UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTIONAnnual Report Pursuant to Section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20172019
OR
o TRANSITION REPORT PURSUANT TO SECTIONTransition Report Pursuant to Section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the transition period from                     to                     .
Commission File Number: 001-16581
SANTANDER HOLDINGS USA, INC.
 
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
 
23-2453088
(I.R.S. Employer
Identification No.)
   
75 State Street, Boston, Massachusetts
(Address of principal executive offices)
 
02109
(Zip Code)
(617) 346-7200
Registrant’s telephone number including area code (617) 346-7200
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolsName of each exchange on which registered
Not ApplicableNot ApplicableNot Applicable
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ.   No o.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  
Yes o.   No þ.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ. No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)submit). Yes þ. No o.



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
Emerging growth company o
   
Non-accelerated filer þ
 (Do not check if smaller reporting company)
Smaller reporting company o
  
Emerging growth company
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o. No þ.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the numberNumber of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

ClassOutstanding at February 28, 2018
Common Stock (no par value)Outstanding at February 29, 2020: 530,391,043 shares



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INDEX

  
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FORWARD-LOOKING STATEMENTS
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

This Annual Report on Form 10-K of Santander Holdings USA, Inc. (“SHUSA” or the “Company”)SHUSA 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, actions and/or policies of the Board of Governors of the Federal Reserve, System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the "FDIC"),FDIC, the Office of the Comptroller of the Currency (the “OCC”)OCC and the Consumer Financial Protection Bureau (the “CFPB”),CFPB, and other changes in monetary and fiscal policies and regulations, including policies that affect market interest rate policies of the Federal Reserve,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"),GAAP, the failure to adhere to which could subject SHUSA and/or its subsidiaries to formal or informal regulatory compliance and enforcement actions;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, including effects from the pending discontinuation of LIBOR as an interest rate benchmark, 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;
the pursuit of protectionist trade or other related policies, including tariffs by the U.S., its global trading partners, and/or other countries, and/or trade disputes generally;
the ability of certain European member countries to continue to service their debt and the risk that a weakened European economy could negatively affect U.S.-based financial institutions, counterparties with which SHUSA does business, as well as the stability of global financial markets;
inflation, interest rate, marketmarkets, including economic instability and monetary fluctuations, which may, among other things, reduce net interest margins and impact funding sourcesrecessionary conditions in Europe and the ability to originate and distribute financial products ineventual exit of the primary and secondary markets;
regulatory uncertainties and changes faced by financial institutions in the U.S. and globally arisingUnited Kingdom from the U.S. presidential administration and Congress and the potential impact those uncertainties and changes could have on SHUSA's business, results of operations, financial condition or strategy;European Union;
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 subsidiaries' ability to continue to receivepay dividends from its subsidiaries or other investments;to it;
changes in credit ratings assigned to SHUSA or its subsidiaries;
the ability to manage risks inherent in our businesses, including through effective use of systems and controls, insurance, derivatives and capital management;
SHUSA’s ability to manage credit risk that may increase to the extent our loans are concentrated by loan type, industry segment, borrower type or location of the borrower or collateral;
SHUSA’s ability to timely develop competitive new products and services in a changing environment that are responsive to the needs of SHUSA's customers and are profitable to SHUSA, the acceptancesuccess of such products and services byour marketing efforts to customers, and the potential for new products and services to impose additional unexpected costs, losses, or lossesother liabilities not anticipated at their initiation, and expose SHUSA to increased operational risk;
competitors of SHUSA that 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;SHUSA and cause SHUSA to lose business or market share;
SC's agreement with 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;
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 maintainupgrade, as necessary, SHUSA’s data processing and related systemsother IT infrastructure on a timely and acceptable basis, and within projected cost estimates;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 cyber-attacks,cyberattacks, technological failure, human error, fraud or malice, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;
changes to 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;
changes to income tax laws and regulations;
acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters;
the costs and effects of regulatory or judicial actions or proceedings, including possible business restrictions resulting from such actions or proceedings; and
adverse publicity, and negative public opinion, whether specific to SHUSA or regarding other industry participants or industry-wide factors, or other reputational harm.harm; and
acts of terrorism or domestic or foreign military conflicts; and acts of God, including pandemics and other significant public health emergencies, and other natural disasters.

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GLOSSARY OF ABBREVIATIONS AND ACRONYMS
SHUSA provides the following list of abbreviations and acronyms as a tool for the readers that are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements.
2018 Resolution Plan: The Section 165(d) Resolution Plan most recently filed by Santander, dated as of December 31, 2018
COSO: Committee of Sponsoring Organizations
ABS: Asset-backed securities
Covered Fund: ahedge fund or a private equity fund
ACL: Allowance for credit losses
CPRs: Changes in anticipated loan prepayment rates
ADRs: American Depositary Receipts
CRA: Community Reinvestment Act
AFS: Available-for-sale
CRA NPR: the NPR related to the CRA issued by the OCC and the FDIC on December 12, 2019
ALLL: Allowance for loan and lease losses
CRD IV: Capital Requirements Directive IV
ASC: Accounting Standards Codification
CRE: Commercial Real Estate
ASU: Accounting Standards Update
CRE & VF: Commercial Real Estate and Vehicle Finance
Bank: Santander Bank, National Association
CTMC: Compensation and Talent Management Committee
BEA: Bureau of Economic Analysis
DCF: Discounted cash flow
BHC: Bank holding company
DDFS: DDFS LLC
BHC Act: Bank Holding Company Act of 1956, as amended
 
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
ACLBOLI: Allowance for credit lossesBank-owned life insurance
 
DOJ: Department of Justice
AFS:BSI: Available-for-saleBanco Santander International
DPD: days past due
BSPR: Banco Santander Puerto Rico
DTA: Digital Transformation Award
CBP: Citizens Bank of Philadelphia
 
DTI: Debt-to-income
ALLL:C&I: Allowance for loanCommercial and lease lossesIndustrial Banking
 
ECOA:Economic Growth Act: Equal Credit Opportunitythe Economic Growth, Regulatory Relief, and Consumer Protection Act
Alt-ACCAR: : Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentationComprehensive Capital Analysis and Review
 
EPS: Enhanced Prudential Standards
AOD:CD Assurance: Certificate of Discontinuancedeposit
 
ETR: Effective tax rate
APR:CECL:  Annual percentage rateCurrent expected credit losses
EU: European Union
CEF: Closed-end fund
 
Exchange Act: Securities Exchange Act of 1934, as amended
ASCCEO: : Accounting Standards CodificationChief Executive Officer
 
FASB:Financial Accounting Standards Board
ASUCET1: Accounting Standards UpdateCommon equity Tier 1
 
FBO: Foreign banking organization
ATM:CEVF:  Automated teller machineCommercial Equipment Vehicle Financing
 
FCA: Fiat Chrysler Automobiles US LLC
BankCFPB: Santander Bank, National AssociationConsumer Financial Protection Bureau
FDIC: Federal Deposit Insurance Corporation
CFO: Chief Financial Officer
 
FDIA: Federal Deposit Insurance Corporation Improvement Act
BEACFTC: : Bureau of Economic Analysis
FDIC: Federal Deposit Insurance Corporation
BHC: Bank holding companyCommodity Futures Trading Commission
 
Federal Reserve: Board of Governors of the Federal Reserve System
BOLIChase: : Bank-owned life insuranceJPMorgan Chase & Co. and certain of its subsidiaries, including EMC Mortgage LLC
 
FHLB: Federal Home Loan Bank
BSI:Change in Control: Banco Santander InternationalConsolidation of SC in January 2014
 
FHLMC: Federal Home Loan Mortgage Corporation
CBPCHRO:: Citizens Bank of Pennsylvania Chief Human Resources Officer
 
FICO®: Fair Isaac Corporation credit scoring model
CCAR: Comprehensive Capital Analysis and Review
Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CD: Certificate(s) of deposit
FNMA: Federal National Mortgage Association
CEO: Chief Executive Officer
FRB: Federal Reserve Bank
CEVF: Commercial equipment vehicle financing
FTP: Funds transfer pricing
CET1: Common equity Tier 1
FVO: Fair value option
CFPB: Consumer Financial Protection Bureau
GAAP: Accounting principles generally accepted in the United States of America
Change in Control: First quarter 2014 change in control and consolidation of SC
GCB: Global Corporate Banking
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC
 
HQLA:Final Rule: High-quality liquid assetsRule implementing certain of the EPS mandated by Section 165 of the DFA
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement
 
IHC:FINRA: Financial Industrial Regulatory Authority
CIB: U.S. intermediate holding companyCorporate and Investment Banking
FNMA: Federal National Mortgage Association
CLTV: Combined loan-to-value
 
IPO:FRB: Initial public offeringFederal Reserve Bank
CMO:CMOs: Collateralizedcollateralized mortgage obligationobligations
 
IRS:FVO:  Internal Revenue ServiceFair value option
CMP:COBRA:  Civil monetary penaltyConsolidated Omnibus Budget Reconciliation Act
 
ISDA:GAAP: International Swaps and Derivatives Association, Inc.��Accounting principles generally accepted in the United States of America
CODM: Chief Operating Decision Maker
 
IT:GLBA: Information technologyGramm-Leach-Bliley Act
Company: Santander Holdings USA, Inc.
 
LendingClub:GNMA:  LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquires loans under flow agreementsGovernment National Mortgage Association
Consent Order: Consent order signed by the Bank with the CFPB on July 14, 2016 regarding the Bank’s overdraft coverage practices for ATM and one-time debit card transactions
LCR: Liquidity coverage ratio
Covered Fund: hedge fund or a private equity fund under the Volcker Rule
LHFI: Loans held-for-investment
CPR: Changes in anticipated loan prepayment rates
LHFS: Loans held-for-sale
CRA: Community Reinvestment Act
LIBOR: London Interbank Offered Rate
DCF: Discounted cash flow
LIHTC: Low Income Housing Tax Credit
DDFS: Dundon DFS LLC
LTD: Long-term debt

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GSIB: globally systemically important bank
RSUs: Restricted stock units
HFI: Held for investment
RV: Recreational vehicle
HTM: Held to maturity
RWA: Risk-weighted asset
IDI: insured depository institution
S&P: Standard & Poor's
IFRS: International Financial Reporting Standards
SAF: Santander Auto Finance
IHC: U.S. intermediate holding company
SAM: Santander Asset Management, LLC
IPO: Initial public offering
Santander: Banco Santander, S.A.
IRC: Internal Revenue Code
Santander BanCorp: Santander BanCorp and its subsidiaries
IRS: Internal Revenue Service
Santander Global Technology: Santander Global Technology S.L.
ISBAN: Ingenieria De Software Bancario S.L.
Santander UK: Santander UK plc
ISDA: International Swaps and Derivatives Association, Inc.
SBNA: Santander Bank, National Association
LCR: liquidity coverage ratio
SC: Santander Consumer USA Holdings Inc. and its subsidiaries
LHFI: Loans HFI
SCB: stress capital buffer
LHFS: Loans held-for-sale
SC BCTMC: Board Compensation and Talent Management Committee for SC
LIBOR: London Interbank Offered Rate
SC Common Stock: Common shares of SC
LTD: Long-term debt
SCF: Statement of cash flows
LTV: Loan-to-value
 
Santander NYSCRA:: New York branch of Banco Santander, S.A. Servicemembers' Civil Relief Act
MBS: Mortgage-backed securities
 
Santander UK: Santander UK plc
Massachusetts AG:SCI: Massachusetts Attorney General
SBNA: Santander Bank, National AssociationConsumer International Puerto Rico, LLC
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations
 
SCSDART:: Santander Consumer USA Holdings Inc. and its subsidiaries
MSR: Mortgage servicing right
SC Common Stock: Common shares of SC
NCI: Non-controlling interest
SCF: Statement of cash flows
NMD: Non-maturity deposits
SDART: Santander Drive Auto Receivables Trust a SC securitization platform
NPL:MEP: Non-performing loanManagement Equity Plan
 
SDGTSDGT:: Specially Designated Global Terrorist
NSFR:MGB: Net stable funding ratioMexican government bond
 
SECSEC:: Securities and Exchange Commission
NYSE:Mississippi AG: New York Stock ExchangeAttorney General of the State of Mississippi
 
Securities Act: Securities Act of 1933, as amended
OCC:Moody’s: Office of the Comptroller of the CurrencyMoody's Investors Service, Inc.
 
Separation AgreementSFS:: Agreement entered into by Thomas Dundon, the former Chief Executive Officer of SC, DDFS, SC and Santander on July 2, 2015
OEM: Original equipment manufacturer
SFS: Santander Financial Services, Inc.
OIS:MSPA:  Overnight indexed swapMaster Securities Purchase Agreement
 
SHUSASHUSA:: Santander Holdings USA, Inc.
Order:MSR: OCC consent order signed by SBNA on January 26, 2012 which replaced a prior order signed by the BankMortgage servicing right
SHUSA/US Risk Committee: Joint SHUSA and other parties with the OTSCombined U.S. Operations of Santander Risk Committee
MVE: Market value of equity
SIFMA: Securities Industry and Financial Markets Association
NCI: Non-controlling interest
 
SIS: Santander Investment Securities Inc.
Nominations Committee: Nominations and Executive Committee
SOFR: Secured Overnight Financing Rate
NMDs: non-maturity deposits
SPAIN: Santander Private Auto Issuing Note
NMTC: New market tax credits
SREV: Santander Revolving Auto Loan Trust
NPL: Non-performing loan
SRIP: Special Regulatory Incentive Program
NPR: notice of proposed rulemaking
SRT: Santander Retail Auto Lease Trust
NSFR: net stable funding ratio
SSLLC: Santander Securities LLC
NYSE: New York Stock Exchange
TBV: tangible book value
OCC: Office of the Comptroller of the Currency
TCJA: Tax Cut and Jobs Act of 2017
OCI: Other comprehensive income
TDR: Troubled debt restructuring
OEM: Original equipment manufacturer
TLAC: Total loss-absorbing capacity
OIS: Overnight indexed swap
TLAC Rule: The Federal Reserve’s total loss-absorbing capacity rule
OREO: Other real estate owned
 
SPAINTrusts:: Santander Prime Auto Issuing Note Trust, a securitization platform Securitization trusts
OTC: Over-the-counter
TSR: Total shareholder return
OTTI:Other-than-temporary impairment
 
SPEU.K.:: Special purpose entity United Kingdom
Parent Company: the parent holding company of SBNA and other consolidated subsidiaries
 
Sponsor HoldingsUPB:: Sponsor Auto Finance Holding Series LP Unpaid principal balance
PCI: purchased credit-impaired
 
SSLLC: U.S. MEs: U.S. material entities of Santander Securities, LLC
Produban: Produban Servicios Informaticos Generales S.L.
VIE: Variable interest entity
REIT: Real estate investment trust
 
Subvention:VOEs: 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.voting interest entities
RIC:Retail installment contract
 
TDR:YTD: Troubled debt restructuringYear-to-date
RV: Recreational vehicle
TLAC:ROU: Total loss-absorbing capacityRight-of-use
RWA: Risk-weighted assets
Trusts: Securitization trusts
S&P: Standard & Poor's
UPB: Unpaid principal balance
Santander: Banco Santander, S.A.
VIE: Variable interest entity
Santander BanCorp: Santander BanCorp and its subsidiaries
VOE: Voting rights entity
  

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PART I


ITEM 1 - BUSINESS


General

Santander Holdings USA, Inc. ("SHUSA" or the "Company")SHUSA is the parent holding company of Santander Bank, National Association, (the "Bank" or "SBNA"),SBNA, a national banking association, and owns a majority interest (approximately 68%)approximately 76.3% (as of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"),March 4, 2020) of SC, a specialized consumer finance company focused on vehicle finance and third-party servicing.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").Santander. SHUSA is also the parent company of Santander BanCorp, (together with its subsidiaries, “Santander BanCorp”), a holding company headquartered in Puerto Rico whichthat offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico; Santander Securities, LLC (“SSLLC”),BSPR; SSLLC, a registered broker-dealer headquartered in Boston; Banco Santander International (“BSI”), an Edge Act corporation locatedBSI, a financial services company headquartered in Miami whichthat offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; Santander Investment Securities Inc. (“SIS”),SIS, a registered broker-dealer locatedheadquartered 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 SEC.

