts	Recorded Investment⁽¹⁾		Number of Contracts	Recorded Investment⁽¹⁾		Number of Contracts	Recorded Investment⁽¹⁾
	(dollars in thousands)						(dollars in thousands)
Commercial
CRE	—	$	—	3	$	21,061	2	$	223	7	$	21,654
C&I	6	5,956		31	3,029		31	6,801		129	16,563
Consumer:
Residential mortgages	23	2,804		39	5,668		102	10,432		135	18,503
Home equity loans and lines of credit	9	641		17	1,111		24	1,707		37	2,270
RICs and auto loans	5,188	83,531		9,244	154,601		18,073	298,602		30,052	501,643
Personal unsecured loans	61	565		4,205	5,765		178	1,745		6,586	9,574
Total	5,287	$	93,497	13,539	$	191,235	18,410	$	319,510	36,946	$	570,207


(1)	The recorded investment represents the period-end balance. Does not include Chapter 7 bankruptcy TDRs.

NOTE 5. OPERATING LEASE ASSETS, NET

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

Operating lease assets, net consisted of the following as of September 30, 2019 and December 31, 2018:



(in thousands)	September 30, 2019			December 31, 2018
Leased vehicles	$	21,067,104		$	18,737,338
Less: accumulated depreciation	(3,851,631		)	(3,518,025		)
Depreciated net capitalized cost	17,215,473			15,219,313
Origination fees and other costs	80,751			66,967
Manufacturer subvention payments	(1,258,407		)	(1,307,424		)
Leased vehicles, net	16,037,817			13,978,856

Commercial equipment vehicles and aircraft, gross	154,409			130,274
Less: accumulated depreciation	(40,802		)	(30,337		)
Commercial equipment vehicles and aircraft, net⁽¹⁾	113,607			99,937

Total operating lease assets, net⁽¹⁾	$	16,151,424		$	14,078,793

(1) Includes $74.2 million and zero of operating lease assets held for sale as of September 30, 2019 and December 31, 2018, respectively.

The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of September 30, 2019 (in thousands):



2019	$	733,095
2020	2,512,414
2021	1,479,345
2022	374,899
2023	27,679
Thereafter	12,990
Total	$	5,140,422

Lease income for the three-month and nine-month periods ended September 30, 2019 was $735.8 million and $2.1 billion, respectively, compared to $610.3 million and $1.7 billion, respectively, for the corresponding periods in 2018.

During the three-month and nine-month periods ended September 30, 2019, the Company recognized $48.5 million and $121.0 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 compared to $49.0 million and $167.9 million for the corresponding periods in 2018, respectively. These amounts are recorded within Miscellaneous income, net in the Company's Condensed Consolidated Statements of Operations.

Lease expense for the three-month and nine-month periods ended September 30, 2019 was $523.9 million and $1.5 billion, respectively, compared to $455.3 million and $1.3 billion respectively, for the corresponding periods in 2018.

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 its Condensed Consolidated Balance Sheets.

The collateral borrowings under credit facilities and securitization notes payable of the Company’s consolidated VIEs remain on the Condensed Consolidated Financial Statements. The Company recognizes finance charges, fee income, and provisions for credit losses on the RICs, and leased vehicles and interest expense on the debt. Revolving credit facilities generally also utilize entities that are considered VIEs, which are included on the Condensed Consolidated Balance Sheets.

NOTE 6. VIEs (continued)

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

On-balance sheet VIEs

The assets of consolidated VIEs that are included in the Company's Condensed Consolidated Financial Statements, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, and that can be used only to settle obligations of the consolidated VIEs and the liabilities of those entities for which creditors (or beneficial interest holders) do not have recourse to the Company's general credit, were as follows⁽¹⁾:



(in thousands)	September 30, 2019		December 31, 2018
Assets
Restricted cash	$	1,702,681	$	1,582,158
Loans⁽²⁾	25,084,477		24,098,638
Operating lease assets, net	16,037,817		13,978,855
Various other assets	592,890		685,383
Total Assets	$	43,417,865	$	40,345,034
Liabilities
Notes payable⁽²⁾	$	32,950,281	$	31,949,839
Various other liabilities	179,474		122,010
Total Liabilities	$	33,129,755	$	32,071,849

(1) 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. 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.

(2) Reflects the impacts of purchase accounting.

The Company retains servicing rights 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, net. As of September 30, 2019 and December 31, 2018, the Company was servicing $28.2 billion and $27.2 billion, respectively, of gross RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.

A summary of the cash flows received from the consolidated securitization Trusts for the three-month and nine-month periods ended September 30, 2019 and 2018 is as follows:



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,
(in thousands)	2019		2018		2019		2018
Assets securitized	$	5,498,705	$	5,414,393	$	15,340,428	$	19,167,290

Net proceeds from new securitizations ⁽¹⁾	$	4,475,722	$	4,014,928	$	12,232,777	$	12,073,124
Net proceeds from sale of retained bonds	2,414		203,704		119,719		797,336
Cash received for servicing fees ⁽²⁾	242,801		229,520		740,760		659,210
Net distributions from Trusts ⁽²⁾	1,018,301		860,024		2,689,735		2,186,010
Total cash received from Trusts	$	5,739,238	$	5,308,176	$	15,782,991	$	15,715,680

(1) Includes additional advances on existing securitizations.

(2) These amounts are not reflected in the accompanying 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 and nine-month periods ended September 30, 2019, the Company sold no RICs to VIEs in off-balance sheet securitizations compared to sales of $274.6 million for a loss of $0.7 million and $2.9 billion for a loss of $20.7 million during the three-month and nine-month periods ended September 30, 2018, respectively. Beginning in 2017, the transactions were executed under the Company's 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.

NOTE 6. VIEs (continued)

As of September 30, 2019 and December 31, 2018, the Company was servicing $2.8 billion and $4.1 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)	September 30, 2019		December 31, 2018
Santander Private Auto Issuing Note ("SPAIN") trust	$	2,445,116	$	3,461,793
Total serviced for related parties	2,445,116		3,461,793

Chrysler Capital securitizations	310,126		611,050
Total serviced for third parties	310,126		611,050
Total serviced for other portfolio	$	2,755,242	$	4,072,843

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 Trusts for the three-month and nine-month periods ended September 30, 2019 and 2018 is as follows:



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,
(in thousands)	2019		2018		2019		2018
Receivables securitized ⁽¹⁾	$	—	$	274,609	$	—	$	2,905,922

Net proceeds from new securitizations	$	—	$	274,855	$	—	$	2,909,794
Cash received for servicing fees	7,859		11,896		27,467		32,590
Total cash received from Trusts	$	7,859	$	286,751	$	27,467	$	2,942,384

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

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

Goodwill is assigned to reporting units, which are operating segments or one level below an operating segment, as of the acquisition date. The following table presents the Company's goodwill by its reporting units at September 30, 2019:



(in thousands)	Consumer and Business Banking		C&I⁽¹⁾			CRE and Vehicle Finance		CIB		SC		Total
Goodwill at December 31, 2018	$	1,880,304	$	1,412,995		$	—	$	131,130	$	1,019,960	$	4,444,389
Re-allocations during the period	—		(1,095,071		)	1,095,071		—		—		—
Goodwill at September 30, 2019	$	1,880,304	$	317,924		$	1,095,071	$	131,130	$	1,019,960	$	4,444,389

(1) Formerly Commercial Banking.

The Company made a change in its reportable segments beginning January 1, 2019 and, accordingly, has re-allocated goodwill to the related reporting units based on the estimated fair value of each reporting unit. Upon re-allocation, management tested the new reporting units for impairment, using the same methodology and assumptions as used in the October 1, 2018 goodwill impairment test, and noted there was no impairment. See Note 18 for additional details on the change in reportable segments.

During first quarter of 2018, the reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million, for Commercial Banking and CRE, respectively, were combined.

There were no disposals, additions or impairments of goodwill for the three-month and nine-month periods ended September 30, 2019 or 2018. The Company evaluates goodwill for impairment at the reporting unit level. The Company completes its annual goodwill impairment test as of October 1 each year. The Company conducted its last annual goodwill impairment tests as of October 1, 2018 using generally accepted valuation methods.

NOTE 7. GOODWILL AND OTHER INTANGIBLES (continued)

Other Intangible Assets

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



	September 30, 2019					December 31, 2018
(in thousands)	Net Carrying Amount		Accumulated Amortization			Net Carrying Amount		Accumulated Amortization
Intangibles subject to amortization:
Dealer networks	$	357,786	$	(222,214	)	$	387,196	$	(192,804	)
Chrysler relationship	53,750		(85,000		)	65,000		(73,750		)
Trade name	13,800		(4,200		)	14,700		(3,300		)
Other intangibles	5,611		(49,586		)	8,297		(46,894		)
Total intangibles subject to amortization	$	430,947	$	(361,000	)	$	475,193	$	(316,748	)

At September 30, 2019 and December 31, 2018, the Company did not have any intangibles, other than goodwill, that were not subject to amortization.

Amortization expense on intangible assets was $14.7 million and $44.3 million for the three-month and nine-month periods ended September 30, 2019, respectively, and $15.3 million and $45.9 million for the three-month and nine-month periods ended 2018, 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)
2019	$	58,993	$	44,250	$	14,743
2020	58,658		—		58,658
2021	39,903		—		39,903
2022	39,901		—		39,901
2023	28,649		—		28,649
Thereafter	249,093		—		249,093

NOTE 8. OTHER ASSETS

The following is a detail of items that comprised other assets at September 30, 2019 and December 31, 2018:



(in thousands)	September 30, 2019		December 31, 2018
Operating lease ROU assets	$	663,206	$	—
Deferred tax assets	508,821		625,087
Accrued interest receivable	541,019		566,602
Derivative assets at fair value	716,016		511,916
Other repossessed assets	226,156		225,890
Equity method investments	251,039		204,687
MSRs	128,469		152,121
OREO	80,760		107,868
Miscellaneous assets, receivables and prepaid expenses	1,549,569		1,259,165
Total other assets	$	4,665,055	$	3,653,336

NOTE 8. OTHER ASSETS (continued)

Other assets is comprised of:


•	Operating lease ROU assets

We have operating leases for real estate and non-real estate assets. Real estate leases relate to office space and bank/lending retail branches. Non-real estate leases include data centers, automated teller machines ("ATMs"), vehicles and certain equipment leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Some lease payments may vary based on changes in the Consumer Price Index. The Company generally uses the contractual lease terms to allocate lease and non-lease components.

Real estate leases may include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The exercise of lease renewal options is at our sole discretion. The Company includes a renewal option period in the lease term if it is reasonably certain that it will exercise such option. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized based on the present value of lease payments over the lease term, using our incremental borrowing rates.

At September 30, 2019, operating lease ROU assets were $663.2 million and operating lease liabilities were $721.4 million. Operating lease ROU assets are included in Other Assets in the Company’s Condensed Consolidated Balance Sheets. Lease liabilities are included in Accrued expenses and payables in the Company’s Condensed Consolidated Balance Sheets.

For the three-month and nine-month periods ended September 30, 2019, operating lease expenses were $35.8 million and $110.0 million and sublease income was $1.1 million and $3.0 million, respectively, and are reported within Occupancy and equipment expenses in the Company’s Condensed Consolidated Statements of Operations.

Supplemental balance sheet information related to leases was as follows:



Maturity of Lease Liabilities at September 30, 2019	Total Operating leases
	(in thousands)
2019	$	38,427
2020	139,331
2021	130,297
2022	120,090
2023	105,041
Thereafter	272,422
Total lease liabilities	$	805,608
Less: Interest	(84,167		)
Present value of lease liabilities	$	721,441



Operating Lease Term and Discount Rate	September 30, 2019
Weighted-average remaining lease term (years)	6.9
Weighted-average discount rate	3.2	%



Other Information	September 30, 2019
	(in thousands)
Operating cash flows from operating leases⁽¹⁾	$	(98,110	)
Leased assets obtained in exchange for new operating lease liabilities	$	813,090

(1) Activity is included within the net change in other liabilities on the Condensed Consolidated SCF.

NOTE 8. OTHER ASSETS (continued)


•	The Company made approximately $2.9 million in payments during the nine months ending September 30, 2019 to Santander for rental of certain office space. The related ROU asset and lease liability were approximately $14.2 million on September 30, 2019.


•	Deferred tax asset, net - Refer to Note 13 of these Condensed Consolidated Financial Statements for more information on tax-related activities.


•	Derivative assets at fair value - Refer to the offsetting of financial assets table in Note 12 to these Condensed Consolidated Financial Statements for the detail of these amounts.

•

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.


•	MSRs - See further discussion on the valuation of the MSRs in Note 14.

•

Miscellaneous assets, receivables and prepaid expenses includes $318.2 million and $373.2 million of Income tax receivables and $315.2 million and $199.0 million of prepaid expenses at September 30, 2019 and December 31, 2018, respectively. In addition, subvention receivables in connection with the Chrysler Agreement, investment and capital market receivables, derivatives trading receivables, and unapplied payments are also included in miscellaneous assets. In connection with SC's execution of the sixth amendment to the Chrysler Agreement in June 2019, SC paid a $60 million upfront fee to FCA. This fee is being amortized into Other expenses over the remaining term of the Chrysler Agreement. The 2019 increase was also due to increases in subvention receivables, investment principal receivable and due from others related to broker-dealer activities.

NOTE 9. DEPOSITS AND OTHER CUSTOMER ACCOUNTS

Deposits and other customer accounts are summarized as follows:



	September 30, 2019				December 31, 2018
(dollars in thousands)	Balance		Percent of total deposits		Balance		Percent of total deposits
Interest-bearing demand deposits	$	10,376,161	15.7	%	$	8,827,704	14.4	%
Non-interest-bearing demand deposits	14,550,514		22.0	%	14,420,450		23.4	%
Savings	5,684,208		8.6	%	5,875,787		9.6	%
Customer repurchase accounts	581,491		0.9	%	654,843		1.1	%
Money market	25,867,102		38.9	%	24,263,929		39.4	%
Certificates of deposit ("CDs")	9,180,492		13.9	%	7,468,667		12.1	%
Total deposits ⁽¹⁾	$	66,239,968	100.0	%	$	61,511,380	100.0	%


(1)	Includes foreign deposits, as defined by the FRB, of $9.6 billion and $8.4 billion at September 30, 2019 and December 31, 2018, respectively.

Deposits collateralized by investment securities, loans, and other financial instruments totaled $3.7 billion and $2.7 billion at September 30, 2019 and December 31, 2018, respectively.

Demand deposit overdrafts that have been reclassified as loan balances were $89.4 million and $50.0 million at September 30, 2019 and December 31, 2018, respectively.

At September 30, 2019 and December 31, 2018, the Company had $2.0 billion and $1.9 billion of CDs greater than $250 thousand.

NOTE 10. BORROWINGS

Total borrowings and other debt obligations at September 30, 2019 were $49.2 billion, compared to $45.0 billion at December 31, 2018. Periodically, as part of the Company's wholesale funding management, it opportunistically repurchases outstanding borrowings in the open market and subsequently retires the obligations.

NOTE 10. BORROWINGS (continued)

Bank

The Bank had no new securities issuances during the three-month and nine-month periods ended September 30, 2019 and the year ended December 31, 2018.

During the nine-month period ended September 30, 2019, the Bank repurchased the following borrowings and other debt obligations:


•	$27.9 million of its subordinated notes due August 2022.


•	$21.2 million of its real estate investment trust ("REIT") preferred debt.

The Bank did not repurchase any outstanding borrowings in the open market during the year ended December 31, 2018.

SHUSA

During the nine-month period ended September 30, 2019, the Company issued $2.5 billion of debt, consisting of:


•	$1.0 billion of its 3.50% senior notes due 2024,


•	$720.9 million of its senior floating rate notes due 2022.


•	$750.0 million of its 2.88% senior fixed rate notes due 2024 with BSSA, an affiliate.

During the nine-month period ended September 30, 2019, the Company repurchased the following borrowings and other debt obligations:


•	$178.7 million of its 2.70% senior notes, due May 2019.


•	$388.7 million of its senior floating rate notes, due July 2019.


•	$371.0 million of its senior floating rate notes, due September 2019.

During 2018, the Company issued $1.4 billion of debt consisting of:


•	$427.9 million of its senior floating rate notes.


•	$1.0 billion of its 4.45% senior notes due 2021.

During 2018, the Company repurchased the following borrowings and other debt obligations:


•	$244.6 million of its 3.45% senior notes.


•	$821.3 million of its 2.7% senior notes.


•	$154.6 million of its Sovereign Cap Trust IX subordinated debentures and common securities.

The Company recorded a loss on debt extinguishment related to debt repurchases and early repayments, primarily at the Bank, of $1.1 million for the nine-month period ended September 30, 2019. The Company recorded a loss on debt extinguishment related to debt repurchases and early repayments of $3.5 million for the corresponding period in 2018.

Subsequent to September 30, 2019, the Company has had the following debt activity:


•	Issued $439.1 million of floating rate senior notes due January 2023 in a private offering.


•	In October 2019, the Company exchanged $378.0 million of its 4.450% senior notes due 2021 and $570.8 million of its 3.700% senior notes due 2022 for $948.9 million of new 3.244% senior notes due October 2026.


•	In conjunction with the debt exchange in October 2019, repurchased $37.3 million of its 4.450% senior notes due 2021 and its 3.700% senior notes due 2022.


•	In addition, a subsidiary of the Company redeemed $37.7 million of its 2.00% subordinated debt in October 2019.

NOTE 10. BORROWINGS (continued)

Parent Company and other Subsidiary Borrowings and Debt Obligations

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



	September 30, 2019				December 31, 2018
(dollars in thousands)	Balance		Effective Rate		Balance		Effective Rate
Parent Company
2.70% senior notes, due May 2019	$	—	—	%	$	178,628	2.82	%
2.65% senior notes, due April 2020	999,085		2.82	%	997,848		2.82	%
4.45% senior notes, due December 2021	996,628		4.61	%	995,540		4.61	%
3.70% senior notes, due March 2022	1,440,080		3.74	%	1,440,063		3.74	%
3.40% senior notes, due January 2023	995,736		3.54	%	994,831		3.54	%
3.50% senior notes, due June 2024	995,579		3.60	%	—		—	%
4.50% senior notes, due July 2025	1,096,370		4.56	%	1,095,966		4.56	%
4.40% senior notes, due July 2027	1,049,810		4.40	%	1,049,799		4.40	%
2.88% senior notes, due January 2024 ⁽⁴⁾	750,000		2.88	%	—		—	%
Senior notes, due July 2019 ⁽¹⁾	—		—	%	388,717		3.22	%
Senior notes, due September 2019 ⁽¹⁾	—		—	%	370,936		3.18	%
Senior notes, due January 2020 ⁽¹⁾	302,642		3.57	%	302,619		3.22	%
Senior notes, due September 2020 ⁽²⁾	105,399		3.70	%	108,888		3.17	%
Senior notes, due June 2022⁽¹⁾	427,880		3.59	%	427,850		3.38	%
Senior notes, due July 2022 ⁽³⁾	720,851		3.45	%	—		—	%
Subsidiaries
2.00% subordinated debt, maturing through 2042	40,548		2.00	%	40,703		2.00	%
Short-term borrowing, due within one year, maturing July 2019	—		—	%	44,000		2.40	%
Short-term borrowing, due within one year, maturing October 2019	8,636		0.38	%	15,900		0.38	%
Total Parent Company and subsidiaries' borrowings and other debt obligations	$	9,929,244	3.75	%	$	8,452,288	3.76	%

(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) This note will bear interest at a rate equal to the three-month GBP LIBOR plus 105 basis points per annum.

(3) This note will bear interest at a rate equal to the three-month LIBOR plus 110 basis points per annum.

(4) This note is with SHUSA's parent company, Santander.

Bank Borrowings and Debt Obligations

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



	September 30, 2019				December 31, 2018
(dollars in thousands)	Balance		Effective Rate		Balance		Effective Rate
Subordinated term loan, due February 2019	$	—	—	%	$	99,402	8.20	%
FHLB advances, maturing through September 2021	6,725,000		2.48	%	4,850,000		2.74	%
Real estate investment trust ("REIT") preferred, callable May 2020	125,622		13.08	%	145,590		13.22	%
Subordinated term loan, due August 2022	—		—	%	26,770		9.95	%
Total Bank borrowings and other debt obligations	$	6,850,622	2.67	%	$	5,121,762	3.18	%

The Bank had outstanding irrevocable letters of credit totaling $813.9 million from the FHLB of Pittsburgh at September 30, 2019, used to secure uninsured deposits placed with the Bank by state and local governments and their political subdivisions.

NOTE 10. BORROWINGS (continued)

Revolving Credit Facilities

The following tables present information regarding SC's credit facilities as of September 30, 2019 and December 31, 2018, respectively:



	September 30, 2019
(dollars in thousands)	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
Warehouse line, due March 2021	$	547,945	$	1,250,000	3.49	%	$	794,643	$	—
Warehouse line, due November 2020	322,420		500,000		2.98	%	356,093		352
Warehouse line, due July 2021	484,700		500,000		3.30	%	650,051		—
Warehouse line, due August 2020⁽¹⁾	1,728,843		4,400,000		3.70	%	2,760,820		2,473
Warehouse line, due October 2020	1,062,977		2,050,000		3.83	%	1,480,296		1,207
Warehouse line, due June 2021	290,384		500,000		3.22	%	421,304		—
Warehouse line, due November 2020	481,300		1,000,000		3.27	%	700,767		—
Warehouse line, due June 2021	65,900		350,000		5.61	%	77,355		149
Repurchase facility, due January 2020⁽²⁾	332,388		332,388		3.80	%	452,740		—
Repurchase facility, due October 2019⁽²⁾	95,901		95,901		3.04	%	153,680		—
Repurchase facility, due December 2019⁽²⁾	47,824		47,824		3.30	%	69,945		—
Total SC revolving credit facilities	$	5,460,582	$	11,026,113	3.58	%	$	7,917,694	$	4,181


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

(2)

The repurchase facilities are collateralized by securitization notes payable retained by SC. As the borrower, SC is exposed to liquidity risk due to changes in the market value of retained securities pledged. In some instances, SC places or receives cash collateral with counterparties under collateral arrangements associated with SC's repurchase agreements. The maturity date for the repurchase facility trade that expired in October 2019, was extended to January 2020.



	December 31, 2018
(dollars in thousands)	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
Warehouse line, maturing on various dates	$	314,845	$	1,250,000	4.83	%	$	458,390	$	—
Warehouse line, due November 2020	317,020		500,000		3.53	%	359,214		525
Warehouse line, due August 2020⁽¹⁾	2,154,243		4,400,000		3.79	%	2,859,113		4,831
Warehouse line, due October 2020	242,377		2,050,000		5.94	%	345,599		120
Warehouse line, due August 2019	53,584		500,000		8.34	%	78,790		—
Warehouse line, due November 2020	1,000,000		1,000,000		3.32	%	1,430,524		6
Warehouse line, due October 2019	97,200		350,000		4.35	%	108,418		328
Repurchase facility, due April 2019⁽²⁾	167,118		167,118		3.84	%	235,540		—
Repurchase facility, due March 2019⁽²⁾	131,827		131,827		3.54	%	166,308		—
Total SC revolving credit facilities	$	4,478,214	$	10,348,945	3.92	%	$	6,041,896	$	5,810

(1), (2) See corresponding footnotes to the September 30, 2019 credit facilities table above.

The warehouse lines and repurchase facilities are fully collateralized by a designated portion of the SC's RICs, leased vehicles, securitization notes payable and residuals retained by the Company.

NOTE 10. BORROWINGS (continued)

Secured Structured Financings

The following tables present information regarding SC's secured structured financings as of September 30, 2019 and December 31, 2018, respectively:



	September 30, 2019
(dollars in thousands)	Balance		Initial Note Amounts Issued⁽³⁾		Initial Weighted Average Interest Rate Range	Collateral⁽²⁾		Restricted Cash
SC public securitizations, maturing on various dates between April 2021 and February 2027⁽¹⁾	$	19,569,743	$	45,743,942	1.33% - 3.42%	$	25,502,549	$	1,685,777
SC privately issued amortizing notes, maturing on various dates between July 2019 and September 2024	7,349,641		9,749,793		1.05% - 3.90%	10,654,448		12,725
Total SC secured structured financings	$	26,919,384	$	55,493,735	1.05% - 3.90%	$	36,156,997	$	1,698,502

(1) Securitizations executed under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), are included within this balance.

(2) Secured structured financings may be collateralized by SC's collateral overages of other issuances.

(3) Excludes securitizations which no longer have outstanding debt and excludes any incremental borrowings.



	December 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 between April 2021 and April 2026	$	19,225,169	$	41,380,952	1.16% - 3.53%	$	24,912,904	$	1,541,714
SC privately issued amortizing notes, maturing on various dates between July 2019 and September 2024	7,676,351		11,305,368		0.88% - 3.17%	10,383,266		35,201
Total SC secured structured financings	$	26,901,520	$	52,686,320	0.88% - 3.53%	$	35,296,170	$	1,576,915

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 September 30, 2019 and December 31, 2018, SC had private issuances of notes backed by vehicle leases outstanding totaling $9.0 billion and $7.8 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 and nine-month periods ended September 30, 2019 and 2018, respectively.



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Three-Month Period Ended September 30, 2019									June 30, 2019					September 30, 2019
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity		Ending Balance
Change in accumulated OCI on cash flow hedge derivative financial instruments	$	2,509		$	1,974		$	4,483
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments⁽¹⁾	5,293			(1,559		)	3,734
Net unrealized gains on cash flow hedge derivative financial instruments	7,802			415			8,217			$	(11,676	)	$	8,217	$	(3,459	)

Change in unrealized gains on investments in debt securities AFS	47,439			(12,642		)	34,797
Reclassification adjustment for (gains) included in net income/(expense) on non-OTTI securities⁽²⁾	(267		)	71			(196		)
Net unrealized gains on investments in debt securities AFS	47,172			(12,571		)	34,601			(40,973		)	34,601		(6,372		)
Pension and post-retirement actuarial gain⁽³⁾	728			(186		)	542			(43,870		)	542		(43,328		)

As of September 30, 2019	$	55,702		$	(12,342	)	$	43,360		$	(96,519	)	$	43,360	$	(53,159	)



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Nine-Month Period Ended September 30, 2019									December 31, 2018					September 30, 2019
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity		Ending Balance
Change in accumulated OCI on cash flow hedge derivative financial instruments	$	26,549		$	(10,361	)	$	16,188
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments⁽¹⁾	235			(69		)	166
Net unrealized gains on cash flow hedge derivative financial instruments	26,784			(10,430		)	16,354			$	(19,813	)	$	16,354	$	(3,459	)

Change in unrealized gains on investments in debt securities	323,169			(81,798		)	241,371
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities ⁽²⁾	(2,646		)	670			(1,976		)
Net unrealized gains on investments in debt securities	320,523			(81,128		)	239,395			(245,767		)	239,395		(6,372		)
Pension and post-retirement actuarial gain⁽³⁾	13,303			(559		)	12,744			(56,072		)	12,744		(43,328		)
As of September 30, 2019	$	360,610		$	(92,117	)	$	268,493		$	(321,652	)	$	268,493	$	(53,159	)


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

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



	Total Other Comprehensive (Loss)/Income									Total Accumulated Other Comprehensive Loss
	Three-Month Period Ended September 30, 2018									June 30, 2018						September 30, 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	$	(7,485	)	$	4,052		$	(3,433	)
Reclassification adjustment for net (gains) on cash flow hedge derivative financial instruments⁽¹⁾	(567		)	178			(389		)
Net unrealized (losses) on cash flow hedge derivative financial instruments	(8,052		)	4,230			(3,822		)	$	(28,492	)	$	(3,822	)	$	(32,314	)

Change in unrealized (losses) on investment securities AFS	(69,101		)	16,984			(52,117		)
Reclassification adjustment for net losses included in net income/(expense) on non-OTTI securities⁽²⁾	2,350			(578		)	1,772
Net unrealized (losses) on investment securities AFS	(66,751		)	16,406			(50,345		)	(325,575		)	(50,345		)	(375,920		)

Pension and post-retirement actuarial gain⁽⁴⁾	842			(216		)	626			(55,382		)	626			(54,756		)

As of September 30, 2018	$	(73,961	)	$	20,420		$	(53,541	)	$	(409,449	)	$	(53,541	)	$	(462,990	)



	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Nine-Month Period Ended September 30, 2018									December 31, 2017						September 30, 2018
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
Change in accumulated OCI on cash flow hedge derivative financial instruments	$	(32,961	)	$	6,542		$	(26,419	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments⁽¹⁾	14,765			(4,643		)	10,122
Net unrealized (losses) on cash flow hedge derivative financial instruments	(18,196		)	1,899			(16,297		)	$	(6,388	)	$	(16,297	)
Cumulative impact of adoption of new ASUs ⁽⁴⁾													(9,629		)
Net unrealized (losses) on cash flow hedge derivative financial instruments upon adoption													(25,926		)	(32,314		)

Change in unrealized (losses) on investment securities	(251,596		)	38,938			(212,658		)
Reclassification adjustment for net losses included in net income/(expense) on non-OTTI securities ⁽²⁾	1,931			(317		)	1,614
Net unrealized (losses) on investment securities	(249,665		)	38,621			(211,044		)	(140,498		)	(211,044		)
Cumulative impact of adoption of new ASU⁽⁴⁾													(24,378		)
Net unrealized (losses) on investments in debt securities													(235,422		)	(375,920		)
Pension and post-retirement actuarial gain⁽³⁾	7,613			(5,737		)	1,876			(51,545		)	1,876
Cumulative impact of adoption of new ASUs ⁽⁴⁾													(5,087		)
Pension and post-retirement actuarial gain upon adoption													(3,211		)	(54,756		)

As of September 30, 2018	$	(260,248	)	$	34,783		$	(225,465	)	$	(198,431	)	$	(264,559	)	$	(462,990	)

(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 OCI reclassified to Retained earnings as a result of the adoption of ASU 2018-02. Refer to Note 1 for further discussion.

NOTE 12. DERIVATIVES

General

Derivatives represent contracts between parties that usually require little or no initial net investment and result in one or both parties 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 derivative contract is calculated to determine required payments under the 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.

See Note 14 for discussion of the valuation methodology for derivative instruments.

Credit Risk Contingent Features

The Company has entered into certain derivative contracts that require the posting of collateral to counterparties when those contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to the Company's long-term senior unsecured credit ratings. In a limited number of instances, counterparties also have the right to terminate their International Swaps and Derivatives Association, Inc. ("ISDA") Master Agreements if the Company's ratings fall below a specified level, typically investment grade. As of September 30, 2019, derivatives in this category had a fair value of $1.1 million. The credit ratings of the Company and the Bank are currently considered investment grade. During the third quarter of 2019, no additional collateral would be required if there were a further 1- or 2- notch downgrade by either Standard & Poor's ("S&P") or Moody's Investor Services ("Moody's").

As of September 30, 2019 and December 31, 2018, 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 $8.1 million and $9.5 million, respectively. The Company had $11.2 million and $11.5 million in cash and securities collateral posted to cover those positions as of September 30, 2019 and December 31, 2018, 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 highly effective cash flow hedges. The gain or loss on the derivative instrument is reported as a component of accumulated OCI 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 March 2024. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. As of September 30, 2019, the Company expected $5.4 million of 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 September 30, 2019 and December 31, 2018 included:



(dollars in thousands)	Notional Amount		Asset		Liability		Weighted Average Receive Rate		Weighted Average Pay Rate		Weighted Average Life (Years)
September 30, 2019
Cash flow hedges:
Pay fixed — receive variable interest rate swaps	$	3,650,000	$	5,886	$	47,949	2.16	%	1.86	%	1.55
Pay variable - receive fixed interest rate swaps	6,320,000		16,666		20,067		1.43	%	1.82	%	2.42
Interest rate floor	4,000,000		27,205		—		0.02	%	—	%	1.47
Total	$	13,970,000	$	49,757	$	68,016	1.22	%	1.31	%	1.92

December 31, 2018
Cash flow hedges:
Pay fixed — receive variable interest rate swaps	$	4,176,105	$	44,054	$	10,503	2.67	%	1.74	%	2.07
Pay variable - receive fixed interest rate swaps	4,000,000		—		89,769		1.41	%	2.40	%	2.02
Interest rate floor	2,000,000		10,932		—		0.04	%	—	%	1.91
Total	$	10,176,105	$	54,986	$	100,272	1.66	%	1.66	%	2.02

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 and adjustable rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.

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

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 and may or may not be physically settled depending on the Company’s needs. 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 OIS, a total return swap on Visa, Inc. Class B common shares, and equity options, which manage the Company's market risk associated with certain investments and customer deposit products.

Derivatives Not Designated in Hedge Relationships – Notional and Fair Values

Other derivative activities at September 30, 2019 and December 31, 2018 included:



	Notional				Asset derivatives Fair value				Liability derivatives Fair value
(in thousands)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Mortgage banking derivatives:
Forward commitments to sell loans	$	677,098	$	329,189	$	1,366	$	4	$	—	$	4,821
Interest rate lock commitments	256,826		133,680		4,098		2,677		—		—
Mortgage servicing	535,000		455,000		26,800		1,575		3,371		8,953
Total mortgage banking risk management	1,468,924		917,869		32,264		4,256		3,371		13,774

Customer-related derivatives:
Swaps receive fixed	11,464,070		11,335,998		497,002		92,542		3,309		120,185
Swaps pay fixed	12,151,033		11,825,804		10,230		163,673		450,453		72,662
Other	3,558,347		2,162,302		4,889		11,151		13,694		14,294
Total customer-related derivatives	27,173,450		25,324,104		512,121		267,366		467,456		207,141

Other derivative activities:
Foreign exchange contracts	3,573,541		3,635,119		45,615		47,330		29,106		37,466
Interest rate swap agreements	2,119,966		2,281,379		1,232		11,553		13,851		3,264
Interest rate cap agreements	9,063,716		7,758,710		60,301		128,467		—		—
Options for interest rate cap agreements	9,063,716		7,741,765		—		—		60,301		128,377
Other	1,149,387		1,038,558		15,354		4,527		17,536		7,137
Total	$	53,612,700	$	48,697,504	$	666,887	$	463,499	$	591,621	$	397,159

Gains (Losses) on All Derivatives

The following Condensed Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the three-month and nine-month periods ended September 30, 2019 and 2018:



(in thousands)		Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
Derivative Activity⁽¹⁾	Line Item	2019			2018			2019			2018

Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Interest expense on borrowings	$	8,283		$	10,255		$	35,065		$	20,944
Pay variable receive-fixed interest rate swap	Interest income on loans	(11,324		)	(7,777		)	(34,022		)	(14,820		)
Other derivative activities:
Forward commitments to sell loans	Miscellaneous income, net	5,349			2,653			6,183			1,900
Interest rate lock commitments	Miscellaneous income, net	(373		)	(1,232		)	1,421			(953		)
Mortgage servicing	Miscellaneous income, net	9,886			(3,576		)	31,187			(16,238		)
Customer-related derivatives	Miscellaneous income, net	10,559			1,039			(5,791		)	10,942
Foreign exchange	Miscellaneous income, net	(4,518		)	6,948			25,459			15,655
Interest rate swaps, caps, and options	Miscellaneous income, net	2,479			10,081			10,345			20,313
Other	Miscellaneous income, net	453			261			85			(2,122		)


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

NOTE 12. DERIVATIVES (continued)

The net amount of change recognized in OCI for cash flow hedge derivatives were gains of $4.5 million and $16.2 million, net of tax, for the three-month and nine-month periods ended September 30, 2019, respectively, and losses of $3.4 million and $26.4 million, net of tax, for the three-month and nine-month periods ended September 30, 2018, respectively.

The net amount of changes reclassified from OCI into earnings for cash flow hedge derivatives were losses of $3.7 million and $0.2 million, net of tax, for the three-month and nine-month periods ended September 30, 2019, respectively, and a gain of $0.4 million and a loss of $10.1 million, net of tax, for the three-month and nine-month periods ended September 30, 2018, respectively.

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 nettable ISDA Master Agreement 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 Sheets” 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 Master 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 Sheets" section of the tables below.

Information about financial assets and liabilities that are eligible for offset on the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, 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		Collateral Received ⁽³⁾		Net Amount
September 30, 2019
Cash flow hedges	$	49,757	$	—	$	49,757	$	17,070	$	32,687
Other derivative activities⁽¹⁾	661,443		628		660,815		66,181		594,634
Total derivatives subject to a master netting arrangement or similar arrangement	711,200		628		710,572		83,251		627,321
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	5,444		—		5,444		2,079		3,365
Total Derivative Assets	$	716,644	$	628	$	716,016	$	85,330	$	630,686


December 31, 2018
Cash flow hedges	$	54,986	$	—	$	54,986	$	22,451	$	32,535
Other derivative activities⁽¹⁾	460,822		6,570		454,252		117,582		336,670
Total derivatives subject to a master netting arrangement or similar arrangement	515,808		6,570		509,238		140,033		369,205
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	2,677		—		2,677		—		2,677
Total Derivative Assets	$	518,485	$	6,570	$	511,915	$	140,033	$	371,882


(1)	Includes customer-related and other derivatives.


(2)	Includes mortgage banking derivatives.

(3)

Collateral received includes cash, cash equivalents, and other financial instruments. Cash collateral received is reported in Other liabilities, as applicable, in the Condensed Consolidated Balance Sheets. Financial instruments that are pledged to the Company are not reflected in the accompanying Condensed Consolidated Balance Sheets since the Company does not control or have the ability to rehypothecate these instruments.

NOTE 12. DERIVATIVES (continued)



	Offsetting of Financial Liabilities
							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		Collateral Pledged ⁽³⁾		Net Amount
September 30, 2019
Cash flow hedges	$	68,016	$	—	$	68,016	$	58,458	$	9,558
Other derivative activities⁽¹⁾	591,621		10,633		580,988		539,922		41,066
Total derivatives subject to a master netting arrangement or similar arrangement	659,637		10,633		649,004		598,380		50,624
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	—		—		—		—		—
Total Derivative Liabilities	$	659,637	$	10,633	$	649,004	$	598,380	$	50,624

December 31, 2018
Cash flow hedges	$	100,272	$	—	$	100,272	$	5,612	$	94,660
Other derivative activities⁽¹⁾	392,338		13,422		378,916		316,285		62,631
Total derivatives subject to a master netting arrangement or similar arrangement	492,610		13,422		479,188		321,897		157,291
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	4,821		—		4,821		3,827		994
Total Derivative Liabilities	$	497,431	$	13,422	$	484,009	$	325,724	$	158,285


(1)	Includes customer-related and other derivatives.


(2)	Includes mortgage banking derivatives.

(3)

Cash collateral pledged and financial instruments pledged is reported in Other assets, in the Condensed Consolidated Balance Sheets. In certain instances, the Company is over-collateralized since the actual amount of collateral pledged exceeds the associated financial liability. As a result, the actual amount of collateral pledged that is reported in Other assets may be greater than the amount shown in the table above.

NOTE 13. INCOME TAXES

An income tax provision of $112.9 million and $109.9 million was recorded for the three-month periods ended September 30, 2019 and 2018, respectively. An income tax provision of $384.5 million and $374.2 million was recorded for the nine-month periods ended September 30, 2019 and 2018, respectively. This resulted in an effective tax rate ("ETR") of 29.5% and 31.5% for the three-month periods ended September 30, 2019 and 2018, respectively, and 29.6% and 30.3% for the nine-month periods ended September 30, 2019 and 2018, respectively.

The decrease in the ETR for the three-month and nine-month periods ended September 30, 2019 as compared to the three-month and nine-month periods ended September 30, 2018 was primarily due to certain recoveries related to amounts on account with the Internal Revenue Service (“IRS”).

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

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

NOTE 13. INCOME TAXES (continued)

On September 5, 2019, the Federal District Court in Massachusetts entered a stipulated judgment resolving the Company’s litigation relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion that was previously disclosed within its Form 10-K for 2018. That stipulated judgment resolved the Company’s tax liability for the 2003 through 2005 tax years with no material effect on net income. The Company has agreed with the IRS to resolve the treatment of the same financing transactions for the 2006 and 2007 tax years, subject to review by the Congressional Joint Committee on Taxation and final IRS approval. That anticipated resolution with the IRS is consistent with the September 5, 2019, stipulated judgment and would have no material effect on net income.

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 OCI are released only when an entire portfolio (i.e., all related units of account) of a particular type is liquidated, sold or extinguished.

The Company had a net deferred tax liability balance of $990.8 million at September 30, 2019 (consisting of a deferred tax asset balance of $508.8 million and a deferred tax liability balance of $1.5 billion), compared to a net deferred tax liability balance of $587.5 million at December 31, 2018 (consisting of a deferred tax asset balance of $625.1 million and a deferred tax liability balance of $1.2 billion). The $403.3 million increase in net deferred liability for the nine-month period ended September 30, 2019 was primarily due to mark-to-mark adjustments and accelerated depreciation from leasing transactions.

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.

Fair value measurement requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that categorizes the inputs to valuation techniques used to measure fair value into three levels as follows:

•Level 1 inputs are quoted prices in active markets for identical assets or liabilities that can be accessed as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

•Level 2 inputs are those other than quoted prices included in Level 1 that are observable for the assets or liabilities, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

•Level 3 inputs are those that are unobservable or not readily observable for the asset or liability and are used to measure fair value to the extent relevant observable inputs are not available.

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 discounted cash flow ("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.

NOTE 14. FAIR VALUE (continued)

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 material transfers in or out of Level 1, 2, or 3 during the nine-month periods ended September 30, 2019 or 2018 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 September 30, 2019 and December 31, 2018.



(in thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2019		Level 1		Level 2		Level 3		Balance at December 31, 2018
Financial assets:
U.S. Treasury securities	$	—	$	5,063,546	$	—	$	5,063,546	$	526,364	$	1,278,381	$	—	$	1,804,745
Corporate debt	—		136,539		—		136,539		—		160,114		—		160,114
ABS	—		81,008		73,530		154,538		—		109,638		327,199		436,837
State and municipal securities	—		11		—		11		—		16		—		16
MBS	—		8,376,590		—		8,376,590		—		9,231,275		—		9,231,275
Investment in debt securities AFS⁽³⁾	—		13,657,694		73,530		13,731,224		526,364		10,779,424		327,199		11,632,987
Other investments - trading securities	—		3,433		—		3,433		4		6		—		10
RICs HFI⁽⁴⁾	—		—		93,393		93,393		—		—		126,312		126,312
LHFS ⁽¹⁾⁽⁵⁾	—		437,927		—		437,927		—		209,506		—		209,506
MSRs ⁽²⁾	—		—		126,491		126,491		—		—		149,660		149,660
Other assets - derivatives ⁽³⁾	—		712,448		4,196		716,644		—		515,781		2,704		518,485
Total financial assets ⁽⁶⁾	$	—	$	14,811,502	$	297,610	$	15,109,112	$	526,368	$	11,504,717	$	605,875	$	12,636,960
Financial liabilities:
Other liabilities - derivatives ⁽³⁾	—		655,102		4,535		659,637		—		496,593		838		497,431
Total financial liabilities	$	—	$	655,102	$	4,535	$	659,637	$	—	$	496,593	$	838	$	497,431


(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 had total MSRs of $128.5 million and $152.1 million as of September 30, 2019.and December 31, 2018, 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) Approximately $297.6 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 2.0% of total assets measured at fair value on a recurring basis and approximately 0.2% of total consolidated assets.