The Bank's principal markets are in the Mid-Atlantic and Northeastern United States. At December 31, 2017,2019, the Bank had 647588 branches and 2,046 automated teller machines ("ATMs")2,231 ATMs across its footprint. 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").BOLI. The Bank's principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The volumes, and accordingly the financial results of the Bank are affected by the economic environment, including interest rates and consumer and business confidence and spending, as well as the competitive conditions within the Bank's geographic footprint.

SC'sSAF is SC’s primary businessvehicle brand, and is available as a finance option for automotive dealers across the indirect origination of retail installment contracts ("RICs"), principally through manufacturer-franchised dealers in connectionUnited States. Since May 2013, under its agreement with their sale of newFCA, SC has operated as FCA's preferred provider for consumer loans, leases, and used vehicles to retail consumers. SC also offers a full spectrum of auto financing productsdealer loans and provides services to ChryslerFCA customers and dealers under the Chrysler Capital brand, the trade name used in providing services ("Chrysler Capital") under the ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC, signed by SC in 2013 (the "Chrysler Agreement").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.

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 originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders,terminated the previously disclosed tolling agreement dated July 11, 2018 between SC and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally,FCA.

Since its IPO, SC has several relationships through which it provides other consumer finance products. Common stockbeen consolidated with the Company and Santander for financial reporting and accounting purposes. If the Company directly, owned 80% or more of SC ("Common Stock, SC could be consolidated with the Company for tax filing and capital planning purposes. Among other things, tax consolidation would (1) facilitate certain offsets of SC’s taxable income, (2) eliminate the double taxation of dividends from SC, and (3) trigger a release into SHUSA’s income of an approximately $414 million deferred tax liability recognized with respect to the GAAP basis vs. the income tax basis in the Company's ownership of SC. Tax consolidation would also allow for SC's net deferred tax liability to off-set the Company's net deferred tax asset, which would provide a regulatory capital benefit. In addition, SHUSA and Santander would recognize a larger percentage of SC's net income. SC Common Stock")Stock is listed for trading on the New York Stock Exchange (the "NYSE")NYSE under the trading symbol "SC".

SC's Relationship with FCA

In February 2013, SC entered into the Chrysler Agreement, pursuant to which SC became the preferred provider for FCA’s consumer loans and leases and dealer loans effective May 1, 2013. Business generated under terms of the Chrysler Agreement is branded as Chrysler Capital. During 2017,2019, SC originated more than $6.7$12.8 billion of Chrysler Capital retail installment contracts ("RICs")RICs and more than $6.0$8.5 billion of Chrysler Capital vehicle leases.

The Chrysler Agreement requires, among other things, that SC bears the risk of loss on loans originated pursuant to the agreement, but also that FCA shares in any residual gains and losses from consumer leases. The agreement also requires that SC maintainsmaintain at least $5.0 billion in funding available for dealer inventory financing and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to SC.


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The Chrysler Agreement has a ten-year term, subject to early termination in certain circumstances, including the failure by either party to comply with certain of their ongoing obligations. These obligations include, for SC, meeting specified escalating penetration rates for the first five years and, for FCA, treating SC in a manner consistent with comparable original equipment manufacturers' ("OEMs")OEMs` treatment of their captive providers, primarily regarding sales support. In addition, FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander or its affiliates or its other stockholders owns 20% or more of its common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) the CompanySC becomes, controls, or becomes controlled by, an OEM that competes with Chrysler, or (iii) certain of SC's credit facilities become impaired.

In connection with entering into the Chrysler Agreement, SC paid FCA a $150 million upfront, nonrefundable fee on May 1, 2013. This fee is considered payment for future profits generated from the Chrysler Agreement. Accordingly, the Company amortizes the Chrysler Agreement and is being amortized into Other expenses over the expected ten-year term. In addition, in June 2019, in connection with the execution of the sixth amendment to the Chrysler Agreement, the Company paid a $60 million upfront fee to FCA. This fee is being amortized into Other expenses over the remaining term as a component of net finance and other interest income. The Companythe Chrysler Agreement. SC has also executed an equity option agreement with FCA, whereby FCA may elect to purchase, at any time during the term of the Chrysler Agreement, at fair market value, an equity participation of any percentage in the Chrysler Capital portion of SC's business.

ForIn June 2018, SC announced that it was in exploratory discussions with FCA regarding the future of FCA's U.S. finance operations. FCA announced its then intention to establish a periodcaptive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it would consider. Subsequently, FCA decided not to establish a captive U.S. auto finance unit, and FCA and the Company entered into the amendment described above as of 20 business days after FCA's deliveryJune 2019. The amendment revised previously established retail and lease share (penetration) expectations and clarified key factors associated with the revenue and risk share guidance referenced in the Chrysler Agreement. Pursuant to the amendment, SC made a one-time payment of $60 million to FCA.

FCA has not delivered a notice of intent to exercise its equity option, and the Company isremains committed to discuss with FCA, in good faith, the structure and valuationsuccess of the proposed equity participation. If the parties are unable to agree on a structure and FCA still intends to exercise its option, SC will be required to create a new company into which the Chrysler Capital assets will be transferred and which will own and operate the Chrysler Capital business. If FCA and SC cannot agree on a fair market value during the 20-day negotiation period, each party will engage an investment bank and the appointed banks will mutually appoint a third independent investment bank to determine the value, with the cost of the valuation divided evenly between FCA and SC. Each party has the right to a one-time deferral of the independent valuation process for up to nine months. FCA will have a period of 90 days after a valuation has been determined, either by negotiation between the parties or by an investment bank, to deliver a binding notice of exercise. Following this notice, FCA's purchase is to be paid and settled within 10 business days, subject to a delay of up to 180 days if necessary to obtain any required consents from governmental authorities.

Any new company formed to affect FCA's exercise of its equity option will be a Delaware limited liability company unless otherwise agreed to by the parties. As long as each party owns at least 20% of the business, FCA and SC will have equal voting and governance rights without regard to ownership percentage. If either party has an ownership interest in the business of less than 20%, the party with less than 20% ownership will have the right to designate a number of directors proportionate to its ownership and will have other customary minority voting rights.

Because the equity option is exercisable at fair market value, SC could recognize a gain or loss upon exercise if the fair market value is determined to be different from book value. The Company believes that the fair market value of its Chrysler Capital financing business currently exceeds book value and therefore has not recorded a contingent liability for potential loss upon FCA's exercise.

Subsequent to the exercise of the equity option, SC's rights under the Chrysler Agreement would be assigned to the jointly-owned business. Exercise of the equity option would be considered a triggering event requiring re-evaluation of whether or not the remaining unamortized balance of the upfront fee the Company paid to FCA on May 1, 2013 should be impaired.

Until January 31, 2017, SC had a flow agreement with Bank of America whereby the Company was committed to sell a contractually determined amount of eligible Chrysler Capital loans to Bank of America on a monthly basis, depending on the amount and credit quality of eligible current month originations and prior month sales. This agreement originally extended through May 31, 2018. On July 27, 2016, the flow agreement was amended to reduce the maximum commitment to sell eligible loans each month to $300,000. On October 27, 2016, Bank of America notified the Company that it was terminating the flow agreement effective January 31, 2017 and, accordingly, the agreement is now terminated. For loans sold under the agreement, SC retains the servicing rights at contractually agreed-upon rates. The Company may also 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.

SC has sold loans to Citizens Bank of Pennsylvania ("CBP") under terms of a flow agreement and other predecessor sale agreements. SC retains servicing on the sold loans and will owe CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. On June 25, 2015, SC executed an amendment to the servicing agreement with CBP which increased the servicing fees. This amendment also amended the flow agreement between CBP and SC, effective August 1, 2015, to reduce CBP's committed purchases of Chrysler Capital prime loans from a maximum of $600 million and a minimum of $250 million per quarter to a maximum of $200 million and a minimum of $50 million per quarter. On February 13, 2017, the Company and CBP entered into a mutual agreement to terminate the flow agreement effective May 1, 2017.

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Intermediate Holding Company ("IHC")IHC

On July 1, 2016, due to both its global and U.S. non-branch total consolidated asset size, Santander became subject to both of the provisions of the FBO Final Rule discussed below under the "Supervision and Regulation""Regulatory Matters" section of Item 17, MD&A, of this Form 10-K. As a result of this rule, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company, which became a U.S. intermediate holding company (an "IHC").IHC. On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. (“SFS”),SFS, a finance company located in Puerto Rico, was transferred to SHUSA, and on July 2, 2018, another Santander subsidiary, SAM, an investment adviser located in Puerto Rico, was transferred to SHUSA. Refer to Note 1 to the Consolidated Financial Statements for additional details.

On October 21, 2019, the Company entered into an agreement to sell the stock of Santander BanCorp (the holding company that owns BSPR) for total consideration of approximately $1.1 billion, subject to adjustment based on the consolidated Santander BanCorp balance sheet at closing. At December 31, 2019, BSPR had 27 branches, approximately 1,000 employees, and total assets of approximately $6.0 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 a third party 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. Once it becomes apparent that this transaction is more likely than not to receive regulatory approval, the Company will recognize a deferred tax liability of approximately $50 million for the unremitted earnings of Santander BanCorp. Completion of the transaction is not expected to result in any material gain or loss.

Segments

The Company's reportable segments are focused principally around the customers the Company serves. In 2017,2019, the Company has identified the following reportable segments:


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Consumer and Business Banking

The Consumer and Business Banking segment includes the products and services provided to Bank consumer and business banking customers, through the Bank's branch locations, including consumer deposit, business banking, residential mortgage, unsecured lending and investment services. The branch locations offerThis segment provides a wide range of products and services to consumers and business banking customers, including demand and interest-bearing demand deposit accounts, money market and savings accounts, CDs and retirement savings products. The branch locationsIt also offerprovides lending products such as credit cards, mortgages, home equity loans and lines of credit, and business loans such as commercialbusiness lines of credit and business creditcommercial 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.

Commercial BankingC&I

The Commercial BankingC&I segment currently provides commercial lines, loans, letters of credit, receivables financing and deposits to mediummedium- and large business bankinglarge-sized commercial customers, as well as financing and deposits for government entities,entities. This segment also provides niche product financing for specific industries.

CRE & VF

The CRE & VF segment provides CRE loans and multifamily loans to customers. This segment also provides commercial loans to dealers and financing for commercial equipment and commercial vehicles. This segment also provides financing and deposits for government entities and niche product financing for specific industries, including oil and gas and mortgage warehousing, among others.

Commercial Real EstateCIB

The Commercial Real Estate segment offers commercial real estate loans and multifamily loans to customers.

Global Corporate Banking ("GCB")

The GCBCIB segment serves the needs of global commercial and institutional customers by leveraging theSantander's international footprint of Santander to provide financing and banking services to corporations with over $500 million in annual revenues. GCB'sCIB also includes SIS, which 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

SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC’s primary business is the indirect origination ofindirectly originating RICs, principally through manufacturer-franchisedOEM-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with a ten-year private label financing agreement with FCA that became effective May 1, 2013,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. In the third quarter of 2015, SC announced that it wouldmade a strategic decision to exit the personal lending market to focus on its core objectives of expanding the reach and such assets were accordingly classified as heldrealizing the value of its vehicle finance and servicers for sale. In February 2016, SC sold substantially all of the $869.3 million Lending Club portfolio and the remaining portfolio was sold in April 2017.


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others platforms.

SC continues to hold the Bluestem portfolio, which had a carrying balance of approximately $1.1$1.0 billion as of December 31, 2017,2019, and remainremains a party to agreements with Bluestem that includes obligations, among other things, to purchase new advances originated by Bluestem and existing balances on accounts with new advances, for an initial term ending in April 2020 and renewable through April 2022 at Bluestem’s option. Both parties have the right to terminate this agreement upon written notice if certain events were to occur, including if there is a material adverse change in the financial condition of either party. Although a third party is being sought to assume this obligation,these obligations, SC may not be successful in finding such a party, and Bluestem may not agree to the substitution. The Bluestem portfolio continues to be classified as held-for sale.held-for-sale. Significant lower-of-cost-or-market adjustments have been recorded on this portfolio and may continue as long as SC holds the portfolio, particularly due to the purchase commitments. There is a risk that material changes to SC’s relationship with Bluestem, or the loss or discontinuance of Bluestem’s business, would materially and adversely affect SC’s business, financial condition and results of operations. On March 9, 2020, Bluestem Brands, Inc., together with certain of its affiliates, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.

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


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The financial results for each of these reportable segments are included in Note 23 of the Notes to Consolidated Financial Statements and are discussed in Item 7, "Line of Business Results" within the Management's Discussion & Analysis of Financial Condition and Results of Operations ("MD&A")&A section of this Form 10-K. These results have been presented based on the Company's management structure and management accounting practices. The structure and accounting practices are specific to the Company and, as a result, the financial results of the Company's reportable segments are not necessarily comparable with similar information for other financial institutions.

Other

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

Subsidiaries

SHUSA has two principal consolidated majority-owned subsidiaries at December 31, 2017,2019, the Bank and SC.

Employees

At December 31, 2017,2019, the Company had approximately 17,00016,900 employees among itself and its subsidiaries. No Company employees are represented by a collective bargaining agreement.

Competition

The Bank is subject to substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits include the ability to offer attractive rates, the convenience of office locations, the availability of alternate channels of distribution, and servicing capabilities. Direct competition for deposits comes primarily from other national, regional, and state banks, thrift institutions, and broker dealers.broker-dealers. Competition for deposits also comes from money market mutual funds, corporate and government securities, and credit unions. The primary factors driving competition for commercial and consumer loans are interest rates, loan origination fees, service levels and the range of products and services offered. Competition for originating loans normally comes from thrift institutions, national and state banks, mortgage bankers, mortgage brokers, finance companies, and insurance companies.

The Company also provides investment management, broker-dealer and private banking services for its clients. We face competition in providing these services from trust companies, full-service banks, asset managers, investment advisors, securities dealers, mutual fund companies, and other financial institutions.

SC is also subject to substantial competition, particularly in the automobile finance industry. SC competes on the pricing it offersoffered on its loans and leases as well as the customer service SC provides automobile dealer customers. Pricing for these loans and leases is transparent because SC, along with its competitors, provides pricing and other terms and conditions for loans and leases through web-based credit application aggregation platforms. When dealers submit applications for consumers acquiring vehicles, they can compare SC's terms and conditions against its competitors’ pricing. Dealer relationships are important in the automotive finance industry. Vehicle finance providers tailor product offerings to meet dealers' needs. SC's primary competitors in the vehicle finance space are national and regional banks, credit unions, independent financial institutions, and the affiliated finance companies of automotive manufacturers.

Supervision and Regulation

SHUSA is a bank holding company (“BHC”)BHC pursuant to the Bank Holding Company Act of 1956 (the “BHC Act”).BHC Act. As a BHC, the Company is subject to consolidated supervision by the Federal Reserve. SBNA is an FDIC-insureda national bank authorizedchartered under the National Bank Act and subject to supervision by the OCC.OCC and a member of the FDIC. In addition, the CFPB has oversight over SHUSA, SBNA, and SHUSA’s other non-bank affiliates, including SC, for compliance with federal consumer protection laws.

Refer to the "Regulatory Matters" section within Item 7- MD&A for discussion of current regulatory matters impacting the Company.

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BHC Activity and Acquisition Restrictions

Federal laws restrict the types of activities in which BHCs may engage, and subject them to a range of supervisory requirements, including regulatory enforcement actions for violations of laws and policies. BHCs may engage in the business of banking and managing and controlling banks, as well as closely-related activities.

The Company would be required to obtain approval from the Federal Reserve if the Company were to acquire shares of any depository institution or any holding company of a depository institution, or any financial entity that is not a depository institution, such as a lending company.

Control of the Company or the Bank

Under the Change in Bank Control Act, individuals, corporations or other entities acquiring SHUSA's common stock may, alone or together with other investors, be deemed to control the Company and thereby the Bank. Ownership of more than 10% of SHUSA’s capital stock may be deemed to constitute “control” if certain other control factors are present. If deemed to control the Company, those persons or groups would be required to obtain the Federal Reserve's approval to acquire the Company’s common stock and could be subject to certain ongoing reporting procedures and restrictions under federal law and regulations.

Standards for Safety and Soundness

The federal banking agencies adopted certain operational and managerial standards for depository institutions, including internal audit system components, loan documentation requirements, asset growth parameters, information technology and data security practices, and compensation standards for officers, directors and employees.