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 September 30, 2019		Level 1		Level 2		Level 3		Balance at December 31, 2018
Impaired commercial LHFI	$	—	$	162,177	$	214,293	$	376,470	$	5,182	$	150,208	$	219,258	$	374,648
Foreclosed assets	—		15,045		62,293		77,338		—		16,678		81,208		97,886
Vehicle inventory	—		318,435		—		318,435		—		342,617		—		342,617
LHFS⁽¹⁾	—		957,303		1,085,579		2,042,882		—		—		1,073,795		1,073,795
Auto loans impaired due to bankruptcy	—		197,729		—		197,729		—		189,114		—		189,114
MSRs	—		—		8,290		8,290		—		—		9,386		9,386


(1)	These amounts include $925.6 million and $1.1 billion of personal LHFS that were impaired as of September 30, 2019 and December 31, 2018, 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 $321.2 million and $479.4 million at September 30, 2019 and December 31, 2018, 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 of 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 LHFS 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.

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 September 30,						Nine-Month Period Ended September 30,
(in thousands)	Statement of Operations Location	2019			2018			2019			2018
Impaired LHFI	Provision for credit losses	$	(3,877	)	$	(45,515	)	$	(9,990	)	$	(44,936	)
Foreclosed assets	Miscellaneous income, net ⁽¹⁾	(4,014		)	(5,750		)	(7,798		)	(10,351		)
LHFS	Provision for credit losses	—			—			—			(387		)
LHFS	Miscellaneous income, net ⁽¹⁾	(67,021		)	(86,838		)	(239,059		)	(236,549		)
Auto loans impaired due to bankruptcy	Provision for credit losses	1,943			(5,034		)	(9,721		)	(93,846		)
MSRs	Miscellaneous income, net ⁽¹⁾	(128		)	(940		)	(483		)	(560		)


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

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 and nine-month periods ended September 30, 2019 and 2018, respectively, for those assets and liabilities measured at fair value on a recurring basis.



	Three-Month Period Ended September 30, 2019															Three-Month Period Ended September 30, 2018
(in thousands)	Investments AFS			RICs HFI			MSRs			Derivatives, net			Total			Investments AFS			RICs HFI			MSRs			Derivatives, net			Total
Balances, beginning of period	$	324,979		$	104,193		$	129,913		$	1,939		$	561,024		$	346,856		$	152,082		$	158,470		$	545		$	657,953
Losses in other comprehensive income	(634		)	—			—			—			(634		)	(702		)	—			—			—			(702		)
Gains/(losses) in earnings	—			2,841			(8,878		)	(2,395		)	(8,432		)	—			4,015			3,518			(1,547		)	5,986
Additions/Issuances	—			—			10,353			—			10,353			—			—			3,899			—			3,899
Settlements⁽¹⁾	(250,815		)	(13,641		)	(4,897		)	117			(269,236		)	(510		)	(19,598		)	(5,778		)	1,420			(24,466		)
Balances, end of period	$	73,530		$	93,393		$	126,491		$	(339	)	$	293,075		$	345,644		$	136,499		$	160,109		$	418		$	642,670
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period	$	—		$	2,841		$	(8,878	)	$	(2,022	)	$	(8,059	)	$	—		$	4,015		$	3,518		$	(315	)	$	7,218

	Nine-Month Period Ended September 30, 2019															Nine-Month Period Ended September 30, 2018
(in thousands)	Investments AFS			RICs HFI			MSRs			Derivatives, net			Total			Investments AFS			RICs HFI			MSRs			Derivatives, net			Total
Balances, beginning of period	$	327,199		$	126,312		$	149,660		$	1,866		$	605,037		$	350,252		$	186,471		$	145,993		$	1,514		$	684,230
Losses in OCI	(2,136		)	—			—			—			(2,136		)	(2,476		)	—			—			—			(2,476		)
Gains/(losses) in earnings	—			9,793			(32,815		)	(2,496		)	(25,518		)	—			14,051			17,287			(2,712		)	28,626
Additions/Issuances	—			2,079			21,456			—			23,535			—			3,276			9,496			—			12,772
Settlements⁽¹⁾	(251,533		)	(44,791		)	(11,810		)	291			(307,843		)	(2,132		)	(67,299		)	(12,667		)	1,616			(80,482		)
Balances, end of period	$	73,530		$	93,393		$	126,491		$	(339	)	$	293,075		$	345,644		$	136,499		$	160,109		$	418		$	642,670
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period	$	—		$	9,793		$	(32,815	)	$	(3,917	)	$	(26,939	)	$	—		$	14,051		$	17,287		$	(1,759	)	$	29,579


(1)	Settlements include charge-offs, prepayments, paydowns 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 Accounting Standards Codification (“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

Debt securities classified as AFS are accounted for at fair value. 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.

NOTE 14. FAIR VALUE (continued)

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. Actively traded quoted market prices for 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 Consolidated Statements of Operations through Net gain/(loss) 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 issuances 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 consist 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, net. 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.

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


•	A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $5.4 million and $10.7 million, respectively, at September 30, 2019.


•	A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $4.1 million and $7.9 million, respectively, at September 30, 2019.

Significant increases/(decreases) in any of those inputs in isolation would result in significantly (lower)/higher fair value measurements, respectively. 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 commonly accepted valuation techniques, including DCF analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount the Company would receive or pay to terminate the contract or agreement, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.

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

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

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

NOTE 14. FAIR VALUE (continued)

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 September 30, 2019 and December 31, 2018, respectively:



(dollars in thousands)	Fair Value at September 30, 2019		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Financial Assets:
ABS
Financing bonds	$	51,090	DCF	Discount Rate ⁽¹⁾	1.44% - 1.44% (1.44%)
Sale-leaseback securities	22,440		Consensus Pricing ⁽²⁾	Offered quotes ⁽³⁾	106.07	%
RICs HFI	93,393		DCF	CPR ⁽⁴⁾	6.66	%
				Discount Rate ⁽⁵⁾	9.50% - 14.50% (13.00%)
				Recovery Rate ⁽⁶⁾	25.00% - 43.00% (41.32%)
Personal LHFS ⁽¹⁰⁾	925,611		Lower of Market or Income Approach	Market Participant View	70.00% - 80.00%
				Discount Rate	15.00% - 25.00%
				Default Rate	30.00% - 40.00%
				Net Principal & Interest Payment Rate	70.00% - 85.00%
				Loss Severity Rate	90.00% - 95.00%
MSRs ⁽⁹⁾	126,491		DCF	CPR ⁽⁷⁾	7.79% - 100.00% (12.77%)
				Discount Rate ⁽⁸⁾	9.64	%


(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 and note rate.


(8)	Average discount rate from collateral stratified by loan type and note rate.


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


(10)	Excludes non-significant Level 3 LHFS portfolios.



(dollars in thousands)	Fair Value at December 31, 2018		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Financial Assets:
ABS
Financing bonds	$	303,224	DCF	Discount Rate ⁽¹⁾	2.68% - 2.73% (2.69%)
Sale-leaseback securities	23,975		Consensus Pricing ⁽²⁾	Offered Quotes ⁽³⁾	110.28	%
RICs HFI	126,312		DCF	CPR ⁽⁴⁾	6.66	%
				Discount Rate ⁽⁵⁾	9.50% - 14.50% (12.55%)
				Recovery Rate ⁽⁶⁾	25.00% - 43.00% (41.6%)
Personal LHFS ⁽¹⁰⁾	1,068,757		Lower of Market or Income Approach	Market Participant View	70.00% - 80.00%
				Discount Rate	15.00% - 25.00%
				Default Rate	30.00% - 40.00%
				Net Principal & Interest Payment Rate	70.00% - 85.00%
				Loss Severity Rate	90.00% - 95.00%
MSRs ⁽⁹⁾	149,660		DCF	CPR ⁽⁷⁾	7.06% - 100.00% (9.22%)
				Discount Rate ⁽⁸⁾	9.71	%

(1), (2), (3), (4), (5), (6), (7), (8), (9), (10) - See corresponding footnotes to the September 30, 2019 Level 3 significant inputs table above.

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:



	September 30, 2019										December 31, 2018
(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 cash equivalents	$	7,736,777	$	7,736,777	$	7,736,777	$	—	$	—	$	7,790,593	$	7,790,593	$	7,790,593	$	—	$	—
Investment in debt securities AFS	13,731,224		13,731,224		—		13,657,694		73,530		11,632,987		11,632,987		526,364		10,779,424		327,199
Investment in debt securities HTM	3,604,424		3,641,591		—		3,641,591		—		2,750,680		2,676,049		—		2,676,049		—
Other investments - trading securities	3,433		3,433		—		3,433		—		10		10		4		6		—
LHFI, net	86,684,403		88,243,416		—		162,177		88,081,239		83,148,738		83,415,697		5,182		150,208		83,260,307
LHFS	2,480,809		2,491,872		—		1,400,991		1,090,881		1,283,278		1,283,301		—		209,506		1,073,795
Restricted cash	3,665,680		3,665,680		3,665,680		—		—		2,931,711		2,931,711		2,931,711		—		—
MSRs⁽¹⁾	128,469		134,781		—		—		134,781		152,121		159,046		—		—		159,046
Derivatives	716,644		716,644		—		712,448		4,196		518,485		518,485		—		515,781		2,704

Financial liabilities:
Deposits	66,239,968		66,247,647		57,050,967		9,196,680		—		61,511,380		61,456,268		54,039,848		7,416,420		—
Borrowings and other debt obligations	49,159,832		49,850,409		—		36,767,521		13,082,888		44,953,784		45,083,518		—		31,494,126		13,589,392
Derivatives	659,637		659,637		—		655,102		4,535		497,431		497,431		—		496,593		838


(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.

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 do they reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.

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

Cash, cash equivalents and restricted cash

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

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

HTM investment securities

Investment securities HTM are recorded at amortized cost and are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing these securities that incorporate relevant observable market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.

NOTE 14. FAIR VALUE (continued)

LHFI, net

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

LHFS

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

Deposits

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

Borrowings and other debt obligations

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

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 for 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.

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 DPD 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.

NOTE 14. FAIR VALUE (continued)

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:



	September 30, 2019							December 31, 2018
(in thousands)	Fair Value		Aggregate UPB		Difference			Fair Value		Aggregate UPB		Difference
LHFS⁽¹⁾	$	437,927	$	427,597	$	10,330		$	209,506	$	204,061	$	5,445
RICs HFI	93,393		105,763		(12,370		)	126,312		142,882		(16,570		)
Nonaccrual loans	3,023		4,871		(1,848		)	7,630		10,427		(2,797		)


(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 DPD for LHFS and more than 60 DPD for RICs HFI.

Residential MSRs

The Company maintains an MSR asset for sold residential real estate loans serviced for others. 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. At September 30, 2019 and December 31, 2018, the balance of these loans serviced for others accounted for at fair value was $15.2 billion and $14.4 billion, respectively. Changes in fair value are recorded through Miscellaneous income, net on the Condensed Consolidated Statements of Operations. 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 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."

NOTE 15. NON-INTEREST INCOME AND OTHER EXPENSES

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



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
(in thousands)	2019			2018			2019			2018
Non-interest income:
Consumer and commercial fees	$	133,049		$	144,505		$	412,566		$	420,843
Lease income	735,783			610,324			2,116,503			1,720,526
Miscellaneous income, net
Mortgage banking income, net	15,343			7,154			38,067			26,432
BOLI	15,338			14,759			45,769			44,142
Capital market revenue	48,326			31,810			146,290			129,506
Net gain on sale of operating leases	48,490			48,965			120,980			167,906
Asset and wealth management fees	45,020			41,299			132,224			128,557
Loss on sale of non-mortgage loans	(87,399		)	(86,745		)	(238,771		)	(205,526		)
Other miscellaneous income, net	44,915			11,673			83,290			11,981
Net gains/(losses) on sale of investment securities	2,267			(1,688		)	2,646			(1,931		)
Total Non-interest income	$	1,001,132		$	822,056		$	2,859,564		$	2,442,436

NOTE 15. NON-INTEREST INCOME AND OTHER EXPENSES (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 this 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 September 30,					Nine-Month Period Ended September 30,
(in thousands)	2019		2018			2019			2018
Non-interest income:
In-scope of revenue from contracts with customers:
Depository services⁽¹⁾	$	63,016	$	59,704		$	179,298		$	175,482
Commission and trailer fees⁽²⁾	39,971		27,626			119,607			89,058
Interchange income, net⁽²⁾	16,891		15,780			49,854			45,423
Underwriting service fees⁽²⁾	27,043		11,282			77,835			60,626
Asset and wealth management fees⁽²⁾	35,169		41,190			109,166			121,544
Other revenue from contracts with customers⁽²⁾	9,924		8,807			30,303			26,493
Total in-scope of revenue from contracts with customers	192,014		164,389			566,063			518,626
Out-of-scope of revenue from contracts with customers:
Consumer and commercial fees⁽³⁾	59,432		74,558			200,972			218,733
Lease income	735,783		610,324			2,116,503			1,720,526
Miscellaneous income/(loss)⁽³⁾	11,636		(25,527		)	(26,620		)	(13,518		)
Net gains/(losses) on sale of investment securities	2,267		(1,688		)	2,646			(1,931		)
Total out-of-scope of revenue from contracts with customers	809,118		657,667			2,293,501			1,923,810
Total non-interest income	$	1,001,132	$	822,056		$	2,859,564		$	2,442,436

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

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

(3) 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 15. NON-INTEREST INCOME AND OTHER EXPENSES (continued)

Other Expenses

The following table presents the Company's other expenses for the following periods:



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,
(in thousands)	2019		2018		2019⁽¹⁾		2018
Other expenses:
Amortization of intangibles	$	14,742	$	15,288	$	44,250	$	45,864
Deposit insurance premiums and other expenses	11,104		15,861		53,348		47,425
Loss on debt extinguishment	6		57		1,133		3,470
Other administrative expenses	145,870		119,385		404,399		359,132
Other miscellaneous expenses	18,407		8,813		33,236		11,761
Total Other expenses	$	190,129	$	159,404	$	536,366	$	467,652

(1) The nine-month period ended September 30, 2019 includes $25.3 million of FDIC insurance premiums that relates to periods from the first quarter of 2015 through the fourth quarter of 2018. The Company has concluded that the out-of-period correction is immaterial to all impacted periods.

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	September 30, 2019		December 31, 2018
	(in thousands)
Commitments to extend credit	$	30,902,239	$	30,269,311
Letters of credit	1,401,114		1,488,714
Commitments to sell loans	786,326		875
Unsecured revolving lines of credit	25,408		28,145
Recourse exposure on sold loans	52,973		49,733
Total commitments	$	33,168,060	$	31,836,778

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.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Included within the reported balances for Commitments to extend credit at September 30, 2019 and December 31, 2018 are $5.8 billion and $5.7 billion, respectively, of commitments that can be canceled by the Company without notice.

Commitments to extend credit also include amounts committed by the Company to fund its investments in CRA, LIHTC, and other equity method investments in which it is a limited partner.

Letters of Credit

The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments at September 30, 2019 was 10.2 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a requested draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and other customer business assets. The maximum undiscounted exposure related to these commitments at September 30, 2019 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 September 30, 2019. Management believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of the commitments, as has been the Company’s experience to date. As of September 30, 2019 and December 31, 2018, the liability related to these letters of credit was $6.2 million and $4.6 million, respectively, which is recorded within the reserve for unfunded lending commitments in Other liabilities on the Condensed Consolidated Balance Sheets. The credit risk associated with letters of credit is monitored using the same risk rating system utilized within the loan and financing lease portfolio. Also included within the reserve for unfunded lending commitments at September 30, 2019 and December 31, 2018 was the liability related to lines of credit outstanding of $86.7 million and $88.7 million, respectively.

Unsecured Revolving Lines of Credit

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

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 the FNMA, the Company retained a portion of the associated credit risk.

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. Commitments to sell loans at September 30, 2019 include the commercial equipment finance leases and loans that will be sold to an unrelated third party as disclosed in Note 4.

SC Commitments

The following table summarizes liabilities recorded for commitments and contingencies as of September 30, 2019 and December 31, 2018, all of which are included in Accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets:



Agreement or Legal Matter	Commitment or Contingency	September 30, 2019		December 31, 2018
		(in thousands)
Chrysler Agreement	Revenue-sharing and gain/(loss), net-sharing payments	$	22,560	$	7,001
Agreement with Bank of America	Servicer performance fee	4,068		6,353
Agreement with Citizens Bank of Philadelphia (CBP")	Loss-sharing payments	1,866		3,708
Other contingencies	Consumer arrangements	2,138		2,138

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Following is a description of the agreements pursuant to which the liabilities in the preceding table were recorded.

Chrysler Agreement

On June 28, 2019, SC entered into an amendment to the Chrysler Agreement with FCA, which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. Under terms of the Chrysler Agreement, SC must make revenue sharing payments to FCA and also must share with FCA when residual gains/(losses) on leased vehicles exceed a specified threshold. The Chrysler Agreement also requires that SC maintain at least $5.0 billion in funding available for floor plan loans 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.

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. 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 performance payments are due six years from the cut-off date of each loan sale.

Agreement with CBP

Until May 2017, SC sold loans to CBP under terms of a flow agreement and predecessor sale agreements. SC retains servicing on the sold loans and owes 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.

Other Contingencies

SC is or may be subject to potential liability under various other contingent exposures. SC had accrued $2.1 million at September 30, 2019 and December 31, 2018, respectively, for other miscellaneous contingencies.

Agreements

Bluestem

SC is party to agreements with Bluestem whereby SC is committed to purchase certain new advances on personal revolving financings receivables, along with existing balances on accounts with new advances, originated by Bluestem for an initial term ending in April 2020 and renewing through April 2022 at Bluestem's option. As of September 30, 2019 and December 31, 2018, the total unused credit available to customers was $2.9 billion and $3.1 billion, respectively. In 2019, SC purchased $0.8 billion of receivables out of the $3.1 billion unused credit available to customers as of December 31, 2018. In 2018, SC purchased $1.2 billion of receivables out of the $3.9 billion unused credit available to customers as of December 31, 2017. In addition, SC purchased $137.8 million of receivables related to newly-opened customer accounts during the nine-month period ended September 30, 2019.

Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As of September 30, 2019 and December 31, 2018, SC was obligated to purchase $10.1 million and $15.4 million, respectively, in receivables that had been originated by Bluestem but not yet purchased by SC. SC also is required to make a profit-sharing payment to Bluestem each month if performance exceeds a specified return threshold. The agreement, among other provisions, gives Bluestem the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement and, provides that if the repurchase right is exercised, Bluestem has the right to retain up to 20.00% of new accounts subsequently originated.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Others

Under terms of an application transfer agreement with Nissan, SC has the first opportunity to review for its own portfolio any credit applications turned down by Nissan’s captive finance company. The agreement does not require SC to originate any loans, but for each loan originated SC will pay Nissan a referral fee.

In connection with the sale of RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of September 30, 2019, there were no loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s RICs sale agreements is not expected to have a material adverse effect on the Company's or SC’s business, 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.

In November 2015, SC executed a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell $350.0 million in charged-off loan receivables in bankruptcy status on a quarterly basis. However, any sale of more than $275.0 million is subject to a market price check. The remaining aggregate commitment as of September 30, 2019 and December 31, 2018 not subject to a market price check was $39.8 million and $64.0 million, respectively.

Other Off-Balance Sheet Risk

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

Legal and Regulatory Proceedings

Periodically, the Company is party to, or otherwise involved in, various lawsuits, investigations, regulatory matters and other legal proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such lawsuit, investigation, regulatory matter and/or legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matters. 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, investigations, 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, and the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.

As of September 30, 2019 and December 31, 2018, the Company accrued aggregate legal and regulatory liabilities of $297.1 million and $215.2 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 approximately $185 million as of September 30, 2019. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

SHUSA Matters

On March 21, 2017, SC and SHUSA entered into a written agreement with the FRB of Boston. 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.

JPMorgan Chase Mortgage Loan Sale Indemnity Demand

In connection with a 2007 sale by Sovereign Bank of approximately 35,000 second lien mortgage loans to JPMorgan Chase & Co. and certain of its subsidiaries, including EMC Mortgage LLC (collectively, “Chase”), Chase has asserted an indemnity claim against SBNA of approximately $40.0 million under the mortgage loan purchase agreement based on alleged breaches of representations and warranties. The parties are in discussions concerning this matter.

SC Matters

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, which was filed in August 2014, was brought 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 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. In December 2015, SC and the individual defendants moved to dismiss the lawsuit, which was denied. In December 2016, the plaintiffs moved to certify the proposed classes. In July 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). In October 2018, the court vacated the order staying the Deka Lawsuit and ordered that merits discovery in the Deka Lawsuit be stayed until the court ruled on the issue of class certification.

Feldman Lawsuit: In October 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 of its 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. In December 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.

Jackie888 Lawsuit: In September 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. In April 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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.

Regulatory Investigations and 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 FRB of Boston, 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. SC has responded to these requests within the deadlines specified in the subpoenas and has otherwise cooperated with the DOJ with respect to this matter.

•

In October 2014, May 2015, July 2015 and February 2017, SC received subpoenas and/or civil investigative demands ("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 33 state Attorneys General (and the District of Columbia). 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 CIDs, and has otherwise cooperated with the Attorneys General with respect to this matter.


•	In August 2017 and July 2019, SC received CIDs from the CFPB. The stated purpose of the CIDs are to determine whether SC has complied with the Fair Credit Reporting Act and related regulations. SC has responded to these requests within the applicable deadlines and has otherwise cooperated with the CFPB with respect to this matter.

Mississippi Attorney General Lawsuit

In January 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 and seeks unspecified civil penalties, equitable relief and other relief. In March 2017, SC filed motions to dismiss the lawsuit and the parties are proceeding with discovery.

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 service members consisting of $10,000 per service member plus compensation for any lost equity (with interest) for each repossession by SC, and $5,000 per service member 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 SC’s SCRA compliance for a period of five years and requires SC to undertake certain additional remedial measures.

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.

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Puerto Rico FINRA Arbitration

As of September 30, 2019, SSLLC had received 741 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds ("CEFs"), generally, that SSLLC previously recommended and/or sold to clients. 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 469 arbitration cases pending as of September 30, 2019. The Company believes it's reasonably possible it could experience an increase in claims in future periods.

Puerto Rico Putative Class Action: 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 $180.0 million of Puerto Rico bonds and $101.0 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 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. In May 2019, the defendants filed a motion to dismiss the amended complaint.

Puerto Rico Municipal Bond Insurer Litigation: On August 8, 2019, bond insurers National Public Finance Guarantee Corporation and MBIA Insurance Corporation filed suit in Puerto Rico state court against eight Puerto Rico municipal bond underwriters, including SSLLC, alleging that the underwriters made misrepresentations in connection with the issuance of the debt and that the bond insurers relied on such misrepresentations in agreeing to insure certain of the bonds. The complaint alleges damages of not less than $720.0 million. The defendants removed the case to federal court, and plaintiffs have sought to return the case to state court.

Mexican Government Bonds Consolidated Purported Antitrust Class Action: A consolidated purported antitrust class action is pending in the United States District Court, Southern District of New York, captioned In re Mexican Government Bonds Antitrust Litigation, 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. On September 30, 2019, the court granted the defendants motions to dismiss the consolidated complaint.

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 11 to the Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2018. 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:



	Nine-Month Period Ended September 30,
(in thousands)	2019		2018
Cash contribution	$	88,927	$	5,741
Adjustment to book value of assets purchased on January 1	—		277
Deferred tax asset on purchased assets	—		3,156
Contribution from shareholder	$	88,927	$	9,174

NOTE 17. RELATED PARTY TRANSACTIONS (continued)

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 Company re-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.

During the nine-month period ended September 30, 2019, the Company received $88.9 million of capital contributions from Santander.

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 Private Auto Issuing Note trust securitization platform, for a term that ended in December 2018. SC provided servicing on all loans originated under this arrangement. For the three-month and nine-month periods ended September 30, 2018, SC sold $0.3 billion and $2.9 billion of loans, respectively, at fair value under this MSPA. Total losses of $4.2 million and $24.3 million were recognized for the three-month and nine-month periods ended September 30, 2018, respectively. Servicing fee income of $4.7 million and $20.9 million was recognized in the Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2019, respectively, and $10.0 million and $25.8 million for the three-month and nine-month periods ended September 30, 2018, respectively. SC had $17.9 million and $16.0 million of collections due to Santander as of September 30, 2019 and December 31, 2018, 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 and nine-month period ended September 30, 2019, SC facilitated the purchase of $2.1 billion and $5 billion, respectively, of RICs. During the three-month and nine-month periods ended September 30, 2018, SC facilitated the purchase of $685 million and $738 million, respectively, 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 fourth quarter of 2018, the Chief Operating Decision Maker (the “CODM”) drove a reorganization of the Company's business leadership to better align the teams with how the CODM allocates resources and assesses business performance. Changes were made to the internal management reporting in 2019 and, accordingly, beginning in the first quarter of 2019, the prior Commercial Banking segment is now reported as two separate reportable segments: C&I and CRE & Vehicle Finance (“VF”). 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 consumer and business banking customers, including consumer deposit, business banking, residential mortgage, unsecured lending and investment services. This segment offers 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. It also offers lending products such as credit cards, mortgages, home equity lines of credit, and business loans such as business lines of credit and commercial 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 C&I segment currently provides commercial lines, loans, letters of credit, receivables financing and deposits to medium- and large-sized commercial customers, as well as financing and deposits for government entities. This segment also provides niche product financing for specific industries.

NOTE 18. BUSINESS SEGMENT INFORMATION (continued)


•	The CRE & VF segment offers CRE loans and multifamily loans to customers. This segment also offers commercial loans to dealers and financing for commercial equipment and vehicles.

•

The CIB 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. CIB 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. CIB'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 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. 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. This category also includes the Bank’s community development finance activities, including originating CRA-eligible loans and making CRA-eligible investments.

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

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.

NOTE 18. BUSINESS SEGMENT INFORMATION (continued)

Results of Segments

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



For the Three-Month Period Ended	SHUSA Reportable Segments
September 30, 2019	Consumer & Business Banking		C&I		CRE & VF		CIB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments⁽⁴⁾			Eliminations⁽⁴⁾			Total
	(in thousands)
Net interest income	$	381,759	$	59,738	$	104,076	$	36,577		$	8,586		$	1,002,661	$	10,189		$	15,524		$	1,619,110
Non-interest income	120,264		17,631		3,428		53,341			102,489			734,149		1,162			(31,332		)	1,001,132
Provision for/(release of) credit losses	37,915		4,985		6,425		(3,878		)	(7,874		)	566,849		(787		)	—			603,635
Total expenses	414,836		59,242		32,718		66,092			203,816			855,267		9,934			(8,661		)	1,633,244
Income/(loss) before income taxes	49,272		13,142		68,361		27,704			(84,867		)	314,694		2,204			(7,147		)	383,363
Intersegment revenue/(expense)⁽¹⁾	600		1,683		1,605		(3,888		)	—			—		—			—			—



For the Nine-Month Period Ended	SHUSA Reportable Segments
September 30, 2019	Consumer & Business Banking		C&I		CRE & VF		CIB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments⁽⁴⁾			Eliminations⁽⁴⁾			Total
	(in thousands)
Net interest income	$	1,120,907	$	170,525	$	311,790	$	114,646		$	80,489		$	2,978,709	$	27,315		$	39,337		$	4,843,718
Non-interest income	281,464		50,641		9,860		159,970			309,123			2,123,441		5,476			(80,411		)	2,859,564
Provision for/(release of) credit losses	115,130		20,570		9,824		(6,624		)	520			1,548,404		(3,346		)	—			1,684,478
Total expenses	1,208,908		173,426		95,385		198,653			610,116			2,421,754		30,324			(20,521		)	4,718,045
Income/(loss) before income taxes	78,333		27,170		216,441		82,587			(221,024		)	1,131,992		5,813			(20,553		)	1,300,759
Intersegment revenue/(expense)⁽¹⁾	1,576		3,986		5,396		(10,958		)	—			—		—			—			—
Total assets	23,447,787		7,948,200		18,772,209		9,605,098			40,133,105			47,279,015		—			—			147,185,414


(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)	SC 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
September 30, 2018	Consumer & Business Banking			C&I			CRE & VF		CIB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments⁽⁴⁾			Eliminations⁽⁴⁾			Total
	(in thousands)
Net interest income	$	329,693		$	57,059		$	104,203	$	33,594		$	58,876		$	998,211	$	7,357		$	9,768		$	1,598,761
Non-interest income	76,552			15,482			2,611		38,293			88,676			613,882		2,428			(15,868		)	822,056
Provision for/(release of) credit losses	23,690			(26,114		)	1,002		3,160			18,273			597,914		3,089			—			621,014
Total expenses	390,657			52,585			27,079		57,068			196,087			717,356		11,882			(2,327		)	1,450,387
Income/(loss) before income taxes	(8,102		)	46,070			78,733		11,659			(66,808		)	296,823		(5,186		)	(3,773		)	349,416
Intersegment revenue/(expense)⁽¹⁾	604			927			1,117		(2,556		)	(92		)	—		—			—			—



For the Nine-Month Period Ended	SHUSA Reportable Segments
September 30, 2018	Consumer & Business Banking			C&I			CRE & VF		CIB			Other⁽²⁾			SC⁽³⁾		SC Purchase Price Adjustments⁽⁴⁾			Eliminations⁽⁴⁾			Total
	(in thousands)
Net interest income	$	949,253		$	170,728		$	307,422	$	97,273		$	188,213		$	2,975,396	$	24,945		$	27,963		$	4,741,193
Non-interest income	230,204			65,584			3,318		153,568			308,032			1,713,311		7,983			(39,564		)	2,442,436
Provision for/(release of) credit losses	80,363			(56,525		)	8,671		4,868			33,231			1,514,799		23,290			—			1,608,697
Total expenses	1,171,752			167,613			87,874		173,156			588,343			2,125,272		35,293			(7,806		)	4,341,497
Income/(loss) before income taxes	(72,658		)	125,224			214,195		72,817			(125,329		)	1,048,636		(25,655		)	(3,795		)	1,233,435
Intersegment revenue/(expense)⁽¹⁾	1,802			3,306			2,831		(8,364		)	425			—		—			—			—
Total assets	19,832,176			6,784,264			18,519,416		8,072,478			35,612,786			42,806,955		—			—			131,628,075


(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)	SC 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.

Table of Contents

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 71.6% (as of September 30, 2019) of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a specialized consumer finance company. 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 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; 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. SSLLC, SIS and another SHUSA subsidiary, Santander Asset Management, LLC, are registered investment advisers with the Securities and Exchange Commission (the “SEC”).

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 is a full-service, technology-driven 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. 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

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 ("Chrysler Capital"), 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. RICs and vehicle leases entered into with FCA customers under the Chrysler Agreement represent a significant concentration of those portfolios and there is a risk that the Chrysler Agreement could be terminated prior to its expiration date. Termination of the Chrysler Agreement could result in a decrease in the amount of new RICs and vehicle leases entered into with FCA customers as well as dealer loans. Refer to Note 16 for additional details.

The Company's average penetration rate for the third quarter of 2019 was 36%, an increase from 31% for the same period in 2018. Chrysler Capital continues to be a focal point of the Company's strategy. On June 28, 2019, SC entered into an amendment to the Chrysler Agreement with FCA, which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions under the Chrysler Agreement. The amendment also established an operating framework that is mutually beneficial for both parties for the remainder of the contract.

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

SC has dedicated financing facilities in place for its Chrysler Capital business. During the nine-month period ended September 30, 2019, SC originated more than $9.5 billion in Chrysler Capital loans, which represented 56% of the unpaid principal balance ("UPB") of its total RIC originations, with an approximately even share between prime and non-prime, as well $6.7 billion in Chrysler Capital leases. Since its May 2013 launch, Chrysler Capital has originated more than $62.7 billion in retail loans (excluding the SBNA RIC origination program) and $40.1 billion in leases. As of September 30, 2019, SC's carrying value of its auto RIC portfolio consisted of $9.9 billion of Chrysler Capital loans, which represents 38% of SC's carrying value of its auto RIC portfolio.

SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it has provided other consumer finance products.

ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the third quarter of 2019, unemployment remained low and year-to-date market results were positive, recovering from a volatile fourth quarter of 2018.

The unemployment rate at September 30, 2019 was down to 3.5% compared to 3.7% at June 30, 2019, and was lower compared to 4.0% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose in professional and business services, healthcare, transportation, and warehousing.

The Bureau of Economic Analysis (the "BEA") advance estimate indicates that real gross domestic product grew at an annualized rate of 1.9% for the third quarter of 2019, compared to 2.1% for the second quarter of 2019. Growth continued to be driven by increases in personal consumption expenditures and state and local government spending. These positive contributions were offset by decreases to private inventory investment, and non-residential investments, as well as increased imports.

Market year-to-date returns for the following indices based on closing prices at September 30, 2019 were:



		September 30, 2019
Dow Jones Industrial Average		15.4%
Standard & Poor's ("S&P") 500		18.7%
NASDAQ Composite		20.6%

At its September 2019 meeting, the Federal Open Market Committee decided to lower the federal funds rate target to 1.75%, a decision that reflects continued strength in the labor markets, but mixed results in household spending, business investments, and exports. Overall inflation remains below the targeted rate of 2.0%.

The ten-year Treasury bond rate at September 30, 2019 was 1.68%, down from 2.69% at December 31, 2018. Within the industry, changes within this metric are often considered to correspond to changes in 15-year and 30-year mortgage rates.

Current mortgage origination and refinancing information is not yet available. Based on the most current information released based on June 2019 statistics, mortgage originations increased 10.84%year-over-year, which included an increased 6.29% in mortgage originations for home purchases from the same period in 2018 and an increased 23.73% in mortgage originations from refinancing activity from the same period in 2018. These rates are representative of U.S. national average mortgage origination activity.

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 low since that time. NPLs for U.S. commercial banks were approximately 0.89% of loans using the latest available data, which was as of the second quarter of 2019, compared to 0.95% 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.

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

Credit Rating Actions

The following table presents Moody's Investors Service, Inc. (“Moody’s”), S&P and Fitch credit ratings for the Bank, BSPR, SHUSA, Santander, and the Kingdom of Spain, as of September 30, 2019:

BANK

BSPR⁽¹⁾

SHUSA

Moody's

S&P

Fitch

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	A2	A	A-	Baa1	A	A-
Short-Term	P-1	A-1	F-2	P-2	A-1	F-1
Outlook	Stable	Stable	Stable	Stable	Stable	Stable

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

Moody's announced completion of its periodic reviews and affirmed its ratings over SHUSA, SBNA and BSPR in March 2019. In addition, Spain in August 2019 and Santander in July 2019. Fitch affirmed its ratings and outlook for Spain in June 2019 and BSPR in October 2019. In addition, SBNA, SHUSA and Santander in July 2019.

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, however, 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

Most of BSPR’s business activities are concentrated with customers located within Puerto Rico, and thus its results of operations and financial condition are dependent upon the general trends of the Puerto Rico economy, including the residential and commercial real estate markets. Due to the fiscal and economic crisis experienced during the last years, the U.S. Congress enacted the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”) in 2016, which, among other things, established a Fiscal Oversight and Management Board for Puerto Rico (“FOB”) and a framework for the restructuring of the debts of Puerto Rico, its instrumentalities and municipalities. Puerto Rico and several of its instrumentalities have commenced debt restructuring proceedings under PROMESA. At this time, no municipality has commenced, or has been authorized by the oversight board to commence, any such debt restructuring proceeding under PROMESA and, more recently, the FOB has included the island's 78 municipalities as "covered entities" under PROMESA.

On March 9, 2019, the FOB included the 78 municipalities of Puerto Rico as “covered entities” under PROMESA with the objective of guaranteeing their long-term fiscal feasibility. Subsequently, on April 10, 2019, the Puerto Rico Fiscal Agency and Financial Advisory Authority, on behalf of the Puerto Rico Infrastructure Financing Authority and the Puerto Rico Port Authority, entered into a restructuring support agreement for holders of certain Puerto Rico bonds. Finally, on September 19, 2019, the FOB filed the Government of Puerto Rico Plan of Adjustment, which includes: (i) restructuring $35 billion of liabilities and $50 billion of unfunded pension liabilities, (ii) debt service reduction from a maximum of $4.2 billion per year to $1.5 billion per year and (iii) Government Obligation haircuts of 36% for unchallenged and between 55%-65% for challenged debt. Debt from the Puerto Rico Electric Power Authority and the Highway Transportation Authority are not included in this Plan of Adjustment.

Recent trends in key economic indicators show that the island’s economy is moving back to pre-Hurricane Maria levels. The most recent economic activity index revealed a contraction of 0.6% year-over-year. Labor market conditions continue improving at a slower pace. The unemployment rate reached 7.6% for the third quarter of 2019, the lowest level in more than four decades, and 6,700 new nonfarm jobs were created during the 12-month period ending September 30, 2019. Demand for housing has moderated in recent months as the sale of housing units (new and existing) rose only 2.7% annually to 7,419 units during 2019. Meanwhile, the

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

number of housing units in foreclosure increased from its lowest level of 11,655 units in foreclosure in December 2018 to 14,196 units in foreclosure in the second quarter of 2019. On the fiscal front, net revenues to the General Fund totaled $1,046 million in July 2019, $305 million more in revenue collections than in July 2018 and $159 million above what Puerto Rico’s Treasury Department initially projected. The central government’s liquidity remains stable with the Treasury’s Department bank cash position of $7,956 million for the third quarter ending. The cash build is largely due to strong General Fund collections, primarily corporate income taxes.

Although BSPR has a diversified loan portfolio, it continues with efforts to de-risk the portfolio, with credit risk indicators improving significantly year-over-year and surpassing budgeted targets. The lending strategy with respect to the public sector has been to enter into commitments with short-term maturities, payment priorities, and/or strong guarantees, as well as with adequate profitability. Such commitments to the public sector amounted to approximately $247 million ($52 million to agencies and public corporations and $195 million to municipalities) and $265 million ($57 million to agencies and public corporations and $208 million to municipalities) as of September 30, 2019 and December 31, 2018, respectively, which represented approximately 15% and 16% of BSPR's commercial loan portfolio as of September 30, 2019 and December 31, 2018, respectively. A substantial portion of BSPR’s credit exposure to Puerto Rico instrumentalities is either collateralized loans or obligations that have a specific source of income or revenues identified for their repayment, fixed-income investments or real estate. For agencies and public corporations, guarantees are mainly mortgages, securities and standby letter of credits from low-risk multinational entities. In the case of municipalities, the main sources of income are from the Municipal Revenue Collection Center for property taxes and from the Secretary of the Treasury for sales and use taxes. In most cases, these are “general obligations” of a municipality, to which the municipality has pledged its good faith, credit and unlimited taxing power, or “special obligations” of a municipality, to which the applicable municipality has pledged other revenues. As of September 30, 2019 and December 31, 2018, $33 million, or 13%, and $25 million, or 9%, respectively, of commercial loans granted to the public sector mature in one year or less.

During the second quarter of 2019, BSPR formalized a new agreement with the Department of Treasury of Puerto Rico to capture and service new deposits account amounting to $1 billion. United States Treasury securities of $1 billion were acquired and pledged to cover collateral requirements based on the new public sector agreement. The public funds segment in BSPR's deposits portfolio amounted to $1.7 billion (34.4% of total deposits) and $804 million (20.2% of total deposits) as of September 30, 2019 and December 31, 2018, respectively.

See Note 16 to the Consolidated Financial Statements for a discussion of Financial Industry Regulatory Authority (“FINRA") arbitration claims and class action litigation to which the Company and its affiliates are subject as a result of the sale of Puerto Rico bonds and closed-end funds.

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 and bank holding company 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. Santander BanCorp and BSPR also are supervised by the Puerto Rico Office of the Commissioner of Financial Institutions.

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 the payment of dividends as described in the “Stress Tests and Capital Adequacy” discussion in this section. Refer to the Liquidity and Capital Resources section of this MD&A for detail of the capital actions of the Company and its subsidiaries during the period.

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

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") (the “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 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 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.

Economic Growth Act

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act") was signed into law. The Economic Growth Act scales back certain requirements of the DFA. In October 2019, the Federal Reserve finalized a rulemaking implementing the changes required by the Economic Growth Act. The rulemaking provides a tailored approach to the EPS mandated by Section 165 of the DFA. Under the new tailored approach, banks are placed into different categories based on asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. The tailoring rule applies to both Santander and the Company. Both Santander and the Company were placed into Category four of the tailoring rule. The new tailored standards are discussed further below.

Regulatory Capital Requirements

Final U.S. Basel III regulatory capital rules are applicable to both SHUSA and the Bank and establish a comprehensive capital framework that includes both the advanced approaches for the largest internationally active U.S. banks, formerly known as Basel II, and a standardized approach that applies to all banking organizations with over $500 million in assets.

These 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 further capital conservation buffer of 2.5% above these minimum ratios was phased in effective 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.

These 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 deferred the final transition provision phase-in at non-advanced approach institutions for certain capital elements, and suspended the risk-weight to 100 percent for certain deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent. During 2019, the regulatory agencies approved a final rule which includes simplifications for non-advanced approaches to the generally applicable capital rules, specifically with regard to the treatment of minority interest, as well as modifying the risk-weight to 250 percent for certain deferred taxes and mortgage servicing assets not disallowed from capital. This final rule will become effective on April 1, 2020.

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.

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

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 Improvements Act 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 September 30, 2019, the Bank met the criteria to be classified as “well-capitalized.”

On April 10, 2018, the Federal Reserve issued a notice of proposed rulemaking ("NPR") seeking comment on a proposal to simplify capital rules for large banks. If finalized as proposed, the NPR would replace the capital conservation buffer. The capital conservation buffer would be replaced with a new stress capital buffer ("SCB"). The SCB is calculated as the maximum decline in CET1 in the severely adverse scenario (subject to a 2.5% floor) plus four quarters of dividends. The proposal would result in new regulatory capital minimums which are equal to 4.5% CET1 plus the SCB, any globally systemically important bank ("GSIB") surcharge, and any countercyclical capital buffer. The GSIB buffer is applicable only to the largest and most complex firms and does not apply to SHUSA. These new minimums would be firm-specific and would trigger restrictions on capital distributions and discretionary bonuses in the event a firm falls below their new minimums. Firms would still submit a capital plan annually. Supervisory expectations for capital planning processes would not change under the proposal. The Company does not expect this NPR to have a material impact on its current or future planned capital actions.

Stress Testing and Capital Planning

The DFA also requires certain banks and BHCs, including the Company, to perform a stress test and submit a capital plan to the Federal Reserve and receive a notice of non-objection before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. In June 2018, the Company announced that the Federal Reserve did not object to the planned capital actions described in the Company’s capital plan through June 30, 2019. In February 2019, the Federal Reserve announced that SHUSA, as well as other less complex firms, would receive a one-year extension of the requirement to submit its capital plan until April 5, 2020. The Federal Reserve also announced that, for the period beginning July 1, 2019 through June 30, 2020, the Company would be allowed to make capital distributions up to the amount that would have allowed it to remain above all minimum capital requirements in CCAR 2018, adjusted for any changes in the Company’s regulatory capital ratios since the Federal Reserve acted on the 2018 capital plan.

In October 2019, the Federal Reserve finalized rules that tailor the stress testing and capital actions a company is required to perform based on the company’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Under the tailoring rules, the Company is required to submit a capital plan to the Federal Reserve on an annual basis. The Company is also subject to supervisory stress testing on a two-year cycle. The Company continues to evaluate planned capital actions in its annual capital plan and on an ongoing basis.

Liquidity Rules

The Federal Reserve, the FDIC, and the OCC have established 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. Smaller covered companies (more than $50 billion in assets) such as the Company were required to calculate the LCR monthly beginning January 2016.