Insurance of Accounts and Regulation by the FDIC

The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. The Bank's and BSPR's deposits are insured up to applicable limits by the FDIC. The FDIC assesses deposit insurance premiums and is authorized to conduct examinations of, and require reporting by, FDIC-insured institutions like the Bank and BSPR. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the Deposit Insurance Fund. The FDIC also has the authority to initiate enforcement actions against banking institutions and may terminate an institution’s deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC-insured limits, which is currently $250,000 per depositor per ownership category for each ownership deposit account category.

FDIC insurance premium expenses were $60.5 million for the year ended December 31, 2019.

Restrictions on Subsidiary Banking Institution Capital Distributions

Under the FDIA, insured depository institutions must be classified in one of five defined tiers (well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Under OCC regulations, an institution is considered “well-capitalized” if it (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a CET1 capital ratio of 6.5% or greater, (iv) has a Tier 1 leverage ratio of 5% or greater and (v) is not subject to any order or written directive to meet and maintain a specific capital level. As of December 31, 2019, the Bank met the criteria to be classified as “well capitalized.”

If capital levels fall to 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 FDIA and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions and repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the institution’s capital account.


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Foreign Banking Organizations (“FBOs”Federal banking laws, regulations and policies 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 the Company within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) the Bank is not adequately capitalized at the time. In addition, the OCC's prior approval is required if the OCC deems it to be in troubled condition or a problem institution.

Any dividends declared and paid have the effect of reducing the Bank’s Tier 1 capital to average consolidated assets and risk-based capital ratios. During 2019, 2018, and 2017, the Company paid cash dividends of $400.0 million, $410.0 million and $10.0 million, respectively. During 2019, 2018 and 2017, the Company paid cash dividends to preferred shareholders of zero, $11.0 million and $14.6 million, respectively. During the third quarter of 2018, SHUSA redeemed all of its outstanding preferred stock.

Federal Reserve Regulation

Under Federal Reserve regulations, the Bank is required to maintain a reserve against its transaction accounts (primarily interest-bearing and non-interest-bearing checking accounts). Because reserves must generally be maintained in cash or in low-interest-bearing accounts, the effect of the reserve requirements is to reduce an institution’s asset yields.

The amount of total reserve requirements at December 31, 2019 and 2018 were $534.6 million and $429.0 million, respectively. At December 31, 2019 and 2018, the Company complied with these reserve requirements.

FHLB System

The FHLB system was created in 1932 and consists of 11 regional FHLBs. FHLBs are federally-chartered but privately owned institutions created by Congress. The Federal Housing Finance Agency is an agency of the federal government that is charged with overseeing the FHLBs. Each FHLB is owned by its member institutions. The primary purpose of the FHLBs is to provide funding to their members for making housing loans as well as for affordable housing and community development lending. FHLBs are generally able to make advances to their member institutions at interest rates that are lower than could otherwise be obtained by such institutions. As a member, the Bank is required to make minimum investments in FHLB stock based on its level of borrowings from the FHLB. The Bank is a member of and held investments in the FHLB of Pittsburgh which totaled $316.4 million as of December 31, 2019, compared to $230.1 million at December 31, 2018. The Bank utilizes advances from the FHLB to fund balance sheet growth, provide liquidity and for asset and liability management purposes. The Bank had access to advances with the FHLB of up to $17.3 billion at December 31, 2019, and had outstanding advances of $7.0 billion or 41% of total availability at that date. The level of borrowing capacity the Bank has with the FHLB of Pittsburgh is contingent upon the level of qualified collateral the Bank holds at a given time.

The Bank received $16.6 million and $6.6 million in dividends on its stock in the FHLB of Pittsburgh in 2019 and 2018, respectively.

Anti-Money Laundering and the USA Patriot Act

Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act, and the USA Patriot Act require all financial institutions to, among other things, implement policies and procedures relating to anti-money laundering, compliance, suspicious activities, currency transaction reporting and due diligence on customers. The USA Patriot Act substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the U.S., imposed compliance and due diligence obligations, created criminal penalties, compelled the production of documents located both inside and outside the U.S., including those of non-U.S. institutions that have a correspondent relationship in the U.S., and clarified the safe harbor from civil liability to clients. The U.S. Treasury has issued a number of regulations that further clarify the USA Patriot Act’s requirements and provide more specific guidance on their application.

Financial Privacy

Under the GLBA, financial institutions are required to disclose to their retail customers their policies and practices with respect to sharing nonpublic customer information with their affiliates and non-affiliates, how they maintain customer confidentiality, and how they secure customer information. Customers are required under the GLBA to be provided with the opportunity to “opt out” of information sharing with non-affiliates, subject to certain exceptions.

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Environmental Laws

Environmentally-related hazards are a source of high risk and potentially significant liability for financial institutions related to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental cleanup costs to the borrower affecting its ability to repay its loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean-up costs, and liability to the institution for cleanup costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. To minimize this risk, the Bank may require an environmental examination of, and reports with respect to, the property of any borrower or prospective borrower if circumstances affecting the property indicate a potential for contamination, taking into consideration the potential loss to the institution in relation to the burdens to the borrower. Such examination must be performed by an engineering firm experienced in environmental risk studies and acceptable to the institution, and the costs of such examinations and reports are the responsibility of the borrower. These costs may be substantial and may deter a prospective borrower from entering into a loan transaction with the Bank. The Company is not aware of any borrower which is currently subject to any environmental investigation or clean-up proceeding or any other environmental matter that is likely to have a material adverse effect on the financial condition or results of operations of SHUSA or its subsidiaries.

Securities and Investment Regulation

The Company conducts its securities and investment business activities through its subsidiaries SIS and SSLLC. SIS and SSLLC are registered broker-dealers with the SEC and members of FINRA. SIS’s activities include investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed income securities. SIS, SSLLC and SAM are also registered investment advisers with the SEC, and BSI conducts certain securities transactions exempt from SEC registration on behalf of its clients.

Written Agreements and Regulatory Actions

See the “Regulatory Matters” section of the MD&A and Note 22 of the Consolidated Financial Statements in this Form 10-K for a description of current regulatory actions.

Corporate Information

All reports filed electronically by the Company with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, are accessible on the SEC’s website at www.sec.gov. Our filings are also accessible through our website at https://www.santanderus.com/us/investorshareholderrelations. The information contained on our website is not being incorporated herein and is provided for the information of the reader and are not intended to be active links.


ITEM 1A - RISK FACTORS

Summary Risk Factors

The Company is subject to a number of risks that if realized could affect its business, financial condition, results of operations, cash flows and access to liquidity materially. As a financial services organization, certain elements of risk are inherent in our businesses. Accordingly, the Company encounters risk as part of the normal course of its businesses. Some of the Company’s more significant challenges and risks include the following:

We are vulnerable to disruptions and volatility in the global financial markets. Disruptions and volatility in financial markets can have a material adverse effect on our ability to access capital and liquidity on acceptable financial terms. Negative and fluctuating economic conditions, such as a changing interest rate environment, may cause our lending margins to decrease and reduce customer demand for our higher margin products and services.

Uncertainty regarding LIBOR may affect our business adversely. We have established an enterprise-wide initiative to identify, asses and monitor risks associated with the anticipated discontinuation of LIBOR. However, there can be no assurance that we and other market participants will be adequately prepared for the potential disruption to financial markets and potential adverse effects to interest rates on our loans, deposits, derivatives and other financial instruments currently tied to LIBOR.

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We are subject to substantial regulation. As a financial institution, we are subject to extensive regulation by government agencies, including limitations on permissible activities, required financial stress tests, required non-objection to certain actions, investigations and other regulatory proceedings. If we are unable to meet the expectations of our regulators fully, we may need to divert significant resources to remedial actions, be unable to take planned capital actions, and/or be subject to fines or other enforcement actions, among other things. These circumstances could affect our revenues and expenses and other aspects of our business and operations adversely.

We may not be able to detect money laundering or other illegal or improper activities fully or on a timely basis. We work regularly to improve our policies, procedures and capabilities to detect and prevent financial crimes. However, such crimes are evolving continually, and there will be instances in which we may be used by other parties to engage in money laundering or other illegal or improper activities. These instances may result in regulatory fines, sanctions and/or legal enforcement, which could have a material adverse effect on our operating results, financial condition and prospects.

Credit risk is inherent in our business. Our customers’ and counterparties’ financial condition, repayment abilities, repayment intentions, the value of their collateral, and government economic policies, market interest rates and other factors affect the quality of our loan portfolio. Many of these factors are beyond our control, and there can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses.

Liquidity and funding risks are inherent in our business. Changes in market interest rates and our credit spreads occur continuously, may be unpredictable and highly volatile and can significantly increase our cost of funding. We rely primarily on deposits to fund lending activities. However, our ability to maintain or grow deposits depends on factors outside our control, such as general economic conditions and confidence of depositors in the economy and the financial services industry. If deposit withdrawals increase significantly in a short period of time, it could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to fluctuations in interest rates. Interest rates are highly sensitive to factors beyond our control, such as increased regulation of the financial sector, monetary policies, economic and political conditions, and other factors. Variations in interest rates could impact net interest income, which comprises the majority of our revenue, reducing our growth and potentially resulting in losses.

We are subject to significant competition. We compete with banks that are larger than us and non-traditional providers of banking services who may not be subject to the same regulatory or legislative requirements to which we are subject. If we are unable to compete successfully with current and new competitors and anticipate changing banking industry trends, our business may be affected adversely.
We rely on third parties for important products and services. We rely on third-party vendors for key components of our business infrastructure such as loan and deposit servicing systems, custody and clearing services, internet connections and network access. Cyberattacks and breaches of the systems of those vendors could lead to operational and reputational risk and losses for SHUSA.

Risks relating to data collection, processing, storage systems and data security.Proper functioning of financial controls, accounting and other data collection and processing systems is critical to our businesses and our ability to compete effectively. Inadequate personnel, inadequate or failed internal control processes or systems, or external events that interrupt normal business operations could each impair our data collection, processing, storage systems and data security and result in losses.

We and others in our industry face cybersecurity risks. We take protective measures and monitor and develop our systems continuously to protect our technology infrastructure and data from cyberattacks. However, cybersecurity risks continue to increase for our industry, and the proliferation of new technologies and the increased sophistication and activities of the actors behind such attacks present risks for compromised data, theft of funds or theft or destruction of corporate information and assets.

Disclosure controls and procedures over financial reporting and internal controls over financial reporting may not prevent or detect all errors or acts of fraud. The Company’s system of internal controls over financial reporting may not achieve their intended objectives. There are risks that material misstatements due to error or fraud may not be prevented or detected in all cases, and that information may not be reported on a timely basis.


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SC’s financial results could impact our results. SC’s earnings have historically been a significant source of funding for the Company. Factors that could negatively affect SC’s financial results could consequently affect SHUSA’s financial results.

The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the information in this Form-K including matters set forth in this "Risk Factors" section.

Risk Factors

Risk management and mitigation are important parts of the Company's business model and integrated into the Company's day-to-day operations. The success of the Company's business is dependent on management's ability to identify, understand, manage and mitigate the risks presented by business activities in light of the Company's strategic and financial objectives. These risks include credit risk, market risk, capital risk, liquidity risk, operational risk, model risk, investment risk, compliance and legal risk, and strategic and reputational risk. We discuss our principal risk management processes in the Risk Management section included in Item 7 of this Annual Report on Form 10-K.

The following are the most significant risk factors that affect the Company. Any one or more of these could have a material adverse impact on the Company's business, financial condition, results of operations, or cash flows, in addition to presenting other possible adverse consequences, many of which are described below. These risk factors and other risks we may face are also discussed further in other sections of this Annual Report on Form 10-K.

Macro-Economic and Political Risks

Given that our loan portfolios are concentrated in the United States, adverse changes affecting the economy of the United States could adversely affect our financial condition.

Our loan portfolios are concentrated in the United States. Accordingly, the recoverability of our loan portfolios and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general are dependent to a significant extent on the level of economic activity in the United States. A return to recessionary conditions in the United States economy would likely have a significant adverse impact on our loan portfolios and, as a result, on our financial condition, results of operations, and cash flows.

We are vulnerable to disruptions and volatility in the global financial markets.

We face, among others, the following risks in the event of an economic downturn or another recession:

Increased regulation of our industry. Compliance with such regulation has increased our costs and may affect the pricing of our products and services and limit our ability to pursue business opportunities.
Reduced demand for our products and services.
Inability of our borrowers to timely or fully comply with their existing obligations.
The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans.
The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan and lease loss allowances.
The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.
Any worsening of economic conditions may delay the recovery of the financial industry and impact our financial condition and results of operations.
Macroeconomic shocks may impact the household income of our retail customers negatively and adversely affect the recoverability of our retail loans, resulting in increased loan and lease losses. 

Despite the long-term expansion of the U.S. economy, some uncertainty remains regarding U.S. monetary policy and the future economic environment. There can be no assurance that economic conditions will continue to improve. Such economic uncertainty could have an adverse effect on our business and results of operations. A downturn of the economic expansion or failure to sustain the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

In addition, these concerns continue even as the global economy recovers, and some previously stressed European economies have experienced at least partial recoveries from their low points during the recession. If measures to address sovereign debt and financial sector problems in Europe are inadequate, they may delay or weaken economic recovery, or result in the further exit of member states from the Eurozone or more severe economic and financial conditions. If realized, these risk scenarios could contribute to severe financial market stress or a global recession, likely affecting the economy and capital markets in the United States as well.


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Increased disruption and volatility in the financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such decrease in capital markets funding availability or increased costs or in deposit rates could have a material adverse effect on our net interest margins and liquidity.

If some or all of the foregoing risks were to materialize, they could have a material adverse effect on us.

Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.

While the United States economy has performed well overall, it has experienced volatility in recent periods, characterized by slow or regressive growth. This volatility has resulted in fluctuations in the levels of deposits at depository institutions and in the relative economic strength of various segments of the economy to which we lend.

Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default on public debt could cause to the banking system as a whole, particularly since commercial banks' exposure to government debt is high in certain Latin American and European regions or countries.

In addition, our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, international ownership legislation, interest rate caps and tax policies. Growth, asset quality and profitability may be affected by volatile macroeconomic and political conditions.

The actions of the U.S. administration could have a material adverse effect on us.

There is uncertainty about how proposals and initiatives of the current U.S. presidential administration or the broader government could directly or indirectly impact the Company. Although certain proposals and initiatives, such as income tax reform or increased spending on infrastructure projects, could result in greater economic activity and more expansive U.S. domestic economic growth,
other initiatives, such as protectionist trade policies or isolationist foreign policies, could constrict economic growth. The continued uncertainty around these proposals and initiatives, could increase market volatility and affect the Company’s businesses directly or indirectly, including through the effects of such proposals and initiatives on the Company’s customers and/or counterparties.

Developments stemming from the U.K.’s referendum on membership in the EU could have a material adverse effect on us.

Implementing the results of the U.K.’s referendum on remaining part of the EU has had and may continue to have negative effects on global economic conditions and global financial markets. The U.K.'s decision to withdraw from the EU, and the U.K.'s implementation of that referendum, means that the U.K.'s EU membership will cease. The long-term nature of the U.K.’s relationship with the EU is unclear (including with respect to the laws and regulations that will apply as the U.K. determines which EU laws to replicate or replace) and, as negotiations continue in 2020, uncertainty remains as to when the framework for any such relationship governing both the access of the U.K. to European markets and the access of EU member states to the U.K.’s markets will be determined and implemented, and whether such a framework will be established prior to the U.K. leaving the EU. The result of the referendum has created an uncertain political and economic environment in the U.K., and may create such environments in other EU member states. The Governor of the Bank of England has warned that the U.K. exiting the EU could lead to considerable financial instability, a very significant fall in property prices, rising unemployment, depressed economic growth, and higher inflation and interest rates. This could affect the U.K.’s attractiveness as a global investment center, and contribute to a detrimental impact on U.K. economic growth. These developments, or the perception that they could occur, could have a material adverse effect on economic conditions and the stability of financial markets in the U.K., and could significantly reduce market liquidity and restrict the ability of key market participants to operate in certain financial markets. While the Company does not maintain a presence in the U.K., political and economic uncertainty in countries with significant economies and relationships to the global financial industry have in the past led to declines in market liquidity and activity levels, volatile market conditions, a contraction of available credit, lower or negative interest rates, weaker economic growth and reduced business confidence on an international level, each of which could adversely affect our business.