In October 2019, the Federal Reserve finalized rules that tailor the liquidity requirements based on a company’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. In light of the fact that the Company is under $250 billion in assets and has less than $50 billion in short-term wholesale funding, the Company is no longer required to disclose the US LCR.

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

The net stable funding ratio (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 the proposed rule would have on its financial position, results of operations and disclosures.

Resolution Planning

The DFA requires all BHCs and FBOs with assets of $50 billion or more to prepare and regularly update resolution plans ("165(d) Resolution Plan"). The 165(d) 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. The most recent 165(d) Resolution Plan was submitted to the Federal Reserve and FDIC in December 2018. In addition, under amended Federal Deposit Insurance Corporation Improvements Act rules, the insured depository institution ("IDI") resolution plan rule requires that a bank with assets of $50 billion or more develop a plan for its resolution that supports depositors’ 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. The most recent IDI resolution plan was submitted to the FDIC in June 2018. SHUSA and SBNA are currently awaiting feedback.

Total Loss-Absorbing Capacity (“TLAC")

The Federal Reserve’s total loss-absorbing capacity rule (the “TLAC Rule”) 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 applies to U.S. GSIBs 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 RWAs or 9% of its total consolidated assets in the form of TLAC, of which 6% of its RWAs or 3.5% of total consolidated assets must consist of LTD. In addition, 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. The TLAC Rule became effective on January 1, 2019.

Volcker Rule

The DFA added new Section 13 to the Bank Holding Company 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 IDI, 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.

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.

In October 2019, the joint agencies responsible for administering the Volcker Rule finalized revisions to Volcker Rule. The final rule tailors the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of a trading account, clarify certain key provisions in the Volcker Rule, and simplify the information companies are required to provide the banking agencies. The Company is still evaluating the impact of this final rule.

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

Risk Retention Rule

In December 2014, the Federal Reserve issued its final credit risk retention rule, which generally requires sponsors of ABS to retain at least five percent of the credit risk of the assets collateralizing ABS. SHUSA, primarily through SC, is an active participant in the structured finance markets and began to comply with the retention requirements effective in December 2016.

Market Risk Rule

The market risk rule requires certain national banks to measure and hold risk-based regulatory capital for the market risk of their covered positions. The bank must measure and hold capital for its market risk using its internal risk based models. The market risk rule outlines quantitative requirements for the bank's internal risk based models, as well as qualitative requirements for the bank's management of market risk. Banks subject to the market risk rule must also measure and hold market risk regulatory capital for the specific risk associated with certain debt and equity positions.

A bank is subject to the market risk capital rules if its consolidated trading activity, defined as the sum of trading assets and liabilities as reported in its FFIEC 031 and FR Y-9C for the previous quarter, equals the lesser of: (1) 10 percent or more of the bank's total assets as reported in its Call Report and FR Y-9C for the previous quarter, or (2) $1 billion or more. At September 30, 2019, SBNA reported aggregate trading exposure in excess of the market risk threshold, and will begin to hold the market risk component within risk-weighted assets of the risk-based capital ratios in the subsequent quarter.

Heightened Standards

OCC guidelines to strengthen the governance and risk management practices of large financial institutions are commonly referred to as “heightened standards.” The heightened standards apply to insured national banks with $50 billion or more in consolidated assets. The heightened standards require covered institutions to establish and adhere to a written risk governance framework to manage and control their risk-taking activities. The heightened standards also provide minimum standards for the institutions’ boards of directors to oversee the risk governance framework.

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 arm's-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

Regulation AB II, among other things, expanded disclosure requirements and modified the offering and shelf registration process for ABS. SC must comply with these rules, which impact 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, and affect 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.

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

Other Regulatory Matters

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 required SC to pay a civil fine in the amount of $55,000, as well as at least $9.4 million to affected service members, consisting of $10,000 per service member plus compensation for any lost equity (with interest) for each repossession by SC and $5,000 per service member 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 SC 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.

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 civil investigative demands from the CFPB requesting information and testimony regarding SC’s marketing of GAP coverage and loan deferral disclosure practices. In November 2018, SC entered into a voluntary settlement with the CFPB under which the CFPB entered a consent order against SC in an administrative proceeding captioned In the Matter of Santander Consumer USA Holdings Inc., File No. 2018-BCFP-0008. In the consent order, the CFPB found, among other things, that SC violated the Consumer Financial Protection Act of 2010 (the "CFPA") in its marketing of GAP coverage and in certain of its loan deferral disclosure practices. Without admitting or denying the findings, SC agreed to pay a civil penalty of $2.5 million to the CFPB and to provide remediation to certain impacted customers. The consent order also requires SC to submit a comprehensive plan to the CFPB demonstrating how it will comply with the CFPA and the terms of the consent order.

In October 2014, SC received a subpoena from the SEC commencing an investigation into SC’s securitization practices. In June 2016, the SEC served an additional subpoena on SC requesting documents related to SC’s securitization practices as well as SC’s financial restatements. SC has produced documents responsive to these subpoenas, and the SEC has taken testimony from certain of SC’s employees. In December 2018, the SEC and SC reached a voluntary agreement to settle the SEC's investigation under which the SEC entered a cease-and-desist order against SC in an administrative matter captioned In the Matter of Santander Consumer USA Holdings Inc., File No. 3-18932. According to the SEC’s order, among other things, SC failed to calculate and report its credit loss allowance for certain impaired loans in accordance with GAAP. The SEC’s order also found that SC failed to maintain effective internal control over financial reporting, leading to SC’s financial restatements. Without admitting or denying the SEC's findings, SC paid a civil penalty of $1.5 million in January 2019 and agreed to cease and desist from any future violations of the Exchange Act and the rules thereunder.

On March 21, 2017, SC and the Company entered into a written agreement with the FRB of Boston. 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 the Company is required to enhance its oversight of SC's management and operations.

As of September 30, 2019, SSLLC had received 741 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds ("CEFs"), generally, that SSLLC previously recommended and/or sold to clients. 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 469 arbitration cases pending as of September 30, 2019. The Company believes that it is reasonably possible it could experience an increase in claims in future periods.

On August 8, 2019, bond insurers National Public Finance Guarantee Corporation and MBIA Insurance Corporation filed suit in Puerto Rico state court against eight Puerto Rico municipal bond underwriters, including SSLLC, alleging that the underwriters made misrepresentations in connection with the issuance of the debt and that the bond insurers relied on such misrepresentations in agreeing to insure certain of the bonds. The complaint alleges damages of not less than $720 million. The defendants removed the case to federal court, and plaintiffs have sought to return the case to state court.

In addition, 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 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. In May 2019, the defendants filed a motion to dismiss the amended complaint.

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 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 quarterly report:

•

Santander UK plc (“Santander UK”) holds accounts for two customers, with the first customer holding one savings account and one current account and the second customer holding one savings account. Both of the customers, who are resident in the UK, 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 nine months ended September 30, 2019 were negligible relative to the overall profits of Santander.

•

Santander UK holds two frozen current accounts for two UK nationals who are designated by the U.S. under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and remained frozen through the nine months ended September 30, 2019. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK's Collections and Recoveries Department. No revenues or profits were generated by Santander UK on these accounts in the nine months ended September 30, 2019.


•	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 nine months ended September 30, 2019 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 AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					Year To Date Change
(dollars in thousands)	2019			2018			2019			2018			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	1,619,110		$	1,598,761		$	4,843,718		$	4,741,193		$	20,349		1.3	%	$	102,525		2.2	%
Provision for credit losses	(603,635		)	(621,014		)	(1,684,478		)	(1,608,697		)	(17,379		)	(2.8	)%	75,781			4.7	%
Total non-interest income	1,001,132			822,056			2,859,564			2,442,436			179,076			21.8	%	417,128			17.1	%
General, administrative and other expenses	(1,633,244		)	(1,450,387		)	(4,718,045		)	(4,341,497		)	182,857			12.6	%	376,548			8.7	%
Income before income taxes	383,363			349,416			1,300,759			1,233,435			33,947			9.7	%	67,324			5.5	%
Income tax provision	112,927			109,949			384,467			374,162			2,978			2.7	%	10,305			2.8	%
Net income	$	270,436		$	239,467		$	916,292		$	859,273		$	30,969		12.9	%	$	57,019		6.6	%
Net income attributable to non-controlling interest	66,831			72,491			250,086			251,770			(5,660		)	(7.8	)%	(1,684		)	(0.7	)%
Net income attributable to SHUSA	$	203,605		$	166,976		$	666,206		$	607,503		$	36,629		21.9	%	$	58,703		9.7	%

The Company reported pre-tax income of $383.4 million and $1.3 billion for the three-month and nine-month periods ended September 30, 2019, respectively, compared to pre-tax income of $349.4 million and $1.2 billion for the corresponding periods in 2018. Factors contributing to this change were as follows:

•

Net interest income increased $20.3 million and $102.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. This increase was primarily due to an increase in interest income on loans as a result of higher average loan balances, offset by a smaller increase on deposits and customer accounts as a result of higher interest rates overall, and an increase in interest expense on borrowings due to additional borrowing and higher borrowing rates. For further discussion on these changes, refer to the net interest income section of this MD&A.


•	The provision for credit losses decreased $17.4 million and increased $75.8 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. For further discussion on these changes, refer to the Provision for credit losses section of this MD&A.


•	Total non-interest income increased $179.1 million and $417.1 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. This increase was primarily due to lease income associated with the continued growth of the Company's lease portfolio. For additional details, refer to the Non-Interest income section of this MD&A.

•

Total general, administrative, and other expenses increased $182.9 million and $376.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were primarily due to an increase in lease expenses resulting from continued growth of the Company's leased vehicle portfolio, and an increase in operational risk expenses. For additional details, refer to the General, Administrative, and Other expenses section of this MD&A.


•	The Income tax provision remained relatively stable for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. For additional details, refer to the Income Tax Provision section of this MD&A.

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




CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018
	2019 ⁽¹⁾							2018 ⁽¹⁾							Interest			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	$	22,225,245		$	134,440	2.42	%	$	20,580,970		$	128,410	2.50	%	$	6,030		$	10,059		$	(4,029	)
LOANS⁽³⁾:
Commercial loans	33,673,664			355,272		4.22	%	31,916,978			340,155		4.26	%	15,117			18,227			(3,110		)
Multifamily	8,415,539			87,766		4.17	%	8,254,628			82,062		3.98	%	5,704			1,654			4,050
Total commercial loans	42,089,203			443,038		4.21	%	40,171,606			422,217		4.20	%	20,821			19,881			940
Consumer loans:
Residential mortgages	9,847,104			100,531		4.08	%	9,892,635			100,120		4.05	%	411			(674		)	1,085
Home equity loans and lines of credit	5,018,365			64,442		5.14	%	5,547,033			66,877		4.82	%	(2,435		)	(8,026		)	5,591
Total consumer loans secured by real estate	14,865,469			164,973		4.44	%	15,439,668			166,997		4.33	%	(2,024		)	(8,700		)	6,676
RICs and auto loans	33,516,284			1,271,550		15.18	%	27,926,945			1,160,881		16.63	%	110,669			196,105			(85,436		)
Personal unsecured	2,390,750			164,692		27.55	%	2,278,887			155,309		27.26	%	9,383			7,712			1,671
Other consumer⁽⁴⁾	357,361			6,414		7.18	%	501,079			9,124		7.28	%	(2,710		)	(2,586		)	(124		)
Total consumer	51,129,864			1,607,629		12.58	%	46,146,579			1,492,311		12.94	%	115,318			192,531			(77,213		)
Total loans	93,219,067			2,050,667		8.80	%	86,318,185			1,914,528		8.87	%	136,139			212,412			(76,273		)
Intercompany investments	—			—		—	%	4,640			48		4.14	%	(48		)	(48		)	—
TOTAL EARNING ASSETS	115,444,312			2,185,107		7.57	%	106,903,795			2,042,986		7.64	%	142,121			222,423			(80,302		)
Allowance for loan losses ⁽⁵⁾	(3,772,807		)					(3,966,390		)
Other assets⁽⁶⁾	32,392,411							28,530,507
TOTAL ASSETS	$	144,063,916						$	131,467,912
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	11,223,790		$	23,901	0.85	%	$	8,938,955		$	10,280	0.46	%	$	13,621		$	3,155		$	10,466
Savings	5,767,649			3,477		0.24	%	5,930,458			3,354		0.23	%	123			(211		)	334
Money market	24,778,267			83,340		1.35	%	25,381,290			67,135		1.06	%	16,205			(1,541		)	17,746
Certificates of deposit (“CDs”)	8,291,661			42,235		2.04	%	6,048,927			22,496		1.49	%	19,739			9,891			9,848
TOTAL INTEREST-BEARING DEPOSITS	50,061,367			152,953		1.22	%	46,299,630			103,265		0.89	%	49,688			11,294			38,394
BORROWED FUNDS:
Federal Home Loan Bank (“FHLB”) advances, federal funds, and repurchase agreements	6,129,891			39,970		2.61	%	2,201,087			14,294		2.60	%	25,676			25,620			56
Other borrowings	42,279,698			373,074		3.53	%	37,956,828			326,618		3.44	%	46,456			37,778			8,678
TOTAL BORROWED FUNDS ⁽⁷⁾	48,409,589			413,044		3.41	%	40,157,915			340,912		3.40	%	72,132			63,398			8,734
TOTAL INTEREST-BEARING FUNDING LIABILITIES	98,470,956			565,997		2.30	%	86,457,545			444,177		2.06	%	121,820			74,692			47,128
Noninterest bearing demand deposits	14,482,711							15,074,354
Other liabilities⁽⁸⁾	6,192,978							5,874,509
TOTAL LIABILITIES	119,146,645							107,406,408
STOCKHOLDER’S EQUITY	24,917,271							24,061,504
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	144,063,916						$	131,467,912

NET INTEREST SPREAD ⁽⁹⁾						5.27	%						5.58	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.61	%						5.98	%
NET INTEREST INCOME ⁽¹¹⁾				$	1,619,110						$	1,598,761

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




CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018
	2019 ⁽¹⁾							2018 ⁽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	$	21,485,208		$	417,085	2.59	%	$	21,730,872		$	389,493	2.39	%	$	27,592		$	(4,310	)	$	31,902
LOANS⁽³⁾:
Commercial loans	33,356,133			1,089,897		4.36	%	30,982,669			969,301		4.17	%	120,596			75,614			44,982
Multifamily	8,380,211			259,649		4.13	%	8,189,160			243,681		3.97	%	15,968			5,854			10,114
Total commercial loans	41,736,344			1,349,546		4.31	%	39,171,829			1,212,982		4.13	%	136,564			81,468			55,096
Consumer loans:
Residential mortgages	10,121,409			309,529		4.08	%	9,592,576			289,684		4.03	%	19,845			16,199			3,646
Home equity loans and lines of credit	5,179,086			200,682		5.17	%	5,656,230			193,650		4.56	%	7,032			(12,004		)	19,036
Total consumer loans secured by real estate	15,300,495			510,211		4.45	%	15,248,806			483,334		4.23	%	26,877			4,195			22,682
RICs and auto loans	31,755,513			3,701,535		15.54	%	27,156,783			3,392,641		16.66	%	308,894			512,270			(203,376		)
Personal unsecured	2,483,911			502,887		26.99	%	2,304,562			466,630		27.00	%	36,257			36,431			(174		)
Other consumer⁽⁴⁾	390,032			20,974		7.17	%	547,280			29,392		7.16	%	(8,418		)	(8,459		)	41
Total consumer	49,929,951			4,735,607		12.65	%	45,257,431			4,371,997		12.88	%	363,610			544,437			(180,827		)
Total loans	91,666,295			6,085,153		8.85	%	84,429,260			5,584,979		8.82	%	500,174			625,905			(125,731		)
Intercompany investments	—			—		—	%	4,640			139		3.99	%	(139		)	(139		)	—
TOTAL EARNING ASSETS	113,151,503			6,502,238		7.66	%	106,164,772			5,974,611		7.50	%	527,627			621,456			(93,829		)
Allowance for loan losses⁽⁵⁾	(3,832,455		)					(3,974,517		)
Other assets⁽⁶⁾	31,153,498							28,074,761
TOTAL ASSETS	$	140,472,546						$	130,265,016
INTEREST-BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	10,607,947		$	63,570	0.80	%	$	9,046,955		$	25,484	0.38	%	$	38,086		$	5,142		$	32,944
Savings	5,839,750			10,145		0.23	%	5,892,981			8,910		0.20	%	1,235			(79		)	1,314
Money market	24,397,708			235,925		1.29	%	25,383,520			177,019		0.93	%	58,906			(6,568		)	65,474
CDs	8,129,517			118,746		1.95	%	5,739,306			59,607		1.38	%	59,139			29,694			29,445
TOTAL INTEREST-BEARING DEPOSITS	48,974,922			428,386		1.17	%	46,062,762			271,020		0.78	%	157,366			28,189			129,177
BORROWED FUNDS:
FHLB advances, federal funds, and repurchase agreements	5,166,044			106,160		2.74	%	1,636,630			30,768		2.51	%	75,392			72,316			3,076
Other borrowings	41,377,822			1,123,974		3.62	%	37,722,450			931,491		3.29	%	192,483			94,586			97,897
TOTAL BORROWED FUNDS ⁽⁷⁾	46,543,866			1,230,134		3.52	%	39,359,080			962,259		3.26	%	267,875			166,902			100,973
TOTAL INTEREST-BEARING FUNDING LIABILITIES	95,518,788			1,658,520		2.32	%	85,421,842			1,233,279		1.93	%	425,241			195,091			230,150
Noninterest bearing demand deposits	14,460,711							15,239,725
Other liabilities⁽⁸⁾	5,945,936							5,516,131
TOTAL LIABILITIES	115,925,435							106,177,698
STOCKHOLDER’S EQUITY	24,547,111							24,087,318
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	140,472,546						$	130,265,016

NET INTEREST SPREAD ⁽⁹⁾						5.34	%						5.57	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.71	%						5.95	%
NET INTEREST INCOME ⁽¹¹⁾				$	4,843,718						$	4,741,193


(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 leases, goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, BOLI, accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and MSRs. Refer to Note 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.


(11)	Intercompany investment income is eliminated from this line item.

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

NET INTEREST INCOME



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
(dollars in thousands)	2019		2018		2019		2018		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
INTEREST INCOME:
Interest-earning deposits	$	46,944	$	32,202	$	138,861	$	98,655	$	14,742		45.8	%	$	40,206		40.8	%
Investments available-for-sale ("AFS")	64,777		75,136		210,344		225,673		(10,359		)	(13.8	)%	(15,329		)	(6.8	)%
Investments held-to-maturity ("HTM")	16,319		16,931		49,429		51,176		(612		)	(3.6	)%	(1,747		)	(3.4	)%
Other investments	6,400		4,141		18,451		13,989		2,259			54.6	%	4,462			31.9	%
Total interest income on investment securities and interest-earning deposits	134,440		128,410		417,085		389,493		6,030			4.7	%	27,592			7.1	%
Interest on loans	2,050,667		1,914,528		6,085,153		5,584,979		136,139			7.1	%	500,174			9.0	%
Total interest income	2,185,107		2,042,938		6,502,238		5,974,472		142,169			7.0	%	527,766			8.8	%
INTEREST EXPENSE:
Deposits and customer accounts	152,953		103,265		428,386		271,020		49,688			48.1	%	157,366			58.1	%
Borrowings and other debt obligations	413,044		340,912		1,230,134		962,259		72,132			21.2	%	267,875			27.8	%
Total interest expense	565,997		444,177		1,658,520		1,233,279		121,820			27.4	%	425,241			34.5	%
NET INTEREST INCOME	$	1,619,110	$	1,598,761	$	4,843,718	$	4,741,193	$	20,349		1.3	%	$	102,525		2.2	%

Net interest income increased $20.3 million and $102.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $6.0 million and $27.6 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The average balances of investment securities and interest-earning deposits for the three-month and nine-month periods ended September 30, 2019 were $22.2 billion and $21.5 billion with an average yield of 2.42% and 2.59%, respectively, compared to an average balance of $20.6 billion and $21.7 billion with average yields of 2.50% and 2.39% for the corresponding periods in 2018. The increase in interest income on investment securities and interest-earning deposits for the three-month and nine-month periods ended September 30, 2019 was primarily due to an increase in the average yield on interest-earning deposits resulting from 2018 increases to the federal funds rate.

Interest Income on Loans

Interest income on loans increased $136.1 million and $500.2 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were primarily due to the growth of total loans. The average balance of total loans increased $6.9 billion and $7.2 billion for three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. This overall increase in loans was primarily driven by the continued growth of the commercial portfolio, auto loans and RICs.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts increased $49.7 million and $157.4 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. This increase was primarily due to overall higher interest rates and increased deposits. Higher rates were offered to customers on various deposit products in order to attract and grow the customer base. The average balances of total interest-bearing deposits were $50.1 billion and $49.0 billion with an average cost of 1.22% and 1.17% for the three-month and nine-month periods ended September 30, 2019, respectively, compared to average balances of $46.3 billion and $46.1 billion with average costs of 0.89% and 0.78% for the corresponding periods in 2018.

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 $72.1 million and $267.9 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The increase in interest expense on borrowed funds was due to higher interest rates being paid and increased balances during the three-month and nine-month periods ended September 30, 2019. The average balances of total borrowings were $48.4 billion and $46.5 billion with an average cost of 3.41% and 3.52% for the three-month and nine-month periods ended September 30, 2019, respectively, compared to an average balance of $40.2 billion and $39.4 billion with an average cost of 3.40% and 3.26% for the corresponding periods in 2018. The average balance of borrowed funds increased for the three-month and nine-month periods ended September 30, 2019 compared to the three-month and nine-month periods ended September 30, 2018, primarily due to increases in FHLB advances, credit facilities and secured structured financings.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the portfolio. The provision for credit losses for the three-month and nine-month periods ended September 30, 2019 was $603.6 million and $1.7 billion, respectively, compared to $621.0 million and $1.6 billion for the three-month and nine-month periods ended September 30, 2018. The increase for the nine-month period ended September 30, 2019 was primarily due to the increase in the RIC and auto loan portfolio and higher net charge-offs in 2019.



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						Quarter-to-date ("QTD") Change					Year-to-Date ("YTD") Change
(in thousands)	2019			2018			2019			2018			Dollar			Percentage		Dollar			Percentage
Allowance for loan and lease losses ("ALLL"), beginning of period	$	3,783,833		$	3,988,876		$	3,897,130		$	3,994,887		$	(205,043	)	(5.1	)%	$	(97,757	)	(2.4	)%
Charge-offs:
Commercial	(57,276		)	(21,353		)	(117,591		)	(70,978		)	(35,923		)	168.2	%	(46,613		)	65.7	%
Consumer	(1,367,404		)	(1,258,144		)	(4,020,570		)	(3,524,081		)	(109,260		)	8.7	%	(496,489		)	14.1	%
Unallocated	—			—			(275		)	—			—			—	%	(275		)	100.0	%
Total charge-offs	(1,424,680		)	(1,279,497		)	(4,138,436		)	(3,595,059		)	(145,183		)	11.3	%	(543,377		)	15.1	%
Recoveries:
Commercial	18,393			17,325			39,056			41,953			1,068			6.2	%	(2,897		)	(6.9	)%
Consumer	760,423			616,699			2,253,282			1,891,801			143,724			23.3	%	361,481			19.1	%
Total recoveries	778,816			634,024			2,292,338			1,933,754			144,792			22.8	%	358,584			18.5	%
Charge-offs, net of recoveries	(645,864		)	(645,473		)	(1,846,098		)	(1,661,305		)	(391		)	0.1	%	(184,793		)	11.1	%
Provision for loan and lease losses ⁽¹⁾	597,891			613,570			1,684,828			1,623,391			(15,679		)	(2.6	)%	61,437			3.8	%
Consumer	—			—			—			—			—			100.0%		—			100.0%
ALLL, end of period	$	3,735,860		$	3,956,973		$	3,735,860		$	3,956,973		$	(221,113	)	(5.6	)%	$	(221,113	)	(5.6	)%
Reserve for unfunded lending commitments, beginning of period	$	89,406		$	86,973		$	95,500		$	109,111		$	2,433		2.8	%	$	(13,611	)	(12.5	)%
Release of reserves for unfunded lending commitments ⁽¹⁾	5,744			7,444			(350		)	(14,694		)	(1,700		)	(22.8	)%	14,344			(97.6	)%
Loss on unfunded lending commitments	—			(96		)	—			(96		)	96			(100.0	)%	96			(100.0	)%
Reserve for unfunded lending commitments, end of period	95,150			94,321			95,150			94,321			829			0.9	%	829			0.9	%
Total allowance for credit losses ("ACL"), end of period	$	3,831,010		$	4,051,294		$	3,831,010		$	4,051,294		$	(220,284	)	(5.4	)%	$	(220,284	)	(5.4	)%


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

The Company's net charge-offs increased $0.4 million for the three-month period ended September 30, 2019 and $184.8 million for the nine-month period ended September 30, 2019 compared to the corresponding periods in 2018.

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

Consumer charge-offs increased $109.3 million and $496.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the three-month and nine-month periods ended September 30, 2018. The three-month increase was primarily comprised of a $121.9 million increase in RIC and consumer auto loan charge-offs and a $16.4 million increase in indirect purchased loan charge-offs. The nine-month increase was primarily comprised of a $470.1 million increase in RIC and consumer auto loan charge-offs, and a $34.4 million increase in indirect purchased loan charge-offs.

Consumer recoveries increased $143.7 million and $361.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the three-month and nine-month periods ended September 30, 2018. The three-month increase was primarily comprised of a $139.2 million increase in RIC and consumer auto loan recoveries, and a $5.9 million increase in indirect purchased loan recoveries. The nine-month increase was primarily comprised of a $349.0 million increase in RIC and consumer auto loan recoveries, and a $11.8 million increase in indirect purchased recoveries, offset by a $1.0 million decrease in home mortgage loan recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 1.2% and 3.5% for the three-month and nine-month periods ended September 30, 2019, respectively, compared to 1.4% and 3.6% in the three-month and nine-month periods ended September 30, 2018.

Commercial charge-offs increased $35.9 million and $46.6 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the three-month and nine-month periods ended September 30, 2018. The three-month increase was primarily comprised of a $38.2 million increase in Corporate Banking charge-offs. The nine-month increase was primarily comprised of a $50.3 million increase in Corporate Banking charge-offs, offset by a $3.0 million decrease in commercial fleet charge-offs.

Commercial recoveries increased $1.1 million and decreased $2.9 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the three-month and nine-month periods ended September 30, 2018.

NON-INTEREST INCOME



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,					QTD Change					YTD Change
(dollars in thousands)	2019		2018			2019		2018			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Consumer fees	$	92,734	$	106,628		$	295,857	$	306,373		$	(13,894	)	(13.0	)%	$	(10,516	)	(3.4	)%
Commercial fees	40,315		37,877			116,709		114,470			2,438			6.4	%	2,239			2.0	%
Lease income	735,783		610,324			2,116,503		1,720,526			125,459			20.6	%	395,977			23.0	%
Miscellaneous income, net	130,033		68,915			327,849		302,998			61,118			88.7	%	24,851			8.2	%
Net gains/(losses) recognized in earnings	2,267		(1,688		)	2,646		(1,931		)	3,955			234.3	%	4,577			237.0	%
Total non-interest income	$	1,001,132	$	822,056		$	2,859,564	$	2,442,436		$	179,076		21.8	%	$	417,128		17.1	%

Total non-interest income increased $417.1 million for the nine-month period ended September 30, 2019 compared to the nine-month period ended September 30, 2018. This increase was primarily due to an increase in lease income.

Consumer fees

Consumer fees decreased $13.9 million and $10.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The decrease was primarily related to a decrease in consumer loan fees.

Commercial fees

Commercial fees consists of deposit overdraft fees, deposit automated teller machine fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees remained relatively stable for the nine-month period ended September 30, 2019 compared to the corresponding period in 2018.

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

Lease income

Lease income increased $396.0 million for the nine-month period ended September 30, 2019 compared to the nine-month period ended September 30, 2018. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $15.1 billion for the nine-month period ended September 30, 2019, compared to $11.9 billion at September 30, 2018.

Miscellaneous income/(loss)



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					YTD Change
(dollars in thousands)	2019			2018			2019			2018			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Mortgage banking income, net	$	15,343		$	7,154		$	38,067		$	26,432		$	8,189		114.5	%	$	11,635		44.0	%
BOLI	15,338			14,759			45,769			44,142			579			3.9	%	1,627			3.7	%
Capital market revenue	48,326			31,810			146,290			129,506			16,516			51.9	%	16,784			13.0	%
Net gain on sale of operating leases	48,490			48,965			120,980			167,906			(475		)	(1.0	)%	(46,926		)	(27.9	)%
Asset and wealth management fees	45,020			41,299			132,224			128,557			3,721			9.0	%	3,667			2.9	%
Loss on sale of non-mortgage loans	(87,399		)	(86,745		)	(238,771		)	(205,526		)	(654		)	(0.8	)%	(33,245		)	(16.2	)%
Other miscellaneous income, net	44,915			11,673			83,290			11,981			33,242			284.8	%	71,309			595.2	%
Total miscellaneous income/(loss)	$	130,033		$	68,915		$	327,849		$	302,998		$	61,118		88.7	%	$	24,851		8.2	%

Miscellaneous income increased $61.1 million and $24.9 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The amount in the three-month period ended September 30, 2019 increased primarily due to an increase in Other miscellaneous income and an increase in capital markets revenue compared to the corresponding period in 2018. The increase in Other miscellaneous income primarily includes a one-time gain on sale of loans and deposits during the three month period ended September 30, 2019. The nine-month period ended September 30, 2019 increased primarily due to an increase in Other miscellaneous income, partially offset by a decrease in net gain on sale of operating leases and an increase in loss on sale of non-mortgage loans.

GENERAL, ADMINISTRATIVE AND OTHER EXPENSES



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
(dollars in thousands)	2019		2018		2019		2018		Dollar increase/(decrease)			Percentage		Dollar			Percentage
Compensation and benefits	$	485,920	$	436,202	$	1,432,730	$	1,332,708	$	49,718		11.4	%	$	100,022		7.5	%
Occupancy and equipment expenses	156,603		169,595		441,643		492,106		(12,992		)	(7.7	)%	(50,463		)	(10.3	)%
Technology, outside services, and marketing expense	178,053		146,652		482,183		454,944		31,401			21.4	%	27,239			6.0	%
Loan expense	98,639		83,190		308,139		277,683		15,449			18.6	%	30,456			11.0	%
Lease expense	523,900		455,344		1,516,984		1,316,404		68,556			15.1	%	200,580			15.2	%
Other expenses	190,129		159,404		536,366		467,652		30,725			19.3	%	68,714			14.7	%
Total general, administrative and other expenses	$	1,633,244	$	1,450,387	$	4,718,045	$	4,341,497	$	182,857		12.6	%	$	376,548		8.7	%

Total general, administrative and other expenses increased $182.9 million and $376.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The most significant factors contributing to these increases were as follows:


•	Compensation and benefits increased $49.7 million and $100.0 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were primarily due to higher salary and severance expense.


•	Occupancy and equipment expenses decreased $13.0 million and $50.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018, as a result of branch closures.

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


•	Loan expense increased $15.4 million and $30.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were primarily due to higher loan origination expenses.


•	Lease expense increased $68.6 million and $200.6 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio.

•

Other expenses increased $30.7 million and $68.7 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were primarily attributable to an increase in operational risk expense and legal expenses. FDIC insurance premiums for the nine-month period ended September 30, 2019 includes $25.3 million of FDIC insurance premiums that relate to periods from the first quarter 2015 through the fourth quarter of 2018 which was partially offset due to the FDIC surcharges that ended in 2018 as disclosed in Note 15.

INCOME TAX PROVISION

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.

Refer to Note 13 to the Condensed Consolidated Financial Statements for an explanation of the changes in the ETR.

LINE OF BUSINESS RESULTS

General

The Company's segments at September 30, 2019 consisted of Consumer and Business Banking, Commercial & Industrial ("C&I") Banking, Commercial Real Estate and Vehicle Finance ("CRE & VF"), CIB and SC. For additional information with respect to the Company's reporting segments and changes to the segments beginning in the first quarter of 2019, see Note 18 to the Condensed Consolidated Financial Statements.

Results Summary

Consumer and Business Banking



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,					QTD Change					YTD Change
(dollars in thousands)	2019		2018			2019		2018			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	381,759	$	329,693		$	1,120,907	$	949,253		$	52,066		15.8	%	$	171,654		18.1	%
Total non-interest income	120,264		76,552			281,464		230,204			43,712			57.1	%	51,260			22.3	%
Provision for credit losses	37,915		23,690			115,130		80,363			14,225			60.0	%	34,767			43.3	%
Total expenses	414,836		390,657			1,208,908		1,171,752			24,179			6.2	%	37,156			3.2	%
Income/(loss) before income taxes	49,272		(8,102		)	78,333		(72,658		)	57,374			708.1	%	150,991			207.8	%
Intersegment revenue	600		604			1,576		1,802			(4		)	(0.7	)%	(226		)	(12.5	)%
Total assets	23,447,787		19,832,176			23,447,787		19,832,176			3,615,611			18.2	%	3,615,611			18.2	%

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

Consumer and Business Banking reported income before income taxes of $49.3 million and $78.3 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to losses before income taxes of $8.1 million and $72.7 million for the three-month and nine-month periods ended September 30, 2018, respectively. Factors contributing to this change were:


•	Net interest income increased $52.1 million and $171.7 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were primarily driven by deposit product margin due to interest rate increases combined increase auto loan volumes.


•	Non-interest income increased by $43.7 million and $51.3 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were the result of gains on the sale of 14 branches during the third quarter.


•	The provision for credit losses increased $14.2 million and $34.8 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were due to reserve builds for the large growth of the auto portfolio in 2019.


•	Total assets increased $3.6 billion for the quarter ended September 30, 2019 compared to the corresponding period in 2018. This increase was primarily driven by an increase in auto loans.

C&I Banking



	Three-Month Period Ended September 30,					Nine-Month Period Ended September 30,					QTD Change					YTD Change
(dollars in thousands)	2019		2018			2019		2018			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	59,738	$	57,059		$	170,525	$	170,728		$	2,679		4.7	%	$	(203	)	(0.1	)%
Total non-interest income	17,631		15,482			50,641		65,584			2,149			13.9	%	(14,943		)	(22.8	)%
(Release of) /provision for credit losses	4,985		(26,114		)	20,570		(56,525		)	31,099			119.1	%	77,095			136.4	%
Total expenses	59,242		52,585			173,426		167,613			6,657			12.7	%	5,813			3.5	%
Income before income taxes	13,142		46,070			27,170		125,224			(32,928		)	(71.5	)%	(98,054		)	(78.3	)%
Intersegment revenue	1,683		927			3,986		3,306			756			81.6	%	680			20.6	%
Total assets	7,948,200		6,784,264			7,948,200		6,784,264			1,163,936			17.2	%	1,163,936			17.2	%

C&I reported income before income taxes of $13.1 million and $27.2 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to income before income taxes of $46.1 million and $125.2 million for the three-month and nine-month periods ended September 30, 2018. Contributing to these changes were:

•

The provision for credit losses increased $31.1 million and $77.1 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018. These increases were primarily due to release of reserves in 2018 related to the strategic exits of middle market, asset-based lending, and legacy oil and gas portfolios. 2019 represents a more normalized provision for C and I banking.

CRE & VF



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
(dollars in thousands)	2019		2018		2019		2018		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)		Percentage
Net interest income	$	104,076	$	104,203	$	311,790	$	307,422	$	(127	)	(0.1	)%	$	4,368	1.4	%
Total non-interest income	3,428		2,611		9,860		3,318		817			31.3	%	6,542		197.2	%
(Release of) /provision for credit losses	6,425		1,002		9,824		8,671		5,423			541.2	%	1,153		13.3	%
Total expenses	32,718		27,079		95,385		87,874		5,639			20.8	%	7,511		8.5	%
Income before income taxes	68,361		78,733		216,441		214,195		(10,372		)	(13.2	)%	2,246		1.0	%
Intersegment revenue	1,605		1,117		5,396		2,831		488			43.7	%	2,565		90.6	%
Total assets	18,772,209		18,519,416		18,772,209		18,519,416		252,793			1.4	%	252,793		1.4	%

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

CRE and VF reported income before income taxes of $68.4 million and $216.4 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to income before income taxes of $78.7 million and $214.2 million for the three-month and nine-month periods ended September 30, 2018. The results of this reportable segment were relatively consistent period-over-period.

CIB



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					YTD Change
(dollars in thousands)	2019			2018			2019			2018			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	36,577		$	33,594		$	114,646		$	97,273		$	2,983		8.9	%	$	17,373		17.9	%
Total non-interest income	53,341			38,293			159,970			153,568			15,048			39.3	%	6,402			4.2	%
(Release of)/Provision for credit losses	(3,878		)	3,160			(6,624		)	4,868			(7,038		)	(222.7	)%	(11,492		)	(236.1	)%
Total expenses	66,092			57,068			198,653			173,156			9,024			15.8	%	25,497			14.7	%
Income before income taxes	27,704			11,659			82,587			72,817			16,045			137.6	%	9,770			13.4	%
Intersegment expense	(3,888		)	(2,556		)	(10,958		)	(8,364		)	(1,332		)	(52.1	)%	(2,594		)	(31.0	)%
Total assets	9,605,098			8,072,478			9,605,098			8,072,478			1,532,620			19.0	%	1,532,620			19.0	%

CIB reported income before income taxes of $27.7 million and $82.6 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to income before income taxes of $11.7 million and $72.8 million for the three-month and nine-month periods ended September 30, 2018.


•	Total expenses increased $25.5 million for the Nine-Month Period Ended September 30, 2019, compared to the corresponding period in 2018, due to higher compensation related to higher head count.


•	Total assets increased $1.5 billion for the quarter ended September 30, 2019 compared to the third quarter of 2018, primarily driven by an increase in loan balances in the global transaction banking portfolio as a result of generating business with new customers.

Other



	Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,						QTD Change					YTD Change
(dollars in thousands)	2019			2018			2019			2018			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	8,586		$	58,876		$	80,489		$	188,213		$	(50,290	)	(85.4	)%	$	(107,724	)	(57.2	)%
Total non-interest income	102,489			88,676			309,123			308,032			13,813			15.6	%	1,091			0.4	%
(Release of)/Provision for credit losses	(7,874		)	18,273			520			33,231			(26,147		)	(143.1	)%	(32,711		)	(98.4	)%
Total expenses	203,816			196,087			610,116			588,343			7,729			3.9	%	21,773			3.7	%
Loss before income taxes	(84,867		)	(66,808		)	(221,024		)	(125,329		)	(18,059		)	(27.0	)%	(95,695		)	(76.4	)%
Intersegment (expense)/revenue	—			(92		)	—			425			92			(100.0	)%	(425		)	(100.0	)%
Total assets	40,133,105			35,612,786			40,133,105			35,612,786			4,520,319			12.7	%	4,520,319			12.7	%

The Other category reported losses before income taxes of $84.9 million and $221.0 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to losses before income taxes of $66.8 million and $125.3 million for the three-month and nine-month periods ended September 30, 2018. Factors contributing to these changes were:


•	Net interest income decreased $50.3 million and $107.7 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018, due to higher interest rates.


•	The provision for credit losses decreased $26.1 million and $32.7 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018, due to the release of reserves related to the sale of loan portfolios at BSPR, and loan portfolios that were in run off.

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

The Chief Operating Decision Maker ("CODM") manages SC on a historical basis by reviewing the results of SC prior to the first quarter 2014 change in control and consolidation of SC (the "Change in Control") basis. The line of business results table discloses SC's operating information on the same basis that it is reviewed by the CODM.



	Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,				QTD Change					YTD Change
(dollars in thousands)	2019		2018		2019		2018		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)		Percentage
Net interest income	$	1,002,661	$	998,211	$	2,978,709	$	2,975,396	$	4,450		0.4	%	$	3,313	0.1	%
Total non-interest income	734,149		613,882		2,123,441		1,713,311		120,267			19.6	%	410,130		23.9	%
Provision for credit losses	566,849		597,914		1,548,404		1,514,799		(31,065		)	(5.2	)%	33,605		2.2	%
Total expenses	855,267		717,356		2,421,754		2,125,272		137,911			19.2	%	296,482		14.0	%
Income before income taxes	314,694		296,823		1,131,992		1,048,636		17,871			6.0	%	83,356		7.9	%
Intersegment revenue	—		—		—		—		—			0.0%		—		0.0%
Total assets	47,279,015		42,806,955		47,279,015		42,806,955		4,472,060			10.4	%	4,472,060		10.4	%

SC reported income before income taxes of $314.7 million and $1.1 billion for the three-month and nine-month periods ended September 30, 2019, respectively, compared to income before income taxes of $296.8 million and $1.0 billion, respectively, for the three-month and nine-month periods ended September 30, 2018. Contributing to these changes were:


•	Total non-interest income increased $120.3 million and $410.1 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018, due to increasing operating lease income from the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.


•	Total expenses increased $137.9 million and $296.5 million for the three-month and nine-month periods ended September 30, 2019, respectively, compared to the corresponding periods in 2018, due to increasing lease expense from the continued growth in the operating lease vehicle portfolio resulting from the Chrysler Agreement.


•	Total assets increased $4.5 billion for the quarter ended September 30, 2019 compared to the corresponding period in 2018, due to continued growth in RICs and operating lease receivables. This growth was being driven by increased originations.

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:



	September 30, 2019				December 31, 2018				September 30, 2018
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Commercial LHFI:
CRE	$	8,725,162	9.6	%	$	8,704,481	10.0	%	$	9,061,535	10.7	%
C&I	16,087,269		17.8	%	15,738,158		18.1	%	15,118,892		17.8	%
Multifamily	8,465,070		9.4	%	8,309,115		9.5	%	8,201,875		9.6	%
Other commercial	7,441,572		8.2	%	7,630,004		8.8	%	7,406,216		8.7	%
Total commercial loans ⁽¹⁾	40,719,073		45.0	%	40,381,758		46.4	%	39,788,518		46.8	%

Consumer loans secured by real estate:
Residential mortgages	8,917,656		9.9	%	9,884,462		11.4	%	9,737,222		11.3	%
Home equity loans and lines of credit	4,919,207		5.4	%	5,465,670		6.3	%	5,572,127		6.6	%
Total consumer loans secured by real estate	13,836,863		15.3	%	15,350,132		17.7	%	15,309,349		17.9	%

Consumer loans not secured by real estate:
RICs and auto loans - originated	33,832,932		37.4	%	28,532,085		32.8	%	27,191,166		32.0	%
RICs and auto loans - purchased	363,224		0.4	%	803,135		0.9	%	1,004,397		1.2	%
Total RICs and auto loans	34,196,156		37.8	%	29,335,220		33.7	%	28,195,563		33.2	%

Personal unsecured loans	1,325,875		1.5	%	1,531,708		1.8	%	1,288,309		1.5	%
Other consumer	342,296		0.4	%	447,050		0.4	%	480,174		0.6	%

Total consumer loans	49,701,190		55.0	%	46,664,110		53.6	%	45,273,395		53.2	%
Total LHFI	$	90,420,263	100.0	%	$	87,045,868	100.0	%	$	85,061,913	100.0	%

Total LHFI with:
Fixed	$	59,122,407	65.4	%	$	56,696,491	65.1	%	$	54,974,229	64.6	%
Variable	31,297,856		34.6	%	30,349,377		34.9	%	30,087,684		35.4	%
Total LHFI	$	90,420,263	100.0	%	$	87,045,868	100.0	%	$	85,061,913	100.0	%

(1) As of September 30, 2019, the Company had $412.0 million of commercial loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans increased approximately $337.3 million, or 0.8%, from December 31, 2018 to September 30, 2019. This increase was comprised of an increase in C&I loans of $349.1 million, an increase in multifamily loans of $156.0 million, and an increase in CRE loans of $20.7 million, partially offset by a decrease in other commercial loans of $188.4 million.