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 suggests that LIBOR is likely to be discontinued or modified by 2021.


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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 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 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, the 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. 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.

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. As of December 31, 2019, we have approximately $24 billion of assets and approximately $14 billion of liabilities with LIBOR exposure. We also have approximately $63 billion in notional amounts of off-balance sheet contracts with LIBOR exposure.

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 impacted adversely. 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.

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.



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Risks Relating to Our Business

Legal, Regulatory and Compliance Risks

We are subject to substantial regulation which could adversely affect our business and operations.

As a financial institution, the Company is subject to extensive regulation, which materially affects our businesses. The statutes, regulations, and policies to which the Company is subject may change at any time. In addition, regulators' interpretation and application of the laws and regulations to which the Company is subject may change from time to time. Extensive legislation affecting the financial services industry has been adopted in the United States, and regulations have been and are in the process of being implemented. The manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Any legislative or regulatory actions and any required or other changes to our business operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets we hold, compel us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our businesses. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not affect us adversely.

Regulation of the Company as a BHC includes limitations on permissible activities. Moreover, the Company and the Bank are required to perform stress tests and submit capital plans to the Federal Reserve and the OCC on an annual basis, and receive a notice of non-objection to the plans from the Federal Reserve and the OCC before taking capital actions such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. The Federal Reserve may also impose substantial fines and other penalties and enforcement actions for violations we may commit, and has the authority to disallow acquisitions we or our subsidiaries may contemplate, which may limit our future growth plans. Such constraints currently applicable to the Company and its subsidiaries and/or regulatory actions could have an adverse effect on our financial position and results of operations.

Other regulations that significantly affect the Company, or that could significantly affect the Company in the future, relate to capital requirements, liquidity and funding, taxation of the financial sector, and development of regulatory reforms in the United States.

In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements necessitate a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands that may result in supervisory measures.

Significant United States Regulation

From time to time, we are or may become subject to or involved in formal and informal reviews, investigations, examinations, proceedings, and information gathering requests by federal and state government agencies, including, among others, the FRB, the OCC, the CFPB, the FDIC, the DOJ, the SEC, FINRA the Federal Trade Commission and various state regulatory and enforcement agencies.

The DFA will continue to result in significant structural reforms affecting the financial services industry. This legislation provided for, among other things, the establishment of the CFPB with broad authority to regulate the credit, savings, payment and other consumer financial products and services we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the OTC derivatives market, prohibitions on engaging in certain proprietary trading activities, restrictions on ownership of, investment in or sponsorship of hedge funds and private equity funds and restrictions on interchange fees earned through debit card transactions.

The DFA provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the SEC, the U.S. CFTC or both, and are or will be subject to new capital, margin, business conduct, record-keeping, clearing, execution, reporting and other requirements. We may register as a swap dealer with the CFTC.

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Within the DFA, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading and from sponsoring or investing in covered funds, in each case subject to certain exceptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships. The final regulations implementing the Volcker Rule contain exclusions and certain exemptions for market-making, hedging, underwriting, and trading in United States government and agency obligations as well as certain foreign government obligations, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained.

Our resolution in a bankruptcy proceeding could result in losses for holders of our debt and equity securities.

Under regulations issued by the Federal Reserve and the FDIC, and as required by Section 165(d) of the DFA, we and Santander must provide to the Federal Reserve and the FDIC a Section 165(d) Resolution Plan. The purpose of this DFA provision is to provide regulators with plans that would enable them to resolve failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk. The most recently filed Section 165(d) Resolution Plan by Santander, dated as of December 31, 2018, provides a roadmap for the orderly resolution of the material U.S. operations of Santander under hypothetical stress scenarios and the failure of one or more of its U.S. MEs. Material entities are defined as subsidiaries or foreign offices of Santander that are significant to the activities of a critical operation or core business line. The U.S. MEs identified in the 2018 Resolution Plan include, among other entities, the Company, the Bank and SC.

The 2018 Resolution Plan describes a strategy for resolving Santander’s U.S. operations, including its U.S. MEs and the core business lines that operate within those U.S. MEs, in a manner that would substantially mitigate the risk that the resolutions would have serious adverse effects on U.S. or global financial stability. Under the 2018 Resolution Plan’s hypothetical resolutions of the U.S. MEs, the Bank would be placed into FDIC receivership and the Company and SC would be placed into bankruptcy under Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code, respectively.

The strategy described in the 2018 Resolution Plan contemplates a “multiple point of entry” strategy, in which Santander and the Company would each undergo separate resolution proceedings under European regulations and the U.S. Bankruptcy Code, respectively. In a scenario in which the Bank and SC were in resolution, the Company would file a voluntary petition under Chapter 7 of the Bankruptcy Code, and holders of our LTD and other debt securities would be junior to the claims of priority (as determined by statute) and secured creditors of the Company.
The Company, the Federal Reserve and the FDIC are not obligated to follow the Company’s preferred resolution strategy for resolving its U.S. operations under its resolution plan. In addition, Santander could in the future change its resolution strategy for resolving its U.S. operations. In an alternative scenario, the Company alone could enter bankruptcy under the U.S. Bankruptcy Code, and the Company’s subsidiaries would be recapitalized as needed, using assets of the Company, so that they could continue normal operations as going concerns or subsequently be wound down in an orderly manner. As a result, the losses incurred by the Company and its subsidiaries would be imposed first on the holders of the Company’s equity securities and thereafter on unsecured creditors, including holders of our LTD and other debt securities. Holders of our LTD and other debt securities would be junior to the claims of creditors of the Company’s subsidiaries and to the claims of priority (as determined by statute) and secured creditors of the Company. Under either of these scenarios, in a resolution of the Company under Chapter 11 of the U.S. Bankruptcy Code, holders of our LTD and other debt securities would realize value only to the extent available to the Company as a shareholder of the Bank, SC and its other subsidiaries, and only after any claims of priority and secured creditors of the Company have been fully repaid.

The resolution of the Company under the orderly liquidation authority could result in greater losses for holders of our equity and debt securities.

The ability of holders of our LTD and other debt securities to recover the full amount that would otherwise be payable on those securities in a resolution proceeding under Chapter 11 of the U.S. Bankruptcy Code may be impaired by the exercise of the FDIC’s powers under the “orderly liquidation authority” under Title II of the DFA.

Title II of the DFA created a new resolution regime known as the “orderly liquidation authority” to which financial companies, including U.S. IHC of FBOs with assets of $50 billion or more, such as the Company, can be subjected. Under the orderly liquidation authority, the FDIC may be appointed as receiver to liquidate a financial company if, upon the recommendation of applicable regulators, the United States Secretary of the Treasury determines that the entity is in severe financial distress, the entity’s failure would have serious adverse effects on the U.S. financial system, and resolution under the orderly liquidation authority would avoid or mitigate those effects, among other things. Absent such determinations, the Company would remain subject to the U.S. Bankruptcy Code.


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If the FDIC were appointed as receiver under the orderly liquidation authority, then the orderly liquidation authority, rather than the U.S. Bankruptcy Code, would determine the powers of the receiver and the rights and obligations of creditors and other parties who have transacted with the Company. There are substantial differences between the rights available to creditors under the orderly liquidation authority and under the U.S. Bankruptcy Code. For example, under the orderly liquidation authority, the FDIC may disregard the strict priority of creditor claims in some circumstances (which would otherwise be respected under the U.S. Bankruptcy Code), and an administrative claims procedures is used to determine creditors’ claims (as opposed to the judicial procedure utilized in bankruptcy proceedings). Under the orderly liquidation authority, in certain circumstances, the FDIC could elevate the priority of claims if it determines that doing so is necessary to facilitate a smooth and orderly liquidation without the need to obtain the consent of other creditors or prior court review. Furthermore, the FDIC has the right to transfer assets or liabilities of the failed company to a third party or “bridge” entity under the orderly liquidation authority.

Regardless of what resolution strategy Santander might prefer for resolving its U.S. operations, the FDIC could determine that it is a desirable strategy to resolve the Company in a manner that would, among other things, impose losses on the Company’s shareholder, unsecured debtholders (including holders of our LTD) and other creditors, while permitting the Company’s subsidiaries to continue to operate. It is likely that the application of such an entry strategy in which the Company would be the only legal entity in the U.S. to enter resolution proceedings would result in greater losses to holders of our LTD and other debt securities than the losses that would result from the application of a bankruptcy proceeding or a different resolution strategy for the Company. Assuming the Company entered resolution proceedings and support from the Company to its subsidiaries was sufficient to enable the subsidiaries to remain solvent, losses at the subsidiary level could be transferred to the Company and ultimately borne by the Company’s securityholders (including holders of our LTD and other debt securities), with the result that third-party creditors of the Company’s subsidiaries would receive full recoveries on their claims, while the Company’s securityholders (including holders of our LTD) and other unsecured creditors could face significant losses. In addition, in a resolution under the orderly liquidation authority, holders of our LTD and other debt securities of the Company could face losses ahead of our other similarly situated creditors if the FDIC exercised its right, to disregard the strict priority of creditor claims described above.

The orderly liquidation authority also requires that creditors and shareholders of the financial company in receivership must bear all losses before taxpayers are exposed to any losses, and amounts owed by the financial company or the receivership to the U.S. government would generally receive a statutory payment priority over the claims of private creditors, including holders of our LTD and other debt securities. In addition, under the orderly liquidation authority, claims of creditors (including holders of our LTD and other debt securities) could be satisfied through the issuance of equity or other securities in a bridge entity to which the Company’s assets are transferred, as described above. If securities were to be delivered in satisfaction of claims, there can be no assurance that the value of the securities of the bridge entity would be sufficient to repay all or any part of the creditor claims for which the securities were exchanged.

Although the FDIC has issued regulations to implement the orderly liquidation authority, not all aspects of how the FDIC might exercise this authority are known, and additional rulemaking is possible.

United States stress testing, capital planning, and related supervisory actions

The Company is subject to stress testing and capital planning requirements under regulations implementing the DFA and other banking laws and policies. Effective January 2017, the Federal Reserve finalized a rule adjusting its capital plan and stress testing rules, exempting from the qualitative portion of the CCAR certain BHCs and U.S. IHCs of FBOs with total consolidated assets between $50 billion and $250 billion and total nonbank assets of less than $75 billion, and that are not identified as global systemically important banks. Such firms, including the Company, are still required to meet CCAR’s quantitative requirements and are subject to regular supervisory assessments that examine their capital planning processes. In 2017, 2018, and 2019 the Federal Reserve provided its non-objection to SHUSA’s capital plan; however, in 2015 and 2016, the Federal Reserve, as part of its CCAR process, objected on qualitative grounds to the capital plans the Company submitted. There is risk that the Federal Reserve could object to the Company’s future capital plans, which would limit the Company's ability to make capital distributions or take certain capital actions.

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Other supervisory actions and restrictions on U.S. activities

In addition to the foregoing, U.S. bank regulatory agencies from time to time take supervisory actions under certain circumstances that restrict or limit a financial institution’s activities. In many instances, we are subject to significant legal restrictions on our ability to disclose these actions or the full details of these actions publicly. In addition, as part of the regular examination process, certain U.S. subsidiaries’ regulators may advise the subsidiary to operate under various restrictions as a prudential matter. The U.S. supervisory environment has become significantly more demanding and restrictive since the financial crisis of 2008. Under the BHC Act, the Federal Reserve has the authority to disallow us and certain of our U.S. subsidiaries from engaging in certain categories of new activities in the United States or acquiring shares or control of other companies in the United States. Such actions and restrictions currently applicable to us or certain of our U.S. subsidiaries could adversely affect our costs and revenues. Moreover, efforts to comply with nonpublic supervisory actions or restrictions could require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions could have a material adverse effect on our business and results of operations, and we may be subject to significant legal restrictions on our ability to publicly disclose these matters or the full details of these actions.

We are subject to potential intervention by any of our regulators or supervisors, particularly in response to customer complaints.

As noted above, our business and operations are subject to increasingly significant rules and regulations relating to the banking and financial services business. These apply to business operations, affect financial returns, include reserve and reporting requirements, and the conduct of our business. These requirements are established by the relevant central banks and regulatory authorities that authorize, regulate and supervise us in the jurisdictions in which we operate. The relationship between the Company and its customers is also regulated extensively under federal and state consumer protection laws. Among other things, these prohibit unfair, deceptive and abusive trading practices, require disclosures of the cost of credit, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, and restrict our ability to raise interest rates.

In their supervisory roles, regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening, but not guaranteeing, the protection of customers and the financial system. Supervisors' continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, regulators have an outcome-focused regulatory approach that involves proactive enforcement and penalties for infringement. As a result, we face increased supervisory intrusion and scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines.

Some of the regulators focus strongly on consumer protection and on conduct risk. This has included a focus on the design and operation of products, the behavior of customers and the operation of markets. Some of the laws in the relevant jurisdictions in which we operate give regulators the power to make temporary product intervention rules either to improve a company's systems and controls in relation to product design, product management and implementation, or address problems identified with financial products. These problems may potentially cause significant detriment to consumers because of certain product features, governance flaws or distribution strategies. Such rules may prevent institutions from entering into product agreements with customers until such problems have been solved. Some regulators in the jurisdictions in which we operate also require us to be in compliance with training, authorization and supervision of personnel, systems, processes and documentation requirements. Sales practices with retail customers, including incentive compensation structures related to such practices, have recently been a focus of various regulatory and governmental agencies. If we fail to be compliant with such regulations, there would be a risk of an adverse impact on our business from sanctions, fines or other actions imposed by regulatory authorities.

We are exposed to risk of loss from legal and regulatory proceedings.

As noted above, we face risk of loss from legal and regulatory proceedings, including tax proceedings that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory environment reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs. In general, amounts financial institutions pay in settlements of regulatory proceedings or investigations and the severity of terms of regulatory settlements have been increasing. In certain cases, regulatory authorities have required criminal pleas, admissions of wrongdoing, limitations on asset growth, managerial changes, and other extraordinary terms as part of such settlements, all of which could have significant economic consequences for a financial institution.


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We are subject to civil and tax claims and party to certain legal proceedings incidental to the normal course of our business from time to time, including in connection with lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly when the claimants seek very large or indeterminate damages, or when the cases present novel legal theories, involve a large number of parties or are in the early stages of investigation or discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have established adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves we have currently accrued. As a result, the outcome of a particular matter may materially and adversely affect our financial condition and results of operations for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.

In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by the SEC and law enforcement authorities.

Often, the announcement or other publication of claims or actions that may arise from such litigation and regulatory proceedings or of any related settlement may spur the initiation of similar claims by other customers, clients or governmental entities. In any such claim or action, demands for substantial monetary damages may be asserted against us and may result in financial liability, changes in our business practices or an adverse effect on our reputation or client demand for our products and services. In regulatory settlements since the financial crisis, fines imposed by regulators have increased substantially and may in some cases exceed the profit earned or harm caused by the breach.

Regular and ongoing inspection by our banking and other regulators may result in the need to enhance our regulatory compliance or risk management practices. Such remedial actions may entail significant costs, management attention, and systems development, and such efforts may affect our ability to expand our business until those remedial actions are completed. In some instances, we are subjected to significant legal restrictions on our ability to disclose these types of actions or the full detail of these actions publicly. Our failure to implement enhanced compliance and risk management procedures in a manner and timeframe deemed to be responsive by the applicable regulatory authority could adversely impact our relationship with that regulatory authority and lead to restrictions on our activities or other sanctions.

The magnitude and complexity of projects required to address the Company’s regulatory and legal proceedings, in addition to the challenging macroeconomic environment and pace of regulatory change, may result in execution risk and adversely affect the successful execution of such regulatory or legal priorities.

In many cases, we are required to self-report inappropriate or non-compliant conduct to regulatory authorities, and our failure to do so may represent an independent regulatory violation. Even when we promptly bring matters to the attention of appropriate authorities, we may nonetheless experience regulatory fines, liabilities to clients, harm to our reputation or other adverse effects in connection with self-reported matters.

We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with anti-money laundering, anti-terrorism and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems and sophisticated monitoring and compliance personnel, and have become the subject of enhanced government supervision.

While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, those policies and procedures may not completely eliminate instances in which we may be used by other parties to engage in money laundering and other illegal or improper activities. Emerging technologies, such as cryptocurrencies and blockchain, could limit our ability to track the movement of funds. Our ability to comply with legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability.

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These require implementing and embedding effective controls and monitoring within our business and on-going changes to systems and operations. Financial crime is continually evolving and subject to increasingly stringent regulatory oversight and focus. Even known threats can never be fully eliminated, and there will be instances in which we may be used by other parties to engage in money laundering or other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the authority to impose fines and other penalties on us. In addition, our business and reputation could suffer if customers use our banking network for money laundering or other illegal or improper purposes.

While we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree we rely on our counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our and our counterparties’ services as conduits for money laundering (including illegal cash operations) or other illegal activities without our and our counterparties’ knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering or other illegal activities, our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

An incorrect interpretation of tax laws and regulations may adversely affect us.

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations, and is subject to review by taxing authorities. We are subject to the income tax laws of the United States and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgments, estimates, and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material effect on our results of operations.

Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that such reforms would not have an adverse effect upon our business. Aspects of recent U.S. federal income tax reform such as the Tax Cuts and Jobs Act of 2017 limit or eliminate certain income tax deductions, including the home mortgage interest deduction, the deduction of interest on home equity loans and a limitation on the deductibility of property taxes. These limitations and eliminations could affect demand for some of our retail banking products and the valuation of assets securing certain of our loans adversely, increasing our provision for loan losses and reducing profitability.

Credit Risks

If the level of our NPLs increases or our credit quality deteriorates in the future, or if our loan and lease loss reserves are insufficient to cover loan and lease losses, this could have a material adverse effect on us.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted and can continue to
negatively impact our results of operations. In particular, the amount of our reported NPLs may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in the United States, the impact of political events, events affecting certain industries or events affecting financial markets. There can be no assurance that we will be able to effectively control the level of the NPLs in our loan portfolio.


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Our loan and lease loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the last global financial crisis demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and there can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates for any reason, including an increase in lending to individuals and small and medium enterprises, a volume increase in our credit card portfolio or the introduction of new products, or if future actual losses exceed our estimates of incurred losses, we may be required to increase our loan and lease loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this also could have a material adverse effect on us.

In addition, the FASB’s ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments was adopted by the Company on January 1, 2020 and increased our ACL by approximately $2.5 billion. This standard replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. Upon adoption of this standard, companies must recognize credit losses on these assets equal to management’s estimate of credit losses over the assets’ remaining expected lives. It is possible that our ongoing reported earnings and lending activity will be impacted negatively in periods following adoption of this ASU. See “Changes in accounting standards could impact reported earnings” below.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, and this reduces the weighted average life of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent in our commercial activity, and an increase in prepayments could have a material adverse effect on us.

The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting the United States. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events such as natural disasters, particularly in locations in which a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and have an adverse impact on the economy of the affected region. We also may not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment of impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses on our loans, which may materially and adversely affect our results of operations and financial condition.

In addition, auto industry technology changes, accelerated by environmental rules, could affect our auto consumer business, particularly the residual values of leased vehicles, which could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivatives contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearinghouses or other financial intermediaries.


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We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. We rely on information provided by or on behalf of counterparties, such as financial statements, and we may rely on representations of our counterparties as to the accuracy and completeness of that information. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

Liquidity and Financing Risks

Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they become due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate these risks completely. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements as well as limit growth possibilities.

Our cost of obtaining funding is directly related to prevailing market interest rates and our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

If wholesale markets financing ceases to be available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.

We rely, and will continue to rely, primarily on deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of depositors in the economy in general, and the financial services industry in particular, as well as competition among banks for deposits. Any of these factors could significantly increase the amount of deposit withdrawals in a short period of time, thereby reducing our ability to access deposit funding in the future on appropriate terms, or at all. If these circumstances were to arise, they could have a material adverse effect on our operating results, financial condition and prospects.

We anticipate that our customers will continue to make deposits (particularly demand deposits and short-term time deposits) in the near future, and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits, or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

There can be no assurance that, in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments, or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally.


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Any downgrade in our or Santander's debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivatives contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivatives contracts, we may be required to maintain a minimum credit rating or terminate the contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

We conduct a significant number of our material derivatives activities through Santander and Santander UK. We estimate that, as of December 31, 2018, if all of the rating agencies were to downgrade Santander’s or Santander UK’s long-term senior debt ratings, we would be required to post additional collateral pursuant to derivatives and other financial contracts. Refer to further discussion in Note 14 of the Notes to the Consolidated Financial Statements.

While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend on numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a company's long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example depending on certain factors, including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on the Company, the Bank, and SC.

In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace those contracts, our market risk profile could be altered.

There can be no assurance that the rating agencies will maintain their current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase the cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

Market Risks

We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rates, exchange rates or equity prices. Changes in interest rates affect the following areas, of our business, among others:

net interest income;
the volume of loans originated;
the market value of our securities holdings;
the value of our loans and deposits;
gains from sales of loans and securities; and
gains and losses from derivatives.

Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions, and other factors. Variations in interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. This is a result of the different effect a change in interest rates may have on the interest earned on our assets and the interest paid on our borrowings. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure.

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and the collateral used to secure our loans, and may reduce gains or require us to record losses on sales of our loans or securities.


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In addition, we may experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.

Some of our investment management services fees are based on financial market valuations of assets certain of our subsidiaries manage or hold in custody for clients. Changes in these valuations can affect noninterest income positively or negatively, and ultimately affect our financial results. Significant changes in the volume of activity in the capital markets, and in the number of assignments we are awarded, could also affect our financial results.

We are also exposed to equity price risk in our investments in equity securities. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to economic uncertainty and sovereign debt concerns has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income and the market value of our assets and liabilities could be materially adversely affected.

Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

In recent years, financial markets have been subject to volatility and the resulting widening of credit spreads. We have material exposures to securities and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets, and also may translate into increased impairments. In addition, the value we ultimately realize on
disposal of the asset may be lower than its current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition and prospects.

In addition, to the extent fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain. In addition, valuation models are complex, making them inherently imperfect predictors of actual results. Any resulting impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to market, operational and other related risks associated with our derivatives transactions that could have a material adverse effect on us.

We enter into derivatives transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).

The execution and performance of derivatives transactions depend on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivatives transactions continues to depend, to a great extent, on our IT systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.

In addition, disputes with counterparties may arise regarding the terms or the settlement procedures of derivatives contracts, including with respect to the value of underlying collateral, which could cause us to incur unexpected costs, including transaction, operational, legal and litigation costs, or result in credit losses, all of which may impair our ability to manage our risk exposure from these products.


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Risk Management

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. Although we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.

We rely on quantitative models to measure risks and estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, and calculating economic and regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating models will be adversely affected due to the inadequacy of that information. Also, information we provide to the public or our regulators based on poorly designed or implemented models could be inaccurate or misleading.

Some of our qualitative tools and metrics for managing risk are based on our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses therefore could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions based on models that are poorly developed, implemented, or used, or as a result of a modeled outcome being misunderstood or used of for purposes for which it was not designed. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere or seek to limit transactions with us. This could have a material adverse effect on our reputation, operating results, financial condition, and prospects.

As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management is to employ an internal credit rating system to assess the particular risk profile of a customer. Since this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human and IT systems errors. In exercising their judgment on the current and future credit risk of our customers, our employees may not always assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.

We have been refining our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect all possible risks before they occur or, due to limited tools available to us, our employees may not be able to implement them effectively, which may increase our credit risk. Failure to effectively implement,
consistently follow or continuously refine our credit risk management system may result in an increase in the level of NPLs and a higher risk exposure for us, which could have a material adverse effect on us.

General Business and Industry Risks

The financial problems our customers face could adversely affect us.

Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial condition of our borrowers, which could in turn increase our NPL ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds significantly, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.


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We depend in part upon dividends and other funds from subsidiaries.

Most of our operations are conducted through our subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent on our subsidiaries’ earnings and business considerations, and are limited by legal and regulatory restrictions. Additionally, our right to receive any assets of our subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.

Increased competition and industry consolidation may adversely affect our results of operations.

We face substantial competition in all parts of our business from numerous banks and non-bank providers of financial services, including in originating loans and attracting deposits, providing customer service, the quality and range of products and services, technology, interest rates and overall reputation, and we expect competitive conditions to continue to intensify. Our competition comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.

There has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. Some of our competitors are substantially larger than we are, which may give those competitors advantages such as a more diversified product and customer base, the ability to reach more customers and potential customers, operational efficiencies, lower-cost funding and larger branch networks. Many competitors are also focused on cross-selling their products, which could affect our ability to maintain or grow existing customer relationships or require us to offer lower interest rates or fees on our lending products or higher interest rates on deposits. There can be no assurance that increased competition will not adversely affect our growth prospects and therefore our operations. We also face competition from non-bank competitors such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

Non-traditional providers of banking services, such as internet based e-commerce providers, mobile telephone companies and internet search engines, may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to the same regulatory or legislative requirements to which we are subject. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing.

New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to compete successfully with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to anticipate or adapt to emerging technologies or changes in customer behavior effectively, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business. Furthermore, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies and the rise in customer use of internet and mobile banking platforms in recent years could negatively impact our investments in bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in demand towards internet and mobile banking may necessitate changes to our retail distribution strategy, which may include closing and/or selling certain branches and restructuring our remaining branches and workforce. These actions could lead to losses on these assets and increased expenditures to renovate, reconfigure or close a number of our remaining branches or otherwise reform our retail distribution channel. Furthermore, our failure to keep pace with innovation or to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect on our competitive position.

If our customer service levels were perceived by the market to be materially below those of our competitors, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.


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Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

The success of our operations and our profitability depend, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive, and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients and the significant and ongoing investments required to bring new products and services to market in
a timely manner at competitive prices. Our failure to manage these risks and uncertainties also exposes us to the enhanced risk of operational lapses, which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine whether initiatives can be brought to market in a manner that is timely and attractive to our clients. Failure to manage these risks in the development and implementation of new products or services successfully could have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

Goodwill impairments may be required in relation to acquired businesses.

We have made business acquisitions for which it is possible that the goodwill which has been attributed to those businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in the business’ underlying profitability, asset quality or other relevant matters. Impairment testing with respect to goodwill is performed annually, more frequently if impairment indicators are present, and includes a comparison of the carrying amount of the reporting unit with its fair value. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as this excess of carrying value over fair value. We recognized a $10.5 million impairment of goodwill in 2017 primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effect of Hurricane Maria. We did not recognize any impairments of goodwill in 2018 or 2019. It is reasonably possible we may be required to record impairment of $4.5 billion of goodwill attributable to SC and SBNA in the future. There can be no assurance that we will not have to write down the value attributed to goodwill further in the future, which would not impact risk-based capital ratios adversely, but would adversely affect our results of operations and stockholder's equity.

We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

The financial industry in the United States has experienced and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. In addition, due to our relationship with Santander, we are subject to indirect regulation by the European Central Bank, which has recently imposed compensation restrictions that may apply to certain of our executive officers and other employees under the CRD IV prudential rules. These restrictions may impact our ability to retain our experienced management team and key employees and our ability to attract appropriately qualified personnel, which could have a material adverse impact on our business, financial condition, and results of operations.

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We rely on third parties for important products and services.

Third-party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting those parties. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct could adversely affect our ability to deliver products and services to customers and otherwise to conduct business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third-party vendors could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure them.  Any restructuring could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, financial condition and operations.

If a third party obtains access to our customer information and that third party experiences a cyberattack or breach of its systems, this could result in several negative outcomes for us, including losses from fraudulent transactions, potential legal and regulatory liability and associated damages, penalties and restitution, increased operational costs to remediate the consequences of the third party’s security breach, and harm to our reputation from the perception that our systems or third-party systems or services that we rely on may not be secure.

Damage to our reputation could cause harm to our business prospects.

Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees and conducting business transactions with our counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, dealing with sectors that are not well perceived by the public (e.g., weapons industries), dealing with customers on sanctions lists, ratings downgrades, compliance failures, unethical
behavior, and the activities of customers and counterparties, including activities that affect the environment negatively. Further, adverse publicity, regulatory actions or fines, litigation, operational failures or the failure to meet client expectations or other obligations could materially and adversely affect our reputation, our ability to attract and retain clients or our sources of funding for the same or other businesses.

Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement have caused public perception of us and others in the financial services industry to decline. Activists increasingly target financial services firms with criticism for relationships with clients engaged in businesses whose products are perceived to be harmful to the health of customers, or whose activities are perceived to affect public safety affect the environment, climate or workers’ rights negatively. Such criticism could increase dissatisfaction among customers, investors and employees of the Company and damage the Company’s reputation. Alternatively, yielding to such activism could damage the Company’s reputation with groups whose views are not aligned with those of the activists. In either case, certain clients and customers may cease to do business with the Company, and the Company’s ability to attract new clients and customers may be diminished.

Preserving and enhancing our reputation also depends on maintaining systems, procedures and controls that address known risks and regulatory requirements, as well as our ability to timely identify, understand and mitigate additional risks that arise due to changes in our businesses and the markets in which we operate, the regulatory environment and customer expectations.

We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

We may be the subject of misinformation and misrepresentations propagated deliberately to harm our reputation or for other deceitful purposes, including by others seeking to gain an illegal market advantage by spreading false information about us. There can be no assurance that we will be able to neutralize or contain false information that may be propagated regarding the Company, which could have an adverse effect on our operating results, financial condition and prospects effectively.


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Fraudulent activity associated with our products or networks could cause us to suffer reputational damage, the use of our products to decrease and our fraud losses to be materially adversely affected. We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling customer information. The risk of fraud continues to increase for the financial services industry in general. Credit and debit card fraud, identity theft and related crimes are prevalent, and perpetrators are growing more sophisticated. Our resources, customer authentication methods and fraud prevention tools may not be sufficient to accurately predict or prevent fraud. Additionally, our fraud risk continues to increase as third parties that handle confidential consumer information suffer security breaches and we expand our direct banking business and introduce new products and features. Our financial condition, the level of our fraud charge-offs and other results of operations could be materially adversely affected if fraudulent activity were to increase significantly. High-profile fraudulent activity could negatively impact our brand and reputation. In addition, significant increases in fraudulent activity could lead to regulatory intervention and reputational and financial damage to our brands, which could negatively impact the use of our products and services and have a material adverse effect on our business.

The Bank engages in transactions with its subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.

The Bank and its subsidiaries have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

United States law applicable to certain financial institutions, including the Bank and other Santander entities and offices in the U.S., establish several procedures designed to ensure that the transactions entered into with or among our subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions.

The Bank and its affiliates are likely to continue to engage in transactions with their respective affiliates. Future conflicts of interests among our affiliates may arise, which conflicts are not required to be and may not be resolved in SHUSA's favor.

Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, terrorist activities or international hostilities.

Neither the occurrence nor potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, and other significant public health emergencies, dislocations, fires, explosions, or other catastrophic accidents or events), terrorist activities or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities, preventing a subset of our employees from working for a prolonged period and otherwise preventing us from conducting our business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies and defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning and our ability to anticipate the nature of any such event that may occur. The adverse impact of disasters, terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses with which we deal.

Technology and Cybersecurity Risks

Any failure to effectively maintain, secure, improve or upgrade our IT infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Our ability to remain competitive depends in part on our ability to maintain, protect and upgrade our IT on a timely and cost-effective basis. We must continually make significant investments and improvements in our IT infrastructure in order to remain competitive. There can be no assurance that we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our IT infrastructure in the future. Any failure to improve or upgrade our IT infrastructure and management information systems effectively and in a timely manner could have a material adverse effect on us.


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Risks relating to data collection, processing, storage systems and security are inherent in our business.

Like other financial institutions with a large customer base, we have been subject to and are likely to continue to be the subject of attempted cyberattacks in light of the fact that we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Our business depends on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and e-mail services, spreadsheets, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial controls, accounting and other data collection and processing systems is critical to our businesses and our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures proves to be inadequate or is circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent information security risk, we routinely exchange personal, confidential and proprietary information by electronic means, which may be a target for attempted cyberattacks.