Commercial loans increased approximately $930.6 million, or 2.3%, from September 30, 2018 to September 30, 2019. This increase was comprised of an increase in C&I loans of $968.4 million, an increase in multifamily loans of $263.2 million and an increase in other commercial loans of $35.4 million, partially offset by a decrease in CRE loans of $336.4 million.



	At September 30, 2019, Maturing
(in thousands)	In One Year Or Less		One to Five Years		After Five Years		Total ⁽¹⁾
CRE loans	$	1,842,159	$	5,264,949	$	1,618,054	$	8,725,162
C&I and other commercial	11,334,904		11,058,085		1,981,035		24,374,024
Multifamily loans	639,501		5,661,658		2,163,911		8,465,070
Total	$	13,816,564	$	21,984,692	$	5,763,000	$	41,564,256
Loans with:
Fixed rates	$	4,234,711	$	9,010,387	$	3,128,117	$	16,373,215
Variable rates	9,581,853		12,974,305		2,634,883		25,191,041
Total	$	13,816,564	$	21,984,692	$	5,763,000	$	41,564,256

(1) Includes LHFS.

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

Consumer Loans Secured By Real Estate

Consumer loans secured by real estate decreased $1.5 billion, or 9.9%, from December 31, 2018 to September 30, 2019. This decrease was comprised of a decrease in the residential mortgage portfolio of $966.8 million, primarily due to a transfer to held for sale and the sale of residential mortgage loans to the Federal National Mortgage Association (“FNMA”) in 2019, and a decrease in the home equity loans and lines of credit portfolio of $546.5 million.

Consumer loans secured by real estate decreased $1.5 billion, or 9.6%, from September 30, 2018 to September 30, 2019. This decrease was comprised of a decrease in the residential mortgage portfolio of $819.6 million, partially due to the sale of mortgage loans to FNMA, and a decrease in the home equity loans and lines of credit portfolio of $652.9 million.

Consumer Loans Not Secured By Real Estate

RICs and auto loans

RICs and auto loans increased $4.9 billion, or 16.6%, from December 31, 2018 to September 30, 2019. The increase in the RIC and auto loan portfolio was primarily due to an increase of $5.3 billion in originations, net of securitizations, which was partially offset by a $439.9 million decrease in the RIC and auto loan portfolio-purchased. This decrease in the RIC and auto loan portfolio-purchased was due to run-off of the portfolio from normal paydown and chargeoff activity. RICs are collateralized by vehicle titles, and the lender has the right to repossess the vehicle in the event the consumer defaults on the payment terms of the contract. Most of the Company's RICs held for investment ("HFI") are pledged against warehouse lines or securitization bonds. Refer to further discussion of these in Note 10 to the Condensed Consolidated Financial Statements.

RICs increased $6.0 billion, or 21.3%, from September 30, 2018 to September 30, 2019. The increase in the RIC and auto loan portfolio was primarily due to a $6.6 billion increase in new originations, which was partially offset by a decrease in the RICs and auto loan portfolio-purchased of $641.2 million. The decrease in the RIC and auto loan portfolio-purchased was due to run-off of the portfolio from normal paydown and chargeoff activity.

As of September 30, 2019, 72.2% (excluding purchase accounting) of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a Fair Isaac Corporation ("FICO") score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate downpayments. While underwriting guidelines were designed to establish that the customer would be a reasonable credit risk, nonprime loans will nonetheless experience higher default rates than a portfolio of obligations of prime customers. Additionally, higher unemployment rates, higher gasoline prices, unstable real estate values, re-sets of adjustable rate mortgages to higher interest rates, the general availability of consumer credit, and other factors that impact consumer confidence or disposable income could lead to an increase in delinquencies, defaults, and repossessions, as well as decrease consumer demand for used automobiles and other consumer products, weaken collateral values and increase losses in the event of default. Because SC's historical focus for such credit has been predominantly on nonprime consumers, the actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn.

The Company's automated originations process for these credits reflects a disciplined approach to credit risk management to mitigate the risks of nonprime customers. The Company's robust historical data on both organically originated and acquired loans provides it with the ability to perform advanced loss forecasting. Each applicant is automatically assigned a proprietary custom score using information such as FICO scores, debt-to-income ("DTI") ratios, loan-to-value ("LTV") ratios, and over 30 other predictive factors, placing the applicant in one of 100 pricing tiers. The pricing in each tier is continuously monitored and adjusted to reflect market and risk trends. In addition to the Company's automated process, it maintains a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers.

At September 30, 2019, a typical RIC was originated with an average annual percentage rate of 16.5% and was purchased from the dealer at a discount of 0.4%. All of the Company's RICs and auto loans are fixed-rate loans.

The Company records an ALLL to cover its estimate of inherent losses on its RICs incurred as of the balance sheet date.

Personal unsecured and other consumer loans

Personal unsecured and other consumer loans decreased from December 31, 2018 to September 30, 2019 by $310.6 million, and personal unsecured and other consumer loans decreased from September 30, 2018 to September 30, 2019 by $100.3 million.

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

As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. 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 period financial statements. Management is currently evaluating alternatives for the Bluestem portfolio. As of September 30, 2019, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.

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 further implement these 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 created. To ensure credit quality, loans are originated 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 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 "ALLL" section of this MD&A.

Commercial Loans

Commercial loans principally represent commercial real estate loans (including multifamily loans), loans to C&I 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. C&I loans are generally secured by the borrower’s assets and by guarantees. CRE 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.

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 Federal Home Loan Mortgage Corporation (the “FHLMC") or the FNMA. Credit risk is further reduced, since a portion of the Company’s mortgage loan production is sold to investors in the secondary market without recourse.

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

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 ("DPD"). 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.

NON-PERFORMING ASSETS

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



	Period Ended						Change
(dollars in thousands)	September 30, 2019			December 31, 2018			Dollar			Percentage
Non-accrual loans:
Commercial:
CRE	$	101,042		$	88,500		$	12,542		14.2	%
C&I loans	160,835			189,827			(28,992		)	(15.3	)%
Multifamily	3,298			13,530			(10,232		)	(75.6	)%
Other commercial	29,814			72,841			(43,027		)	(59.1	)%
Total commercial loans	294,989			364,698			(69,709		)	(19.1	)%

Consumer loans secured by real estate:
Residential mortgages	185,891			216,815			(30,924		)	(14.3	)%
Home equity loans and lines of credit	110,092			115,813			(5,721		)	(4.9	)%
Consumer loans not secured by real estate:
RICs and auto loans - originated	1,405,829			1,455,406			(49,577		)	(3.4	)%
RICs - purchased	37,615			89,916			(52,301		)	(58.2	)%
Total RICs and auto loans	1,443,444			1,545,322			(101,878		)	(6.6	)%

Personal unsecured loans	3,470			3,602			(132		)	(3.7	)%
Other consumer	9,686			9,187			499			5.4	%
Total consumer loans	1,752,583			1,890,739			(138,156		)	(7.3	)%
Total non-accrual loans	2,047,572			2,255,437			(207,865		)	(9.2	)%

Other real estate owned	80,760			107,868			(27,108		)	(25.1	)%
Repossessed vehicles	223,831			224,046			(215		)	(0.1	)%
Other repossessed assets	2,325			1,844			481			26.1	%
Total other real estate owned ("OREO") and other repossessed assets	306,916			333,758			(26,842		)	(8.0	)%
Total non-performing assets	$	2,354,488		$	2,589,195		$	(234,707	)	(9.1	)%

Past due 90 days or more as to interest or principal and accruing interest	$	87,520		$	98,979		$	(11,459	)	(11.6)%
Annualized net loan charge-offs to average loans ⁽¹⁾	2.6		%	2.9		%	n/a			n/a
Non-performing assets as a percentage of total assets	1.6		%	1.9		%	n/a			n/a
NPLs as a percentage of total loans	2.2		%	2.6		%	n/a			n/a
ALLL as a percentage of total NPLs	182.5		%	172.8		%	n/a			n/a

(1) Annualized net loan charge-offs are based on year-to-date charge-offs.

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

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 for more than 30 days but less than 90 days. Potential problem commercial loans totaled approximately $136.9 million and $98.8 million at September 30, 2019 and December 31, 2018, respectively. This increase was primarily due to loans to one large borrower within the C&I portfolio.

Potential problem consumer loans amounted to $4.3 billion and $4.7 billion at September 30, 2019 and December 31, 2018, respectively. This decrease is attributable in large part due to decreased delinquency in RICs. Management has included these loans in its evaluation of its ACL and reserved for them during the respective periods.

Non-performing assets decreased to $2.4 billion, or 1.6% of total assets, at September 30, 2019, compared to $2.6 billion, or 1.9% of total assets, at December 31, 2018, primarily attributable to a decrease in NPLs in consumer RICs.

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 DPD for interest, principal or maturity, or earlier if it is determined that the collection of principal or interest on the loan is in doubt. RICs are classified as non-performing (or non-accrual) when they are greater than 60 DPD as to contractual principal or interest payments. 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 DPD, the loan automatically returns to accrual status.

Commercial

Commercial NPLs decreased $69.7 million from December 31, 2018 to September 30, 2019. Commercial NPLs accounted for 0.7% and 0.9% of commercial LHFI at September 30, 2019 and December 31, 2018, respectively. The decrease in commercial NPLs was comprised of a $29.0 million decrease in C&I NPLs, a $10.2 million decrease in the Multifamily portfolio, and a $43.0 million decrease in the Other commercial portfolio, offset by a $12.5 million increase in the CRE portfolio.

Consumer Loans Not Secured by Real Estate

RICs and amortizing personal loans are classified as non-performing when they are more than 60 DPD (i.e., 61 or more DPD) 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 account becomes past due more than 60 days. For loans in 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 the loans should also be placed on a cost recovery basis. For loans on non-accrual status, the accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on a cost recovery basis, the Company returns to accrual status when a sustained period of repayment performance has been achieved. NPLs in the RIC and auto loan portfolio decreased by $101.9 million from December 31, 2018 to September 30, 2019. At September 30, 2019, non-performing RICs and auto loans accounted for 4.2% of total RICs and auto LHFI, compared to 5.3% of total RICs and auto loans at December 31, 2018.

NPLs in the personal unsecured and other consumer loan portfolio increased by $0.4 million from December 31, 2018 to September 30, 2019. At September 30, 2019 and December 31, 2018, non-performing personal unsecured and other consumer loans accounted for 0.8% and 0.7% of total unsecured and other consumer loans, respectively.

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

Consumer Loans Secured by Real Estate

The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of September 30, 2019 and December 31, 2018, respectively:



	September 30, 2019						December 31, 2018
(dollars in thousands)	Residential mortgages			Home equity loans and lines of credit			Residential mortgages			Home equity loans and lines of credit
NPLs	$	185,891		$	110,092		$	216,815		$	115,813
Total LHFI	8,917,656			4,919,207			9,884,462			5,465,670
NPLs as a percentage of total LHFI	2.1		%	2.2		%	2.2		%	2.1		%
NPLs in foreclosure status	42.3		%	60.6		%	43.3		%	56.7		%

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.

Delinquencies

The Company generally considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date.

At September 30, 2019 and December 31, 2018, the Company's delinquencies consisted of the following:



	September 30, 2019					December 31, 2018
(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	$458,758	$4,355,704	$207,439	$300,680	$5,322,581	$495,854	$4,760,361	$226,181	$232,264	$5,714,660
Total loans⁽¹⁾	$14,471,815	$34,196,156	$2,668,845	$41,564,256	$92,901,072	$15,564,653	$29,335,220	$3,047,515	$40,381,758	$88,329,146
Delinquencies as a % of loans	3.2%	12.7%	7.8%	0.7%	5.7%	3.2%	16.2%	7.4%	0.6%	6.5%


(1)	Includes LHFS.

Overall, total delinquencies decreased by $392.1 million, or 6.9%, from December 31, 2018 to September 30, 2019, primarily driven by RICs and auto loans, which decreased $404.7 million. RIC delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year, and economic factors. Historically, RIC and auto loan delinquencies have been highest in the period from November through January due to consumers’ holiday spending.

TDRs

TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of 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.

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

The following table summarizes TDRs at the dates indicated:



	As of September 30, 2019
(in thousands)	Commercial			%		Consumer Loans Secured by Real Estate			%		RICs and Auto Loans			%		Other Consumer			%		Total TDRs
Performing	$	57,776		40.2	%	$	256,571		73.7	%	$	3,660,925		87.9	%	$	82,821		69.5	%	$	4,058,093
Non-performing	86,084			59.8	%	91,615			26.3	%	505,196			12.1	%	36,395			30.5	%	719,290
Total	$	143,860		100.0	%	$	348,186		100.0	%	$	4,166,121		100.0	%	$	119,216		100.0	%	$	4,777,383

% of loan portfolio	0.4		%	n/a		2.5		%	n/a		12.2		%	n/a		7.1		%	n/a		5.3		%
(1) Excludes LHFS.

	As of December 31, 2018
(in thousands)	Commercial			%		Consumer Loans Secured by Real Estate			%		RICs and Auto Loans			%		Other Consumer			%		Total TDRs
Performing	$	78,744		42.4	%	$	262,449		72.3	%	$	4,587,081		87.3	%	$	85,950		70.6	%	$	5,014,224
Non-performing	107,024			57.6	%	100,543			27.7	%	664,688			12.7	%	35,873			29.4	%	908,128
Total	$	185,768		100.0	%	$	362,992		100.0	%	$	5,251,769		100.0	%	$	121,823		100.0	%	$	5,922,352

% of loan portfolio	0.5		%	n/a		2.3		%	n/a		17.9		%	n/a		6.2		%	n/a		6.7		%

(1) Excludes LHFS.

The following table provides a summary of TDR activity:



	Nine-Month Period Ended September 30, 2019						Nine-Month Period Ended September 30, 2018
(in thousands)	RICs and Auto Loans			All Other Loans⁽¹⁾			RICs and Auto Loans			All Other Loans⁽¹⁾
TDRs, beginning of period	$	5,251,769		$	670,584		$	6,037,695		$	836,204
New TDRs⁽¹⁾	912,394			66,106			866,453			96,032
Charged-Off TDRs	(1,093,934		)	(8,657		)	(781,356		)	(11,999		)
Sold TDRs	(1,363		)	(5,991		)	—			(5,669		)
Payments on TDRs	(902,745		)	(110,780		)	(491,406		)	(158,965		)
TDRs, end of period	$	4,166,121		$	611,262		$	5,631,386		$	755,603


(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.

At the time a deferral is granted, all delinquent amounts may be deferred or paid, which may result in the classification of the loan as current and therefore not considered delinquent. However, there are instances when a deferral is granted but the loan is not brought completely current, such as when the account's DPD is greater than the deferment period granted. Such accounts are aged based on the timely payment of future installments in the same manner as any other account. Historically, the majority of deferrals are approved for borrowers who are either 31-60 or 61-90 days delinquent, and these borrowers are typically reported as current after deferral. A customer is limited to one deferral each six months, and if a customer receives two or more deferrals over the life of the loan, the loan will advance to a TDR designation.

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.

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

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:



	September 30, 2019				December 31, 2018
(dollars in thousands)	Amount		% of Loans to Total LHFI		Amount		% of Loans to Total LHFI
Allocated allowance:
Commercial loans	$	422,446	45.0	%	$	441,083	46.4	%
Consumer loans	3,266,666		55.0	%	3,409,024		53.6	%
Unallocated allowance	46,748		n/a		47,023		n/a
Total ALLL	3,735,860		100.0	%	3,897,130		100.0	%
Reserve for unfunded lending commitments	95,150				95,500
Total ACL	$	3,831,010			$	3,992,630

General

The ACL decreased by $161.6 million from December 31, 2018 to September 30, 2019. This change in the overall ACL was primarily attributable to the decreased amount of TDRs 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.

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.

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

Commercial

For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3 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 discounted cash flow (“DCF") methodology.

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

The portion of the ALLL related to the commercial portfolio was $422.4 million at September 30, 2019 (1.0% of commercial LHFI) and $441.1 million at December 31, 2018 (1.1% of commercial LHFI). The primary factor resulting in the decreased ACL allocated to the commercial portfolio was in part due to the charge-off to three large commercial borrowers.

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 lifecycles 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.

100

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

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 24.5% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 0.9% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impacts to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown.

Depository and lending institutions in the U.S. generally are expected to experience a significant volume of home equity lines of credit that will be approaching the end of their draw periods over the next several years, following the growth in home equity lending experienced during 2003 through 2007. As a result, many of these home equity lines of credit will either convert to amortizing loans or have principal due as balloon payments. The Company's home equity lines of credit generated after 2007 are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 10 years, along with amortizing repayment periods of up to 20 years. The Company currently monitors delinquency rates for amortizing and non-amortizing lines, as well as other credit quality metrics, including FICO credit scoring model scores and LTV ratios. The Company's home equity lines of credit are generally underwritten considering fully drawn and fully amortizing levels. As a result, the Company currently does not anticipate a significant deterioration in credit quality when these home equity lines of credit begin to amortize.

For RICs, including RICs acquired from a third-party lender that are considered to have no credit deterioration at acquisition, and personal unsecured loans at SC, the Company maintains an ALLL for the Company's HFI 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.

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

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, seasoning, 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 September 30, 2019 and December 31, 2018, respectively. The allowance as a percentage of HFI consumer loans was 6.6% at September 30, 2019 and 7.3% at December 31, 2018. The decrease in the allowance for consumer loans was primarily attributable to lower TDR volume and rate improvement in SC's RIC and auto loan portfolio.

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 $46.7 million and $47.0 million at September 30, 2019 and December 31, 2018, respectively.

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 $0.4 million from $95.5 million at December 31, 2018 to $95.2 million at September 30, 2019. The decrease of the unfunded reserve is primarily related to the Company strategically reducing its exposure to certain business relationships and industries. 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 and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s at the date of issuance. The Company’s 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.

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

Total investment securities AFS increased $2.1 billion from December 31, 2018 to September 30, 2019. During the nine-month period ended September 30, 2019, the composition of the Company's investment portfolio changed due to an increase in U.S. Treasury securities, partially offset by a decrease in MBS. U.S. Treasuries increased by $3.3 billion primarily due to investment purchases. MBS decreased by $854.7 million primarily due to sales, maturities and principal paydowns, partially offset by a decrease in unrealized losses. 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 $3.6 billion at September 30, 2019. The Company had 90 investment securities classified as HTM as of September 30, 2019.

Total gross unrealized losses on investment securities AFS decreased by $266.6 million during the nine-month period ended September 30, 2019. This decrease was primarily related to a decrease in unrealized losses of $256.2 million on MBS, primarily due to a decrease in interest rates.

The average life of the AFS investment portfolio (excluding certain ABS) at September 30, 2019 was approximately 3.31 years. The average effective duration of the investment portfolio (excluding certain ABS) at September 30, 2019 was approximately 1.91 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)	September 30, 2019		December 31, 2018
Investment securities AFS:
U.S. Treasury securities and government agencies	$	8,662,680	$	5,485,392
FNMA and FHLMC securities	4,777,456		5,550,628
State and municipal securities	11		16
Other securities ⁽¹⁾	291,077		596,951
Total investment securities AFS	13,731,224		11,632,987
Investment securities HTM:
U.S. government agencies	3,604,424		2,750,680
Total investment securities HTM⁽²⁾	3,604,424		2,750,680
Other investments	967,882		805,357
Total investment portfolio	$	18,303,530	$	15,189,024


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


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

The following table presents the securities of single issuers (other than obligations of the United States and its political subdivisions, agencies, and corporations) having an aggregate book value in excess of 10% of the Company's stockholder's equity that were held by the Company at September 30, 2019:



	September 30, 2019
(in thousands)	Amortized Cost		Fair Value
FNMA	$	2,654,016	$	2,655,795
GNMA ⁽¹⁾	7,188,358		7,240,725
Government - Treasuries	5,061,127		5,063,546
Total	$	14,903,501	$	14,960,066


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

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

GOODWILL

The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At September 30, 2019, goodwill totaled $4.4 billion and represented 3.0% of total assets and 18.0% of total stockholder's equity. The following table shows goodwill by reporting units at September 30, 2019:



(in thousands)	Consumer and Business Banking		C&I⁽¹⁾			CRE and Vehicle Finance		CIB		SC		Total
Goodwill at December 31, 2018	$	1,880,304	$	1,412,995		$	—	$	131,130	$	1,019,960	$	4,444,389
Re-allocations during the period	—		(1,095,071		)	1,095,071		—		—		—
Goodwill at September 30, 2019	$	1,880,304	$	317,924		$	1,095,071	$	131,130	$	1,019,960	$	4,444,389

(1) Formerly Commercial Banking

The Company made a change in its reportable segments beginning January 1, 2019 and, accordingly, has re-allocated goodwill to the related reporting units based on the estimated fair value of each reporting unit. Upon re-allocation, management tested the new reporting units for impairment, using the same methodology and assumptions as used in the October 1, 2018 goodwill impairment test, and noted that there was no impairment. See Note 18 to the Condensed Consolidated Financial Statements for additional details on the change in reportable segments.

The Company conducted its annual goodwill impairment tests as of October 1, 2018 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. Except for the related reallocation and interim impairment test of C&I and CRE & VF discussed above, at the completion of the 2019 third quarter review, the Company did not identify any indicators which resulted in the Company's conclusion that an interim impairment test would be required to be completed.

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.

For a discussion of the status of litigation with which the Company is involved with the Internal Revenue Service (“IRS”), please refer to Note 13 to the Condensed Consolidated Financial Statements.

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 is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At September 30, 2019 and December 31, 2018, based on the Bank’s capital calculations, the Bank was considered well-capitalized under the applicable capital framework. In addition, the Company's capital levels as of September 30, 2019 and December 31, 2018, 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 also be required if the Bank were notified by the OCC that it is a problem institution or in troubled condition.