Many companies across the country and in the financial services industry have reported significant breaches in the security of their websites or other systems. Cybersecurity risks have increased significantly in recent years due to the development and proliferation of new technologies, increased use of the internet and telecommunications technology to conduct financial transactions, and increased sophistication and activities of organized crime groups, state-sponsored and individual hackers, terrorist organizations, disgruntled employees and vendors, activists and other third parties. Financial institutions, the government and retailers have in recent years reported cyber incidents that compromised data, resulted in the theft of funds or the theft or destruction of corporate information and other assets.

We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. We have policies, practices and controls designed to prevent or limit disruptions to our systems and enhance the security of our infrastructure. These include performing risk management for information systems that store, transmit or process information assets identifying and managing risks to information assets managed by third-party service providers through
on-going oversight and auditing of the service providers’ operations and controls. We develop controls regarding user access to software on the principle that access is forbidden to a system unless expressly permitted, limited to the minimum amount necessary for business purposes, and terminated promptly when access is no longer required. We seek to educate and make our employees aware of information security and privacy controls and their specific responsibilities on an ongoing basis.

Nevertheless, while we have not experienced material losses or other material consequences relating to cyberattacks or other information or security breaches, whether directed at us or third parties, our systems, software and networks, as well as those of our clients, vendors, service providers, counterparties and other third parties, may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code, cyberattacks such as denial of service, malware, ransomware, phishing, and other events that could result in security breaches or give rise to the manipulation or loss of significant amounts of personal, proprietary or confidential information of our customers, employees, suppliers, counterparties and other third parties, disrupt, sabotage or degrade service on our systems, or result in the theft or loss of significant levels of liquid assets, including cash. As cybersecurity threats continue to evolve and increase in sophistication, we cannot guarantee the effectiveness of our policies, practices and controls to protect against all such circumstances that could result in disruptions to our systems. This is because, among other reasons, the techniques used in cyberattacks change frequently, cyberattacks can originate from a wide variety of sources, and third parties may seek to gain access to our systems either directly or by using equipment or passwords belonging to employees, customers, third-party service providers or other authorized users of our systems. In the event of a cyberattack or security breach affecting a vendor or other third party entity on whom we rely, our ability to conduct business, and the security of our customer information, could be impaired in a manner to that of a cyberattack or security breach affecting us directly. We also may not receive information or notice of the breach in a timely manner, or we may have limited options to influence how and when the cyberattack or security breach is addressed.

As financial institutions are becoming increasingly interconnected with central agents, exchanges and clearinghouses, they may be increasingly susceptible to negative consequences of cyberattacks and security breaches affecting the systems of such third parties. It could take a significant amount of time for a cyberattack to be investigated, during which time we may not be in a position to fully understand and remediate the attack, and certain errors or actions could be repeated or compounded before they are discovered and remediated, any or all of which could further increase the costs and consequences associated with a particular cyberattack. The perception of a security breach affecting us or any part of the financial services industry, whether correct or not, could result in a loss of confidence in our cybersecurity measures or otherwise damage our reputation with customers and third parties with whom we do business. Should such adverse events occur, we may not have indemnification or other protection from the third party sufficient to compensate or protect us from the consequences.


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As attempted cyberattacks continue to evolve in scope and sophistication, we may incur significant costs in our attempts to modify or enhance our protective measures against such attacks to investigate or remediate any vulnerability or resulting breach, or in communicating cyberattacks to our customers. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party or a cyberattack could result in our inability to recover or restore data that has been stolen, manipulated or destroyed, damage to our systems and those of our clients, customers and counterparties, violations of applicable privacy and other laws, or other significant disruption of operations, including disruptions in our ability to use our accounting, deposit, loan and other systems and our ability to communicate with and perform transactions with customers, vendors and other parties. These effects could be exacerbated if we would need to shut down portions of our technology infrastructure temporarily to address a cyberattack, if our technology infrastructure is not sufficiently redundant to meet our business needs while an aspect of our technology is compromised, or if a technological or other solution to a cyberattack is slow to be developed. Even if we timely resolve the technological issues in a cyberattack, a temporary disruption in our operations could adversely affect customer satisfaction and behavior, expose us to reputational damage, contractual claims, regulatory, supervisory or enforcement actions, or litigation.

U.S. banking agencies and other federal and state government agencies have increased their attention on cybersecurity and data privacy risks, and have proposed enhanced risk management standards that would apply to us. Such legislation and regulations relating to cybersecurity and data privacy may require that we modify systems, change service providers, or alter business practices or policies regarding information security, handling of data and privacy. Changes such as these could subject us to heightened operational costs. To the extent we do not successfully meet supervisory standards pertaining to cybersecurity, we could be subject to supervisory actions, litigation and reputational damage.

Financial Reporting and Control Risks

Changes in accounting standards could impact reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our Consolidated Financial Statements. These changes can materially impact how we record and report our financial condition and results of operations, as well as affect the calculation of our capital ratios. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

For example, as noted in Note 2 to the Consolidated Financial Statements in this Form 10-K, in June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The adoption of this standard resulted in the increase in the ACL of approximately $2.5 billion and a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase is based on 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. The standard did not have a material impact on the Company’s other financial instruments. Additionally, we elected to utilize regulatory relief which will permit us to phase in 25 percent of the capital impact of CECL in our calculation of regulatory capital amounts and ratios in 2020, and an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023.

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

The preparation of consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect our Consolidated Financial Statements and accompanying notes. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provisions for liabilities.

The ACL is a significant critical estimate. Due to the inherent nature of this estimate, we cannot provide assurance that the Company will not significantly increase the ACL or sustain credit losses that are significantly higher than the provided allowance.


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The valuation of financial instruments measured at fair value can be subjective, in particular when models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove inaccurate.

If the judgments, estimates and assumptions we use in preparing our Consolidated Financial Statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

Disclosure controls and procedures over financial reporting and internal controls over financial reporting may not prevent or detect all errors or acts of fraud, and lapses in these controls could materially and adversely affect our operations, liquidity and/or reputation.

Disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We also maintain a system of internal controls over financial reporting. However, these controls may not achieve their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgement and breakdowns resulting from human failures. Controls can be circumvented by collusion or improper management override. Because of these limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis.

Further, there can be no assurance that we will not suffer from material weaknesses in disclosure controls and processes over financial reporting in the future. If we fail to remediate any future material weaknesses or fail to otherwise maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements and limit our ability to raise capital. Additionally, failure to remediate the material weaknesses or otherwise failing to maintain effective internal controls over financial reporting may negatively impact our operating results and financial condition, impair our ability to timely file our periodic reports with the SEC, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.

Failure to satisfy obligations associated with public securities filings may have adverse regulatory, economic, and reputational consequences.

We filed our Annual Report on Form 10-K for 2015 and certain Quarterly Reports on Form 10-Q in 2016 after the time periods prescribed by the SEC’s regulations. Those failures to file our periodic reports within the time periods prescribed by the SEC, among other consequences, resulted in the suspension of our eligibility to use Form S-3 registration statements until we timely filed our SEC periodic reports for a period of 12 months. We timely filed our SEC periodic reports for 12 consecutive months as of November 13, 2017. If in the future we are not able to file our periodic reports within the time periods prescribed by the SEC, among other consequences, we would be unable to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 consecutive months. Our inability to use Form S-3 registration statements would increase the time and resources we need to spend if we choose to access the public capital markets.

Risks Associated with our Majority-Owned Consolidated Subsidiary

The financial results of SC could have a negative impact on the Company's operating results and financial condition.

SC historically has provided a significant source of funding to the Company through earnings. Our investment in SC involves risk, including the possibility that poor operating results of SC could negatively affect the operating results of SHUSA.

Factors that affect the financial results of SC in addition to those which have been previously addressed include, but are not limited to:
Periods of economic slowdown may result in decreased demand for automobiles as well as declining values of automobiles and other consumer products used as collateral to secure outstanding loans. Higher gasoline prices, the general availability of consumer credit, and other factors which impact consumer confidence could increase loss frequency and decrease consumer demand for automobiles. In addition, during an economic slowdown, servicing costs may increase without a corresponding increase in finance charge income. Changes in the economy may impact the collateral value of repossessed automobiles and repossession, and foreclosure sales may not yield sufficient proceeds to repay the receivables in full and result in losses.

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SC’s growth strategy is subject to significant risks, some of which are outside its control, including general economic conditions, the ability to obtain adequate financing for growth, laws and regulatory environments in the states in which the business seeks to operate, competition in new markets, the ability to attract new customers, the ability to recruit qualified personnel, and the ability to obtain and maintain all required approvals, permits, and licenses on a timely basis
SC’s business may be negatively impacted if it is unsuccessful in developing and maintaining relationships with automobile dealerships that correlate to SC’s ability to acquire loans and automotive leases. In addition, economic downturns may result in the closure of dealerships and corresponding decreases in sales and loan volumes.
SC's business could be negatively impacted if it is unsuccessful in developing and maintaining its serviced for others portfolio. As this is a significant and growing portion of SC's business strategy, if an institution for which SC currently services assets chooses to terminate SC's rights as a servicer or if SC fails to add additional institutions or portfolios to its servicing platform, SC may not achieve the desired revenue or income from this platform.
SC has repurchase obligations in its capacity as a servicer in securitizations and whole loan sales. If significant repurchases of assets or other payments are required under its responsibility as a servicer, this could have a material adverse effect on SC’s financial condition, results of operations, and liquidity.
The obligations associated with being a public company require significant resources and management attention, which increases the costs of SC's operations and may divert focus from business operations. As a result of its IPO, SC is now required to remain in compliance with the reporting requirements of the SEC and the NYSE, maintain corporate infrastructure required of a public company, and incur significant legal and financial compliance costs, which may divert SC management’s attention and resources from implementing its growth strategy.
The market price of SC Common Stock may be volatile, which could cause the value of an investment in SC Common Stock to decline. Conditions affecting the market price of SC Common Stock may be beyond SC’s control and include general market conditions, economic factors, actual or anticipated fluctuations in quarterly operating results, changes in or failure to meet publicly disclosed expectations related to future financial performance, analysts’ estimates of SC’s financial performance or lack of research or reports by industry analysts, changes in market valuations of similar companies, future sales of SC Common Stock, or additions or departures of its key personnel.
SC's business and results of operations could be negatively impacted if it fails to manage and complete divestitures. SC regularly evaluates its portfolio in order to determine whether an asset or business may no longer be aligned with its strategic objectives. For example, in October 2015, SC disclosed a decision to exit the personal lending business and to explore strategic alternatives for its existing personal lending assets. Of its two primary lending relationships, SC completed the sale of substantially all of its loans associated with the LendingClub relationship in February 2016. SC continues to classify loans from its other primary lending relationship, Bluestem, as held-for-sale. SC remains a party to agreements with Bluestem that obligate it to purchase new advances originated by Bluestem, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and which is renewable through April 2022 at Bluestem's option. Both parties have the right to terminate this agreement upon written notice if certain events were to occur, including if there is a material adverse change in the financial reporting condition of either party. Although SC is seeking a third party willing and able to take on this obligation, it may not be successful in finding such a party, and Bluestem may not agree to the substitution. SC has recorded significant lower-of-cost-or-market adjustments on this portfolio and may continue to do so as long as the portfolio is held, particularly due to the new volume it is committed to purchase. Until SC finds a third party to assume this obligation, there is a risk that material changes to its relationship with Bluestem, or the loss or discontinuance of Bluestem’s business, would materially and adversely affect SC’s business, financial condition and results of operations. On March 9, 2020, Bluestem Brands, Inc., together with certain of its affiliates, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.
SC's business could be negatively impacted if access to funding is reduced. Adverse changes in SC's ABS program or in the ABS market generally could materially adversely affect its ability to securitize loans on a timely basis or upon terms acceptable to SC. This could increase its cost of funding, reduce its margins, or cause it to hold assets until investor demand improves.
As with SHUSA, adverse outcomes to current and future litigation against SC may negatively impact its financial position, results of operations, and liquidity. SC is party to various litigation claims and legal proceedings. In particular, as a consumer finance company, it is subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against it could take the form of class action complaints by consumers. As the assignee of loans originated by automotive dealers, it also may be named as a co-defendant in lawsuits filed by consumers principally against automotive dealers.

The Chrysler Agreement may not result in currently anticipated levels of growth and is subject to certain performance conditions that could result in termination of the agreement. If SC fails to meet certain of these performance conditions, FCA may seek to terminate the agreement. In addition, FCA has the option to acquire an equity participation in the Chrysler Capital portion of SC's business.


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In February 2013, SC entered into the Chrysler Agreement with FCA through which SC launched the Chrysler Capital brand on May 1, 2013. Through the Chrysler Capital brand, SC originates private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services SC provides under the Chrysler Agreement include providing (1) credit lines to finance FCA-franchised dealers’ acquisitions of vehicles and other products FCA sells or distributes, (2) automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, (3) financing for commercial and fleet customers, and (4) ancillary services. In addition, SC may facilitate, for an affiliate, offerings to dealers for dealer loan financing, construction loans, real estate loans, working capital loans, and revolving lines of credit. On June 28, 2019, the Company entered into an amendment of the Chrysler Agreement which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. This amendment also terminated a previously disclosed tolling agreement, dated July 11, 2018, between SC and FCA.

In May 2013, in accordance with the terms of the Chrysler Agreement, SC paid FCA a $150 million upfront, nonrefundable payment, to be amortized over ten years. In addition, in June 2019, in connection with the execution of the amendment to the Chrysler Agreement, SC paid a $60 million upfront fee to FCA. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement were terminated in accordance with its term.

As part of the Chrysler Agreement, SC received limited exclusivity rights to participate in specified minimum percentages of certain of FCA's financing incentive programs, which include loan rate subvention and automotive lease residual support subvention. Among other covenants, SC has committed to certain revenue sharing arrangements. SC bears the risk of loss on loans originated pursuant to the Chrysler Agreement, while FCA shares in any residual gains and losses in respect of automotive leases, subject to specific provisions in the Chrysler Agreement, including limitations on SC’s participation in such gains and losses.

The Chrysler Agreement is subject to early termination in certain circumstances, including SC's failure to meet certain key performance metrics, provided FCA treats SC in a manner consistent with other comparable OEMs. FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or SC's other stockholders owns 20% or more of SC’s common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC controls, or becomes controlled by, an OEM that competes with FCA or (iii) certain of SC’s credit facilities become impaired. In addition, under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. There is no maximum limit on the size of FCA’s potential equity participation. Although the Chrysler Agreement contains provisions that are designed to address a situation in which the parties disagree on the fair market value of the equity participation interest, there is a risk that SC ultimately receives less than what it believes to be the fair market value for such interest, and the loss of its associated revenue and profits may not be offset fully by the immediate proceeds for such interest. There can be no assurance that SC would be able to re-deploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing SC’s profitability.

SC’s ability to realize the full strategic and financial benefits of its relationship with FCA depends in part on the successful development of its Chrysler Capital business, which requires a significant amount of management's time and effort as well as the success of FCA's business. If FCA exercises its equity option, if the Chrysler Agreement (or FCA's limited exclusivity obligations thereunder) were to terminate, or if SC otherwise is unable to realize the expected benefits of its relationship with FCA, including as a result of FCA's bankruptcy or loss of business, there could be a materially adverse impact to SHUSA's and SC’s business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of SHUSA's and SC’s portfolio, liquidity, reputation, funding costs and growth, and SHUSA's and SC's ability to obtain or find other OEM relationships or to otherwise implement our business strategy could be materially adversely affected.


ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

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ITEM 2 - PROPERTIES

As of December 31, 2019, the Company utilized 760 buildings that occupy a total of 6.7 million square feet, including 184 owned properties with 1.4 million square feet, 453 leased properties with 3.8 million square feet, and 123 sale-and-leaseback properties with 1.5 million square feet. The executive and primary administrative offices for SHUSA and the Bank are located at 75 State Street, Boston, Massachusetts. The Company leases this location. SC's corporate headquarters are located at 1601 Elm Street, Dallas, Texas. SC leases this location.

Eleven major buildings serve as the headquarters or house significant operational and administrative functions, and are : Operations Center - 2 Morrissey Boulevard, Dorchester, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-Santander Way; 95 Amaral Street, Riverside, Rhode Island-Leased; SHUSA/SBNA Administrative Offices-75 State Street, Boston, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-450 Penn Street, Reading; Pennsylvania-Leased; Loan Processing Center-601 Penn Street; Reading, Pennsylvania-Owned; Operations and Administrative Offices-1130 Berkshire Boulevard, Wyomissing, Pennsylvania-Owned; Operations and Administrative Offices-1401 Brickell Avenue, Miami, Florida-Owned; Operations and Administrative Offices - San Juan, Puerto Rico-Leased; Computer Data Center - Hato Rey, Puerto Rico-Leased; SAM Administrative Offices-Guaynabo Puerto Rico-leased; and SC Administrative Offices-1601 Elm Street, Dallas, Texas-Leased.

The majority of these eleven Company properties identified above are utilized for general corporate purposes. The remaining 749 properties consist primarily of bank branches and lending offices. Of the total number of buildings, the Bank has 588 retail branches, and BSPR has 27 retail branches.

For additional information regarding the Company's properties refer to Note 6 - "Premises and Equipment" and Note 9 - "Other Assets" in the Notes to Consolidated Financial Statements in Item 8 of this Report.


ITEM 3 - LEGAL PROCEEDINGS

Refer to Note 15 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the IRS and Note 20 to the Consolidated Financial Statements for SHUSA’s litigation disclosures, which are incorporated herein by reference.


ITEM 4 - MINE SAFETY DISCLOSURES

None.


PART II


ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company has one class of common stock. The Company’s common stock was traded on the NYSE under the symbol “SOV” through January 29, 2009. On January 30, 2009, all shares of the Company's common stock were acquired by Santander and de-listed from the NYSE. Following this de-listing, there has not been, nor is there currently, an established public trading market in shares of the Company’s common stock. As of the date of this filing, Santander was the sole holder of the Company’s common stock.

At February 28, 2019, 530,391,043 shares of common stock were outstanding. There were no issuances of common stock during 2019, 2018, or 2017.

During the years ended December 31, 2019, 2018, and 2017 the Company declared and paid cash dividends of $400.0 million, $410.0 million, and $10.0 million respectively, to its shareholder.

Refer to the "Liquidity and Capital Resources" section in Item 7 of the MD&A for the two most recent fiscal years' activity on the Company's common stock.


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ITEM 6 - SELECTED FINANCIAL DATA
  SELECTED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands) 
2019 (1)
 
2018 (1)
 
2017 (1)
 
2016 (1)
 2015
Balance Sheet Data          
Total assets $149,499,477
 $135,634,285
 $128,274,525
 $138,360,290
 $141,106,832
Loans HFI, net of allowance 89,059,251
 83,148,738
 76,795,794
 82,005,321
 83,779,641
Loans held-for-sale 1,420,223
 1,283,278
 2,522,486
 2,586,308
 3,190,067
Total investments (2)
 19,274,235
 15,189,024
 16,871,855
 19,415,330
 22,768,783
Total deposits and other customer accounts 67,326,706
 61,511,380
 60,831,103
 67,240,690
 65,583,428
Borrowings and other debt obligations (2)(3)
 50,654,406
 44,953,784
 39,003,313
 43,524,445
 49,828,582
Total liabilities 125,100,647
 111,787,053
 104,583,693
 115,981,532
 119,259,732
Total stockholder's equity 24,398,830
 23,847,232
 23,690,832
 22,378,758
 21,847,100
Summary Statement of Operations         
Total interest income $8,650,195
 $8,069,053
 $7,876,079
 $7,989,751
 $8,137,616
Total interest expense 2,207,427
 1,724,203
 1,452,129
 1,425,059
 1,236,210
Net interest income 6,442,768
 6,344,850
 6,423,950
 6,564,692
 6,901,406
Provision for credit losses (4)
 2,292,017
 2,339,898
 2,759,944
 2,979,725
 4,079,743
Net interest income after provision for credit losses 4,150,751
 4,004,952
 3,664,006
 3,584,967
 2,821,663
Total non-interest income (5)
 3,729,117
 3,244,308
 2,901,253
 2,755,705
 2,905,035
Total general, administrative and other expenses (6)
 6,365,852
 5,832,325
 5,764,324
 5,386,194
 9,381,892
Income/(loss) before income taxes 1,514,016
 1,416,935
 800,935
 954,478
 (3,655,194)
Income tax provision/(benefit) (7)
 472,199
 425,900
 (157,040) 313,715
 (599,758)
Net income / (loss) (9)
 $1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)
Selected Financial Ratios (8)
          
Return on average assets 0.73% 0.76% 0.71% 0.45% (2.18)%
Return on average equity 4.23% 4.11% 4.10% 2.88% (11.98)%
Average equity to average assets 17.31% 18.37% 17.39% 15.67% 18.15 %
Efficiency ratio 62.58% 60.82% 61.81% 57.79% 95.67 %
(1)On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with Accounting Standards Codification ("ASC") 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. On July 2, 2018, an additional Santander subsidiary, SAM, an investment adviser located in Puerto Rico, was transferred to the Company. SFS and SAM are entities under common control of Santander; however, their results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company on both an individual and aggregate basis. As a result, the Company has reported the results of SFS on a prospective basis beginning July 1, 2017 and the results of SAM on a prospective basis beginning July 1, 2018.
(2)The increase in total investments from 2018 to 2019 was due to the purchase of additional AFS treasury securities. The decreases in Total investments and corresponding decreases in Borrowings and other debt obligations from 2016 to 2017 and 2015 to 2016 were primarily driven by the use of proceeds from the sales of investment securities to repurchase and pay off its outstanding borrowings.
(3)The increase in Borrowings and other debt obligations from 2018 to 2019 was primarily a result of the Company funding the growth of the loan portfolio and operating lease portfolio.
(4)The decrease in the Provision for credit losses from 2017 to 2018 was primarily due to lower net charge-offs on the RIC portfolio, accompanied by a recovery on the purchased RIC portfolio and lower provision on the originated RIC portfolio and the commercial loan portfolio. The decrease from 2015 to 2016 was primarily due to significantly lower provision on the purchased RIC portfolio, accompanied by slightly lower net charge-offs across the total loan portfolio.
(5)The increase in Non-interest income from 2018 to 2019 and 2017 to 2018 is primarily attributable to an increase in lease income corresponding to the growth of the operating lease portfolio.
(6)General, administrative, and other expenses increased annually between 2016 and 2019, primarily due to growth in compensation and benefits and lease expense, driven by corresponding growth of the operating lease portfolio. In 2015, this line included a $4.5 billion goodwill impairment charge on SC.
(7)Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information on the Company's income taxes. The income tax benefit in 2017 was due to the impact of the TCJA, resulting in a tax benefit to the Company. The income tax benefit in 2015 was primarily the result of the release of the deferred tax liability in conjunction with the goodwill impairment charge.
(8)For the calculation components of these ratios, see the Non-GAAP Financial Measures section of the MD&A.
(9)Includes net income/(loss) attributable to NCI of $288.6 million, $283.6 million, $405.6 million, $277.9 million, and $(1.7) billion for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively.

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ITEM 7 - MD&A

EXECUTIVE SUMMARY

SHUSA is the parent holding company of SBNA, a national banking association, and owns approximately 72.4% (as of December 31, 2019) of 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 Santander. SHUSA is also the parent company of Santander BanCorp , a holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, BSPR; SSLLC, a registered broker-dealer headquartered in Boston; BSI, a financial services company headquartered in Miami that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; SIS, a registered broker-dealer headquartered 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 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 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 specialized consumer finance company focused on vehicle finance and third-party servicing. SC's primary business is the indirect origination and securitization of 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 is managed through a single reporting segment which included vehicle financial products and services, including RICs, vehicle leases, and dealer loans, as well as financial products and services related to recreational and marine vehicles and other consumer finance products.

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 holds other consumer finance products. However, in 2015, SC announced its exit from personal lending and, accordingly, all of its personal lending assets are classified as HFS at December 31, 2019.

Chrysler Capital

 Since May 2013, under the ten-year private label financing agreement with 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 provides 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.

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. The Company's average penetration rate for the third quarter of 2019 was 34%, an increase from 30% for the same period in 2018.

SC has dedicated financing facilities in place for its Chrysler Capital business and has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. During the year ended December 31, 2019, SC originated $12.8 billion in Chrysler Capital loans, which represented 56% of the UPB of its total RIC originations, with an approximately even share between prime and non-prime, as well as $8.5 billion in Chrysler Capital leases. Additionally, substantially all of the leases originated by SC during the year ended December 31, 2019 were under the Chrysler Agreement. Since its May 2013 launch, Chrysler Capital has originated more than $65.9 billion in retail loans (excluding the SBNA RIC origination program) and purchased $41.9 billion in leases.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the fourth 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 December 31, 2019 was 3.5% compared to 3.5% at September 30, 2019, and was lower compared to 3.9% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose in the retail trade, and healthcare, while mining employment decreased.

The BEA advance estimate indicates that real gross domestic product grew at an annualized rate of 2.1% for the fourth quarter of 2019, consistent with the advance estimated growth of 2.1% for the third quarter of 2019. Growth continued to be driven by increases in personal consumption expenditures, federal government spending, and state and local government spending. In addition, imports, which are a subtraction to in the calculation of the gross domestic product, decreased. These positive contributions were offset by decreases to private inventory investment and non-residential fixed investments.

Market year-to-date returns for the following indices based on closing prices at December 31, 2019 were:
December 31, 2019
Dow Jones Industrial Average22.0%
S&P 50028.5%
NASDAQ Composite34.8%

At its December 2019 meeting, the Federal Open Market Committee decided to maintain the federal funds rate target at 1.50%, to continue to support economic expansion, current strength in labor market conditions, and inflation near its targeted objective. Overall inflation remains below the targeted rate of 2.0%.

The ten-year Treasury bond rate at December 31, 2019 was 1.90%, down from 2.69% at December 31, 2018. Within the industry, changes in 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 September 2019 statistics, mortgage originations increased 29.74% year-over-year, which included an increased 6.21% in mortgage originations for home purchases and an increased 103.1% 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 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 0.87% of loans using the latest available data, which was as of the third quarter of 2019, compared to 0.95% for the prior year.

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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Credit Rating Actions

The following table presents Moody’s, S&P and Fitch credit ratings for the Bank, BSPR, SHUSA, Santander, and the Kingdom of Spain, as of December 31, 2019:
BANK
BSPR(1)(2)
SHUSA
Moody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
Long-TermBaa1A-BBB+Baa1N/ABBB+Baa3BBB+BBB+
Short-TermP-1A-2F-2P-1/P-2N/AF-2n/aA-2F-2
OutlookStableStableStableStableN/AStableStableStableStable

SANTANDERSPAIN
Moody'sS&PFitchMoody'sS&PFitch
Long-TermA2AA-Baa1AA-
Short-TermP-1A-1F-2P-2A-1F-1
OutlookStableStableStableStableStableStable
(1)    P-1 Short Term Deposit Rating; P-2 Short Term Debt Rating.
(2)    Outlook currently is Stable and under review with the possibility of a downgrade.

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

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. The Company is regulated on a consolidated basis by the Federal Reserve, including the FRB of Boston, and the CFPB. The Company's banking and bank holding company subsidiaries are further supervised by the FDIC and 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. 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.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



FBOs

In February 2014, the Federal Reserve issued the final rule implementing certain enhanced prudential standards (“EPS”)EPS mandated by section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA") (“Final Rule”).DFA. 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. In addition, the Final Rule required U.S. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the Final Rule. As a result of this rule, Santander has transferred substantially all of its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. A phased-in

Economic Growth Act

In May 2018, 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 is being used for the standards and requirements at both the FBO and the IHC. As a U.S. BHC with more than $50 billion in total consolidated assets, the Company became subject to the EPS on January 1, 2015. Other standardsmandated by Section 165 of the FBO Final Rule will be phased in through January 1, 2019.

DFA

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 DFA instituted major changestailoring rule applies to bankingboth Santander and financial institution regulatory regimes as a result of the financial crisis. The DFA includes a number of provisions designed to promote enhanced supervision and regulation of financial companies and financial markets. The DFA introduced substantial reforms that reshape the financial services industry, including significantly enhanced regulation. This enhanced regulation has required and will continue to require higher compliance costs and negatively affect the Company's revenue and earnings.

EPS

The DFA imposes EPS on BHCs with at least $50 billion in total consolidated assets (often referred to as “systemically important financial institutions”), including the Company, and required the Federal Reserve to establish prudential standards for such BHCs that are more stringent than those applicable to other BHCs, including standards for risk-based capital requirements and leverage limits; heightened capital and liquidity standards, including eliminating trust preferred securities as Tier 1 regulatory capital; enhanced risk management requirements; and credit exposure reporting and concentration limits. These changes have impacted and are expected to continue impacting the profitability and growth of the Company.

The DFA mandates an enhanced supervisory framework, which means that the Company is subject to annual stress tests by the Federal Reserve, Both Santander and the Company and the Bank are required to conduct semi-annual and annual stress tests, respectively, reporting results to the Federal Reserve and the OCC. The Federal Reserve also has discretionary authority to establish additional prudential standards, on its own or at the Financial Stability Oversight Council's recommendation, regarding contingent capital, enhanced public disclosures, short-term debt limits, and otherwise as deemed appropriate.

Stress Testing and Capital Planning

The Company is subject to the Federal Reserve’s capital plan rule, which requires the Company and the Bank to perform stress tests and submit the results to the Federal Reserve and the OCC on an annual basis. The Company is also required to submit a mid-year stress test to the Federal Reserve. In addition, together with the annual stress test submission, the Company is required to submit a proposed capital plan to the Federal Reserve. As a consolidated subsidiarywere placed into Category four of the Company, SC is included in the Company's stress tests and capital plans.

Under the capital plan rule, the Company is considered a large and non-complex BHC.tailoring rule. The Federal Reserve may object to the Company’s capital plan if the Federal Reserve determines that the Company has not demonstrated an ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the planning horizon. Large and non-complex BHCs such as the Companynew tailored standards are no longer subject to the qualitative objection criteria of the capital plan rule which are applied to larger banks that fall outside the large and non-complex BHC definition.

SHUSA and SBNA are subject to various regulatory restrictions relating to the payment of dividends, including regulatory capital minimums and the requirement to remain "well-capitalized" under prompt corrective action regulations. As a consolidated subsidiary of the Company, SC is included in various regulatory restrictions relating to payment of dividends


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Table of Contents

discussed further below.

Regulatory Capital Requirements

In July 2013, the Federal Reserve, the FDIC and the OCC released final U.S. Basel III regulatory capital rules implementing the global regulatory capital reforms of Basel III that are applicable to both SHUSA and the Bank. The final rules establishedBank 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. Subject to various transition periods, this rule became effective for SHUSA on January 1, 2015.

TheThese 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")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 is beingwas phased in over three years starting in 2016, beginning at 0.625% and increasing by that amount on each subsequent January 1, until the buffer reaches 2.5% oneffective 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.

TheThese 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"),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 proposed finalized changes to the capital rules that became effective on January 1, 2018.  These changes extended the current treatment and will deferdeferred the final transition provision phase-in at non-advanced approach institutions for certain capital elements, and suspendsuspended the risk-weightingrisk-weight to 100 percent for certain deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent.  In addition,During 2019, the regulatory agencies issuedapproved a secondary proposal in 2017final rule which includes simplifications for non-advanced approaches to further revise the generally applicable capital rule by introducing newrules, specifically with regard to the treatment of high volatility acquisition, development and construction loans, and byminority interest, as well as modifying the calculationrisk-weight to 250 percent for minority interest includible within capital, for which the regulators havecertain deferred taxes and mortgage servicing assets not released adisallowed from capital.  This final decision.rule will become effective on April 1, 2020. 

See the Bank Regulatory Capital section of thethis MD&A of this Form 10-K 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.


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Item 7.    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 ImprovementImprovements Act (the “FDIA”) and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution.

At December 31, 2017,2019, the Bank met the criteria to be classified as “well-capitalized.”


9On April 10, 2018, the Federal Reserve issued a 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 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 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, if finalized as proposed, to have a material impact on its current or future planned capital actions. This rule was finalized on March 4, 2020, and its impact is being evaluated.



Table of ContentsStress 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 RulesBHC Activity and Acquisition Restrictions

In September 2014,Federal laws restrict the types of activities in which BHCs may engage, and subject them to a range of supervisory requirements, including regulatory enforcement actions for violations of laws and policies. BHCs may engage in the business of banking and managing and controlling banks, as well as closely-related activities.