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

Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the nine-month periods end September 30, 2019 and 2018, the Company paid cash dividends of $150.0 million, and $335.0 million, respectively, to its common stock shareholder and cash dividends to preferred shareholders of zero and $10.95 million, respectively. On August 15, 2018, SHUSA redeemed all of its outstanding preferred stock.

The following schedule summarizes the actual capital balances of SHUSA and the Bank at September 30, 2019:



	SHUSA

	September 30, 2019		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽¹⁾
CET1 capital ratio	15.01	%	6.50	%	4.50	%
Tier 1 capital ratio	16.19	%	8.00	%	6.00	%
Total capital ratio	17.66	%	10.00	%	8.00	%
Leverage ratio	13.56	%	5.00	%	4.00	%


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



	BANK

	September 30, 2019		Well-capitalized Requirement⁽²⁾		Minimum Requirement⁽²⁾
CET1 capital ratio	16.01	%	6.50	%	4.50	%
Tier 1 capital ratio	16.01	%	8.00	%	6.00	%
Total capital ratio	16.99	%	10.00	%	8.00	%
Leverage ratio	13.38	%	5.00	%	4.00	%


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

In February 2019, the Federal Reserve announced that the Company, as well as other less complex firms, would receive a one-year extension of the requirement to submit its results for the supervisory capital stress tests until April 5, 2020. The Federal Reserve also announced that, for the period beginning on July 1, 2019 through June 30, 2020, the Company would be allowed to make capital distributions up to an amount that would have allowed the company to remain well-capitalized under the minimum capital requirements for CCAR 2018.

In June 2019 the Company announced its planned capital actions for the period from July 1, 2019 through June 30, 2020. These planned capital actions are: (1) common stock dividends of $125 million per quarter from SHUSA to Santander, (2) common stock dividends paid by SC, and (3) an authorization to repurchase up to $1.1 billion of SC’s outstanding common stock. Refer to the Liquidity and Capital Resources section below for discussion of the capital actions taken, including SC’s share repurchase plans and activities.

Refer to the Liquidity and Capital Resources section below for discussion of the capital actions taken, including SC's share repurchase plans and activities.

LIQUIDITY AND CAPITAL RESOURCES

Overall

The Company continues to maintain strong liquidity. 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.

105

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

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 and require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the "Economic and Business Environment" section of this MD&A.

Sources of Liquidity

Company and Bank

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

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 through securitizations in the ABS market and flow agreements. SC seeks to issue debt that appropriately matches the cash flows of the assets that it originates. SC has more than $7.3 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the third quarter of 2019, SC completed on-balance sheet funding transactions totaling approximately $4.6 billion, including:


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


•	securitizations on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform, for approximately $1.2 billion;


•	a lease securitization for approximately $1.2 billion; and


•	a private amortizing lease facility for approximately $1.1 billion.

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

IHC

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 October 16, 2018, the revolving loan agreement was increased to $895.0 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 September 30, 2019, 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/or brokered deposits, and liquid investment securities.

Institutional borrowings

The Company regularly projects its funding needs under various stress scenarios, and maintains contingency plans consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash, unencumbered liquid assets, and capacity to borrow at the FHLB and the FRB’s discount window.

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

Available Liquidity

As of September 30, 2019, the Bank had approximately $20.7 billion in committed liquidity from the FHLB and the FRB. Of this amount, $13.2 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At September 30, 2019 and December 31, 2018, liquid assets (cash and cash equivalents and LHFS) and securities AFS exclusive of securities pledged as collateral) totaled approximately $14.9 billion and $15.9 billion, respectively. These amounts represented 24.7% and 25.8% of total deposits at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, the Bank, BSI and BSPR had $1.1 billion, $1.4 billion, and $677.6 million, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.

BSPR has $688.2 million in committed liquidity from the FHLB, all of which was unused as of September 30, 2019, as well as $2.2 billion in liquid assets aside from cash unused as of September 30, 2019.

Cash, cash equivalents, and restricted cash

As of January 1, 2018, the classification of restricted cash within the Company's Statement of Cash Flows (“SCF") has changed. Refer to Note 1 to the Condensed Consolidated Financial Statements for additional details.



	Nine-Month Period Ended September 30,
(in thousands)	2019			2018
Net cash flows from operating activities	$	4,636,896		$	5,640,345
Net cash flows from investing activities	(12,979,078		)	(8,646,345		)
Net cash flows from financing activities	9,022,335			2,003,439

Cash flows from operating activities

Net cash flow from operating activities was $4.6 billion for the nine-month period ended September 30, 2019, which was primarily comprised of net income of $916.3 million, $1.1 billion in proceeds from sales of LHFS, $1.7 billion in depreciation, amortization and accretion, and $1.7 billion of provision for credit losses, partially offset by $1.1 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $5.6 billion for the nine-month period ended September 30, 2018, which was primarily comprised of net income of $859.3 million, $3.9 billion in proceeds from sales of LHFS, $1.4 billion in depreciation, amortization and accretion, and $1.6 billion of provision for credit losses, partially offset by $2.7 billion of originations of LHFS, net of repayments.

Cash flows from investing activities

For the nine-month period ended September 30, 2019, net cash flow from investing activities was $(13.0) billion, primarily due to $7.1 billion in normal loan activity, $6.0 billion of purchases of investment securities AFS, $6.8 billion in operating lease purchases and originations, and $1.0 billion of purchases of HTM investment securities, partially offset by $4.3 billion of AFS investment securities sales, maturities and prepayments, $1.4 billion in proceeds from sales of LHFI, and $2.7 billion in proceeds from sales and terminations of operating leases.

For the nine-month period ended September 30, 2018, net cash flow from investing activities was $(8.6) billion, primarily due to $6.0 billion in normal loan activity, $1.9 billion of purchases of investment securities AFS, and $7.7 billion in operating lease purchases and originations, partially offset by $3.0 billion of AFS investment securities sales, maturities and prepayments, $935.5 million in proceeds from sales of LHFI, and $3.0 billion in proceeds from sales and terminations of operating leases.

Cash flows from financing activities

For the nine-month period ended September 30, 2019, net cash flow from financing activities was $9.0 billion, which was primarily due to an increase in net borrowing activity of $4.2 billion and a $5.2 billion increase in deposits, partially offset by $150.0 million in dividends paid on common stock and $245.7 million in stock repurchase attributable to NCI.

Net cash flow from financing activities for the nine-month period ended September 30, 2018 was $2.0 billion, which was primarily due to an increase in net borrowing activity of $2.5 billion, partially offset by $335.0 million in dividends paid on common stock and $200.0 million in redemption of preferred stock.

See the SCF for further details on the Company's sources and uses of cash.

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

Credit Facilities

Third-Party Revolving Credit Facilities

Warehouse Lines

SC uses warehouse facilities to fund its originations. Each facility specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. SC's warehouse facilities generally are backed by auto RICs or auto leases. These facilities generally have one- or two-year commitments, staggered maturities and floating interest rates. SC maintains daily and long-term funding forecasts for originations, acquisitions, and other large outflows such as tax payments to balance the desire to minimize funding costs with its liquidity needs.

SC's warehouse facilities 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 facilities, 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 impacted agreement to be immediately due and payable, enforce their interests against collateral pledged under the agreement, restrict SC's ability to obtain additional borrowings under the agreement, and/or remove SC as servicer. SC has never had a warehouse facility terminated due to failure to comply with any ratio or a failure to meet any covenant. A default under one of these agreements can be enforced only with respect to the impacted warehouse facility.

SC has one credit facility with seven banks providing an aggregate commitment of $4.4 billion for the exclusive use of providing short-term liquidity needs to support Chrysler Capital lease financing. As of September 30, 2019 and December 31, 2018, there were outstanding balances of approximately $1.7 billion and $2.2 billion, respectively, on this facility in aggregate. The facility requires reduced advance rates in the event of delinquency, credit loss, or residual loss ratios, as well as other metrics exceeding specified thresholds.

SC has seven credit facilities with ten banks providing an aggregate commitment of $6.2 billion for the exclusive use of providing short-term liquidity needs to support Core and Chrysler Capital loan financing. As of September 30, 2019 and December 31, 2018, there were outstanding balances of approximately $3.3 billion and $2.0 billion, respectively, on these facilities in aggregate. These facilities reduced advance rates in the event of delinquency, credit loss, as well as various other metrics exceeding specific thresholds.

Repurchase Agreements

SC also obtains financing through investment management or repurchase agreements under which it pledges retained subordinate bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 365 days. As of September 30, 2019 and December 31, 2018, there were outstanding balances of $476.1 million and $298.9 million, respectively, under these repurchase agreements.

SHUSA Lending to SC

The Company provides SC with $3.5 billion of committed revolving credit that can be drawn on an unsecured basis. The Company also provides SC with $5.3 billion of term promissory notes with maturities ranging from May 2020 to July 2024. These loans eliminate in the consolidation of SHUSA.

Secured Structured Financings

SC's secured structured financings primarily consist of both public, SEC-registered securitizations, as well as private securitizations under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and privately issues amortizing notes. SC has on-balance sheet securitizations outstanding in the market with a cumulative ABS balance of approximately $27.0 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 flow agreements.

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

Off-Balance Sheet Financing

Beginning in 2017, SC 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. Beginning in 2018, this program was replaced with a new program with SBNA, whereby SC has agreed to provide SBNA with origination support services in connection with the processing, underwriting, and purchasing of retail loans, primarily from FCA dealers, all of which are serviced by SC.

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 maturing deposits, investment activities, funds transfers, and payment of its operating expenses.

BSPR uses liquidity for funding loan commitments and satisfying deposit withdrawal requests.

At September 30, 2019, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.

Dividends, Contributions and Stock Issuances

As of September 30, 2019, the Company had 530,391,043 shares of common stock outstanding. During the three-month and nine-month periods ended September 30, 2019, the Company paid dividends of zero and $150.0 million, respectively, to its sole shareholder, Santander.

During the three-month and nine-month periods ended September 30, 2019, Santander made cash contributions of $13.0 million and $88.9 million, respectively, to the Company.

SC paid a dividend of $0.20 per share in February and May 2019, and a dividend of $0.22 per share in August 2019. Further, SC has declared a cash dividend of $0.22 per share, to be paid on November 22, 2019, to shareholders of record as of the close of business on November 12, 2019. SC has paid a total of $216.8 million in dividends through September 30, 2019, of which $64.5 million has been paid to NCI and $152.3 million has been paid to the Company, which eliminates in the consolidated results of the Company.

The following table presents information regarding the shares of SC common stock repurchased during the three-month and nine-month periods ended September 30, 2019 ($ and shares in thousands, except per share amounts):




	Three-Month Period Ended		Nine-Month Period Ended
	September 30, 2019		September 30, 2019
Total cost of shares repurchased (includes commission)	$	141,019	$	245,663
Average price per share	$	25.71	$	24.08
Number of shares repurchased	5,479,650		10,194,772

In May 2019, the Company announced an amendment to its 2018 capital plan, which authorized SC to repurchase up to $400 million of SC's outstanding common stock through June 30, 2019, which concluded with the repurchase of $86.8 million of SC common stock.

In June 2019, SC announced its planned capital actions for the third quarter of 2019 through the second quarter of 2020, which includes an authorization to repurchase up to $1.1 billion of SC’s outstanding common stock through the end of the second quarter of 2020.

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

During the nine-month period ended September 30, 2019, SHUSA's subsidiaries had the following capital activity which eliminated in consolidation:


•	The Bank declared and paid $175.0 million in dividends to SHUSA.


•	BSI declared and paid $17.5 million in dividends to SHUSA.


•	Santander BanCorp declared and paid $1.25 million in dividends to SHUSA.


•	SHUSA contributed $90.0 million to SSLLC.

During the fourth quarter of 2019, SHUSA's subsidiaries had the following capital activity which eliminates in consolidation:


•	The Bank declared a cash dividend on its common stock of $75.0 million, payable on November 15, 2019 to SHUSA.


•	SHUSA contributed $20.0 million to SSLLC.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

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 year to 3 years		Over 3 years to 5 years		Over 5 years
Payments due for contractual obligations:
FHLB advances ⁽¹⁾	$	6,865,551	$	3,850,789	$	3,014,762	$	—	$	—
Notes payable - revolving facilities	5,460,583		2,704,956		2,755,627		—		—
Notes payable - secured structured financings	26,986,272		479,536		9,493,449		11,643,536		5,369,751
Other debt obligations ^{(1) (2)}	14,470,970		3,176,165		4,611,399		4,109,254		2,574,152
CDs ⁽¹⁾	9,312,123		6,705,185		2,483,590		115,909		7,439
Non-qualified pension and post-retirement benefits	129,464		13,032		26,089		26,768		63,575
Operating leases⁽³⁾	663,533		126,149		215,126		154,540		167,718
Total contractual cash obligations	$	63,888,496	$	17,055,812	$	22,600,042	$	16,050,007	$	8,182,635
Other commitments:
Commitments to extend credit	$	30,902,239	$	6,089,834	$	4,612,666	$	7,360,161	$	12,839,578
Letters of credit	1,401,114		878,326		263,821		222,453		36,514
Total Contractual Obligations and Other Commitments	$	96,191,849	$	24,023,972	$	27,476,529	$	23,632,621	$	21,058,727


(1)	Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at September 30, 2019. 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 $57.1 billion that are due on demand by customers.

The Company is a party to financial instruments and other arrangements with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. See further discussion on these risks in Note 12 and Note 16 to the Condensed Consolidated Financial Statements.

ASSET AND LIABILITY MANAGEMENT

Interest Rate Risk

Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing

net interest income and the net interest margin. To achieve these objectives, the Treasury group works closely with each business line in the Company. The Treasury group also uses various other tools to manage interest rate risk, including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitizations/sales, and financial derivatives.

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

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month 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 September 30, 2019 and December 31, 2018:



	The following estimated percentage increase/(decrease) to net interest income would result
If interest rates changed in parallel by the amounts below	September 30, 2019		December 31, 2018
Down 100 basis points	(1.89	)%	(3.07	)%
Up 100 basis points	1.81	%	2.87	%
Up 200 basis points	3.42	%	5.58	%

Market Value of Equity ("MVE") Analysis

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

Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at September 30, 2019 and December 31, 2018.



	The following estimated percentage increase/(decrease) to MVE would result
If interest rates changed in parallel by the amounts below	September 30, 2019		December 31, 2018
Down 100 basis points	(4.91	)%	(1.55	)%
Up 100 basis points	1.15	%	(1.25	)%
Up 200 basis points	(0.28	)%	(3.49	)%

As of September 30, 2019, the Company’s profile reflected a decrease of MVE of 4.91% for downward parallel interest rate shocks of 100 basis points and an increase of 1.15% 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")).

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

In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates remaining at comparatively low levels, 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.

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 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 14 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 and Procedures

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 September 30, 2019, we did not maintain effective disclosure controls and procedures because of the material weaknesses in internal control over financial reporting described below. In light of these material weaknesses, management completed additional procedures and analysis to validate the accuracy and completeness of the reported financial results. In addition, management engaged the Audit Committee directly, in detail, to discuss the procedures and analysis performed to ensure the reliability of the Company's financial reporting. Notwithstanding these material weaknesses, based on the additional analyses and other procedures performed, management concluded that the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q 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.

This material weakness did not result in a material misstatement to the annual or interim consolidated financial statements.

We have identified the following material weakness 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 our 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 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 resulted in the revision of the Company’s Consolidated Financial Statements for the year ended December 31, 2017, as well as the unaudited Condensed Consolidated Financial Statements for the quarters ended June 30, 2018, March 31, 2018, September 30, 2017, June 30, 2017 and March 31, 2017.

In addition to the above items emanating from SC, the following material weakness was identified at the SHUSA level:

3. 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.

This material weakness did not result in a material misstatement to the annual or interim Consolidated Financial Statements.

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.

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


•	Established regular working group meetings, with appropriate oversight by management, to review and challenge complex accounting matters and 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, including the implementation of a Company-wide comprehensive risk assessment to identify the processes and financial statement areas with higher risks of misstatement.


•	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 has taken the following measures:


•	Appointed an additional independent director to the Audit Committee of the SC Board with extensive experience as a financial expert in SC's industry to provide further experience on the committee.


•	Established regular working group meetings, with appropriate oversight by management of both the Company and SC, 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.

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•	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.


•	Conducted internal training courses over Sarbanes-Oxley regulations and the Company’s internal control over financial reporting program for Company personnel that take part and assist in the execution of the program.

To address the material weaknesses in the review of SCF and footnotes (material weakness 3, 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.


•	Strengthened the review controls, reconciliations and supporting documentation related to the classification of cash flows between operating activities and investing activities in the SCF.


•	Enhanced the risk assessment process to identify higher risk data provisioning processes.


•	Implemented additional completeness and accuracy reviews at a detailed level at the statement preparation and data provider levels.

While progress has been made to remediate all of these material weaknesses, including the development and implementation of enhanced processes, procedures and controls, as of September 30, 2019, we are still in the process of testing the operating effectiveness of the new and enhanced 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. However, 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 September 30, 2019.

Changes in Internal Control over Financial Reporting

Except as discussed below, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the quarter ended September 30, 2019, SHUSA's subsidiary, SC, completed the implementation of a new Oracle Fusion Enterprise Resources Planning application suite. The new system has replaced several of our back office legacy systems such as the general ledger, fixed assets and certain reporting solutions. We have made changes to our internal controls over financial reporting during the implementation of the new system and will continue to evaluate the operating effectiveness of related controls during subsequent periods.

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.

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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 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 flow that are 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, 2018. The information presented below should be read in conjunction with the risk factors disclosed in that Form 10-K.

Uncertainty regarding LIBOR may adversely affect our business

The UK Financial Conduct Authority, which regulates LIBOR, announced in July 2017 that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after 2021. This announcement has resulted in uncertainty about the future of LIBOR and other rates used as interest rate “benchmarks,” and suggests that the continuation of LIBOR on the current basis will not be guaranteed after 2021, and that LIBOR could be discontinued or modified by 2021.

Several international working groups are focused on transition plans and alternative contract language seeking to address potential market disruption that could arise from the replacement of LIBOR with a new reference rate. For example, in the U.S., the Alternative Reference Rates Committee, a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York and comprised of private sector entities, banking regulators and other financial regulators, including the SEC, has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on observable U.S. Treasury-backed repurchase transactions. In addition, ISDA is working to develop alternative contract language applicable in the event of LIBOR’s discontinuation that could apply to derivatives entered into on ISDA documentation. Separately, the SEC issued a statement in July 2019 encouraging market participants to focus on managing the transition from LIBOR prior to 2021 to avoid business and market disruptions, including incorporating fallback language in contracts in the event LIBOR is unavailable and proactive negotiations with counterparties to existing contracts that utilize LIBOR as a reference rate.

The Company, in collaboration with its subsidiaries and affiliates, is engaged in an enterprise-wide initiative to identify, assess and monitor risks associated with the potential discontinuation or unavailability of LIBOR and the transition to use of alternative reference rates such as SOFR. As part of these efforts, the Company has established a LIBOR Transition Steering Committee that includes the Company’s Chief Accounting Officer and Treasurer and representatives of the Company’s significant subsidiaries and business lines, and risk, legal and technology functions. Among other matters, the Company is identifying assets and liabilities tied to LIBOR, the exposure of its subsidiaries to LIBOR, the degree to which fallback language currently exists in the Company’s contracts that reference LIBOR, and monitoring relevant industry developments and publications by market associations and clearing houses.

Over the last few months, we have progressed our transition efforts by developing detailed transition plans, informed by planning test trades in SOFR. We have also initiated plans to develop a communications strategy for internal and client communications, and are implementing new fallback language for prioritized product types. While we have begun the process of identifying existing contracts that extend past 2021 to determine their exposure to LIBOR, there can be no assurance that we and other market participants will be adequately prepared for an actual discontinuation of LIBOR, or of the timing of the adoption and degree of integration of alternative reference rates in financial markets relevant to us. If LIBOR ceases to exist, or if new methods of calculating LIBOR are established, interest rates on our loans, deposits, derivatives and other financial instruments tied to LIBOR, as well as revenue and expenses associated with those financial instruments, may be adversely affected, and financial markets relevant to us could be disrupted.

Even if financial instruments are transitioned to alternative reference rates successfully, the new reference rates are likely to differ from the previous reference rates, and the value and return on those instruments could be adversely impacted. We could also be subject to increased costs due to paying higher interest rates on our existing financial instruments. We could incur legal risks in the event of such changes, as renegotiation and changes to documentation for new and existing transactions may be required, especially if parties to an instrument cannot agree on how to effect the transition. We could also incur further operational risks due to the potential need to adapt information technology systems, trade reporting infrastructure, and operational processes and controls, including models and hedging strategies.

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In addition, it is possible that LIBOR quotes will become unavailable prior to 2021. This could result, for example, if a sufficient number of banks decline to make submissions to the LIBOR administrator. In that scenario, risks associated with the transition away from LIBOR would be accelerated for us and the rest of the financial industry.

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	)	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 August 12, 2019) (Commission File Number 001-16581)

(3.7	)	Bylaws of Santander Holdings USA, Inc. as amended on May 23, 2019 (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed May 23, 2019) (Commission File Number 001-16581)

(4.1	)	Santander Holdings USA, Inc. has certain debt obligations outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of Santander Holdings USA, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Quarterly Report on Form 10-Q. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request.

(10.1	)	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 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)

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(101.INS)		XBRL Instance Document (Filed herewith)

(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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Table of Contents

SIGNATURES

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



		SANTANDER HOLDINGS USA, INC. (Registrant)

Date:	November 12, 2019	/s/ Juan Carlos Alvarez de Soto
		Juan Carlos Alvarez de Soto
		Chief Financial Officer and Senior Executive Vice President


Date:	November 12, 2019	/s/ David L. Cornish
		David L. Cornish
		Chief Accounting Officer, Corporate Controller and Executive Vice President

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