The Company would be required to obtain approval from the Federal Reserve the FDIC, and the OCC finalized a rule to implement the Basel III liquidity coverage ratio (the “LCR”) for certain internationally active banks and nonbank financial companies, and a modified version of the LCR for certain depository institution holding companies that are not internationally active. The LCR is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets ("HQLA") equal to its expected net cash outflow for a 30-day time horizon. This rule implements a phased implementation approach under which the most globally important covered companies (more than $700 billion in assets) and large regional financial institutions ($250 billion to $700 billion in assets) were required to begin phasing-in the LCR requirements in January 2015. Smaller covered companies (more than $50 billion in assets), such asif the Company were required to calculate the LCR monthly beginning January 2016. In November 2015, the Federal Reserve publishedacquire shares of any depository institution or any holding company of a revised final LCR rule. Under this revision,depository institution, or any financial entity that is not a depository institution, such as a lending company.

Control of the Company was required to calculateor the modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016. There is no requirement to submit the calculation to the Federal Reserve. The Company will be required to publicly disclose its US LCR results beginning October 1, 2018.

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

Resolution and Recovery Planning

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

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

Total Loss-Absorbing Capacity ("TLAC")

The Federal Reserve adopted a final rule in December 2016 that requires certain U.S. organizations to maintain a minimum amount of loss-absorbing instruments, including a minimum amount of unsecured long-term debt (“LTD”) (the “TLAC Rule”). The TLAC Rule applies to U.S. global systemically important banks 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, companiesChange in Bank Control Act, individuals, corporations or other entities acquiring SHUSA's common stock may, alone or together with other investors, be deemed to control the Company and thereby the Bank. Ownership of more than 10% of SHUSA’s capital stock may be deemed to constitute “control” if certain other control factors are present. If deemed to control the Company, those persons or groups would be required to obtain the Federal Reserve's approval to acquire the Company’s common stock and could be subject to certain ongoing reporting procedures and restrictions under federal law and regulations.

Standards for Safety and Soundness

The federal banking agencies adopted certain operational and managerial standards for depository institutions, including internal audit system components, loan documentation requirements, asset growth parameters, information technology and data security practices, and compensation standards for officers, directors and employees.

Insurance of Accounts and Regulation by the FDIC

The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. The Bank's and BSPR's deposits are insured up to applicable limits by the FDIC. The FDIC assesses deposit insurance premiums and is authorized to conduct examinations of, and require reporting by, FDIC-insured institutions like the Bank and BSPR. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the Deposit Insurance Fund. The FDIC also has the authority to initiate enforcement actions against banking institutions and may terminate an institution’s deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC-insured limits, which is currently $250,000 per depositor per ownership category for each ownership deposit account category.

FDIC insurance premium expenses were $60.5 million for the year ended December 31, 2019.

Restrictions on Subsidiary Banking Institution Capital Distributions

Under the FDIA, insured depository institutions must be classified in one of five defined tiers (well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Under OCC regulations, an institution is considered “well-capitalized” if it (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a CET1 capital ratio of 6.5% or greater, (iv) has a Tier 1 leverage ratio of 5% or greater and (v) is not subject to any order or written directive to meet and maintain a specific capital level. As of December 31, 2019, the Bank met the criteria to be classified as “well capitalized.”

If capital levels fall to 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 FDIA and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions and repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the institution’s capital account.


8





Federal banking laws, regulations and policies 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 the Company within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) the Bank is not adequately capitalized at the time. In addition, the OCC's prior approval is required if the OCC deems it to be in troubled condition or a problem institution.

Any dividends declared and paid have the effect of reducing the Bank’s Tier 1 capital to average consolidated assets and risk-based capital ratios. During 2019, 2018, and 2017, the Company paid cash dividends of $400.0 million, $410.0 million and $10.0 million, respectively. During 2019, 2018 and 2017, the Company paid cash dividends to preferred shareholders of zero, $11.0 million and $14.6 million, respectively. During the third quarter of 2018, SHUSA redeemed all of its outstanding preferred stock.

Federal Reserve Regulation

Under Federal Reserve regulations, the Bank is required to maintain a minimum amount of TLAC, which consists of a minimum amount of LTDreserve against its transaction accounts (primarily interest-bearing and Tier 1 capital. As a result, SHUSA will need to holdnon-interest-bearing checking accounts). Because reserves must generally be maintained in cash or in low-interest-bearing accounts, the higher of 18% of its risk-weighted assets ("RWAs") or 9% of its total consolidated assets in the form of TLAC. SHUSA must maintain a TLAC buffer composed solely of common equity Tier 1 capital and will be subject to restrictions on capital distributions and discretionary bonus payments based on the sizeeffect of the TLAC buffer it maintains. In addition, the TLAC Rule requires SHUSAreserve requirements is to hold LTD of at least 6% of its RWAs or 3.5% of its total consolidated assets. The TLAC Rule is effective January 1, 2019.

Volcker Rulereduce an institution’s asset yields.

The DFA added new Section 13 toamount of total reserve requirements at December 31, 2019 and 2018 were $534.6 million and $429.0 million, respectively. At December 31, 2019 and 2018, the BHC Act, whichCompany complied with these reserve requirements.

FHLB System

The FHLB system was created in 1932 and consists of 11 regional FHLBs. FHLBs are federally-chartered but privately owned institutions created by Congress. The Federal Housing Finance Agency is commonly referred to as the “Volcker Rule.” The Volcker Rule prohibits a “banking entity” from engaging in “proprietary trading” or engaging in anyan agency of the followingfederal government that is charged with overseeing the FHLBs. Each FHLB is owned by its member institutions. The primary purpose of the FHLBs is to provide funding to their members for making housing loans as well as for affordable housing and community development lending. FHLBs are generally able to make advances to their member institutions at interest rates that are lower than could otherwise be obtained by such institutions. As a member, the Bank is required to make minimum investments in FHLB stock based on its level of borrowings from the FHLB. The Bank is a member of and held investments in the FHLB of Pittsburgh which totaled $316.4 million as of December 31, 2019, compared to $230.1 million at December 31, 2018. The Bank utilizes advances from the FHLB to fund balance sheet growth, provide liquidity and for asset and liability management purposes. The Bank had access to advances with the FHLB of up to $17.3 billion at December 31, 2019, and had outstanding advances of $7.0 billion or 41% of total availability at that date. The level of borrowing capacity the Bank has with the FHLB of Pittsburgh is contingent upon the level of qualified collateral the Bank holds at a given time.

The Bank received $16.6 million and $6.6 million in dividends on its stock in the FHLB of Pittsburgh in 2019 and 2018, respectively.

Anti-Money Laundering and the USA Patriot Act

Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act, and the USA Patriot Act require all financial institutions to, among other things, implement policies and procedures relating to anti-money laundering, compliance, suspicious activities, currency transaction reporting and due diligence on customers. The USA Patriot Act substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the U.S., imposed compliance and due diligence obligations, created criminal penalties, compelled the production of documents located both inside and outside the U.S., including those of non-U.S. institutions that have a correspondent relationship in the U.S., and clarified the safe harbor from civil liability to clients. The U.S. Treasury has issued a number of regulations that further clarify the USA Patriot Act’s requirements and provide more specific guidance on their application.

Financial Privacy

Under the GLBA, financial institutions are required to disclose to their retail customers their policies and practices 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 insharing nonpublic customer information with their affiliates and non-affiliates, how they maintain customer confidentiality, and how they secure customer information. Customers are required under the Covered Fund; (ii) controlling the Covered Fund; or (iii) engaging in certain transactionsGLBA to be provided with the fund if the banking entity or any affiliate is an investment adviser or sponsoropportunity to the Covered Fund. These prohibitions are“opt out” of information sharing with non-affiliates, subject to certain exemptionsexceptions.

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Environmental Laws

Environmentally-related hazards are a source of high risk and potentially significant liability for permitted activities.financial institutions related to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental cleanup costs to the borrower affecting its ability to repay its loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean-up costs, and liability to the institution for cleanup costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. To minimize this risk, the Bank may require an environmental examination of, and reports with respect to, the property of any borrower or prospective borrower if circumstances affecting the property indicate a potential for contamination, taking into consideration the potential loss to the institution in relation to the burdens to the borrower. Such examination must be performed by an engineering firm experienced in environmental risk studies and acceptable to the institution, and the costs of such examinations and reports are the responsibility of the borrower. These costs may be substantial and may deter a prospective borrower from entering into a loan transaction with the Bank. The Company is not aware of any borrower which is currently subject to any environmental investigation or clean-up proceeding or any other environmental matter that is likely to have a material adverse effect on the financial condition or results of operations of SHUSA or its subsidiaries.

Securities and Investment Regulation

The Company conducts its securities and investment business activities through its subsidiaries SIS and SSLLC. SIS and SSLLC are registered broker-dealers with the SEC and members of FINRA. SIS’s activities include investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed income securities. SIS, SSLLC and SAM are also registered investment advisers with the SEC, and BSI conducts certain securities transactions exempt from SEC registration on behalf of its clients.

Written Agreements and Regulatory Actions

See the “Regulatory Matters” section of the MD&A and Note 22 of the Consolidated Financial Statements in this Form 10-K for a description of current regulatory actions.

Corporate Information

All reports filed electronically by the Company with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, are accessible on the SEC’s website at www.sec.gov. Our filings are also accessible through our website at https://www.santanderus.com/us/investorshareholderrelations. The information contained on our website is not being incorporated herein and is provided for the information of the reader and are not intended to be active links.


ITEM 1A - RISK FACTORS

Summary Risk Factors

The Company is subject to a number of risks that if realized could affect its business, financial condition, results of operations, cash flows and access to liquidity materially. As a financial services organization, certain elements of risk are inherent in our businesses. Accordingly, the Company encounters risk as part of the normal course of its businesses. Some of the Company’s more significant challenges and risks include the following:

We are vulnerable to disruptions and volatility in the global financial markets. Disruptions and volatility in financial markets can have a material adverse effect on our ability to access capital and liquidity on acceptable financial terms. Negative and fluctuating economic conditions, such as a changing interest rate environment, may cause our lending margins to decrease and reduce customer demand for our higher margin products and services.

Uncertainty regarding LIBOR may affect our business adversely. We have established an enterprise-wide initiative to identify, asses and monitor risks associated with the anticipated discontinuation of LIBOR. However, there can be no assurance that we and other market participants will be adequately prepared for the potential disruption to financial markets and potential adverse effects to interest rates on our loans, deposits, derivatives and other financial instruments currently tied to LIBOR.

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Because
We are subject to substantial regulation. As a financial institution, we are subject to extensive regulation by government agencies, including limitations on permissible activities, required financial stress tests, required non-objection to certain actions, investigations and other regulatory proceedings. If we are unable to meet the term “banking entity” includes an insured depository institution,expectations of our regulators fully, we may need to divert significant resources to remedial actions, be unable to take planned capital actions, and/or be subject to fines or other enforcement actions, among other things. These circumstances could affect our revenues and expenses and other aspects of our business and operations adversely.

We may not be able to detect money laundering or other illegal or improper activities fully or on a depository institution holding companytimely basis. We work regularly to improve our policies, procedures and anycapabilities to detect and prevent financial crimes. However, such crimes are evolving continually, and there will be instances in which we may be used by other parties to engage in money laundering or other illegal or improper activities. These instances may result in regulatory fines, sanctions and/or legal enforcement, which could have a material adverse effect on our operating results, financial condition and prospects.

Credit risk is inherent in our business. Our customers’ and counterparties’ financial condition, repayment abilities, repayment intentions, the value of their affiliates,collateral, and government economic policies, market interest rates and other factors affect the Volcker Rule has sweeping worldwide applicationquality of our loan portfolio. Many of these factors are beyond our control, and covers entitiesthere can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses.

Liquidity and funding risks are inherent in our business. Changes in market interest rates and our credit spreads occur continuously, may be unpredictable and highly volatile and can significantly increase our cost of funding. We rely primarily on deposits to fund lending activities. However, our ability to maintain or grow deposits depends on factors outside our control, such as Santander,general economic conditions and confidence of depositors in the Company,economy and certainthe financial services industry. If deposit withdrawals increase significantly in a short period of time, it could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to fluctuations in interest rates. Interest rates are highly sensitive to factors beyond our control, such as increased regulation of the Company’s subsidiaries (includingfinancial sector, monetary policies, economic and political conditions, and other factors. Variations in interest rates could impact net interest income, which comprises the Bankmajority of our revenue, reducing our growth and SC), as well as other Santander subsidiariespotentially resulting in the United States and abroad.losses.

The Company implemented certain policies
We are subject to significant competition. We compete with banks that are larger than us and procedures, training programs, record keeping, 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 eachnon-traditional providers of 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 rule.

Collateral Requirements

The Company routinely executes interest rate swaps for the management of its asset/liability mix, and also executes such swaps with its borrower clients. Under the DFA, the Bank is required to post collateral with certain of its counterparties and clearing exchanges. While clearing these financial instruments offers some benefits and additional transparency in valuation, the system requirements for clearing execution add operational complexities to the business and accordingly increase operational risk.

Risk Retention Rule

In December 2014, the Federal Reserve issued its final credit risk retention rule, which generally requires sponsors of asset-backed securities ("ABS") to retain at least five percent of the credit risk of the assets collateralizing ABS. Compliance with the rule with respect to ABS collateralized by residential mortgages was required beginning in December of 2015. Compliance with the rule with regard to all other classes of ABS was required beginning in December of 2016. 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.

Heightened Standards

The Bank isservices who may not be subject to the OCC's regulations undersame regulatory or legislative requirements to which we are subject. If we are unable to compete successfully with current and new competitors and anticipate changing banking industry trends, our business may be affected adversely.
We rely on third parties for important products and services. We rely on third-party vendors for key components of our business infrastructure such as loan and deposit servicing systems, custody and clearing services, internet connections and network access. Cyberattacks and breaches of the National Bank Act. The various lawssystems of those vendors could lead to operational and regulations administered by the OCCreputational risk and losses for national banks affect the Bank's corporate practicesSHUSA.

Risks relating to data collection, processing, storage systems and impose certain restrictions on its activitiesdata security.Proper functioning of financial controls, accounting and investmentsother data collection and processing systems is critical to ensureour businesses and our ability to compete effectively. Inadequate personnel, inadequate or failed internal control processes or systems, or external events that the Bank operatesinterrupt normal business operations could each impair our data collection, processing, storage systems and data security and result in a safelosses.

We and sound manner. These lawsothers in our industry face cybersecurity risks. We take protective measures and regulations also require the Bankmonitor and develop our systems continuously to disclose substantial businessprotect our technology infrastructure and financial informationdata from cyberattacks. However, cybersecurity risks continue to the OCCincrease for our industry, and the public.

In September 2014, the OCC finalized guidelines to strengthen the governance and risk management practicesproliferation of large financial institutions commonly known 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 Actnew technologies and the Federal Reserve's Regulation W, which governs theincreased sophistication and activities of the Bank with affiliated companiesactors behind such attacks present risks for compromised data, theft of funds or theft or destruction of corporate information 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.assets.

Section 23B
Disclosure controls and procedures over financial reporting and internal controls over financial reporting may not prevent or detect all errors or acts of the Federal Reserve Act prohibitsfraud. The Company’s system of internal controls over financial reporting may not achieve their intended objectives. There are risks that material misstatements due to error or fraud may not be prevented or detected in all cases, and that information may not be reported on a depository institution from engaging in certain transactions with affiliates unless the transactions are considered arms' length. To meet the definition of arms-length, the terms of the transaction must be the same, or at least as favorable, as those for similar transactions with non-affiliated companies.timely basis.

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


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Community Reinvestment Act (“CRA”)
SC’s financial results could impact our results. SC’s earnings have historically been a significant source of funding for the Company. Factors that could negatively affect SC’s financial results could consequently affect SHUSA’s financial results.

SBNAThe above list is not exhaustive, and Bancowe face additional challenges and risks. Please carefully consider all of the information in this Form-K including matters set forth in this "Risk Factors" section.

Risk Factors

Risk management and mitigation are important parts of the Company's business model and integrated into the Company's day-to-day operations. The success of the Company's business is dependent on management's ability to identify, understand, manage and mitigate the risks presented by business activities in light of the Company's strategic and financial objectives. These risks include credit risk, market risk, capital risk, liquidity risk, operational risk, model risk, investment risk, compliance and legal risk, and strategic and reputational risk. We discuss our principal risk management processes in the Risk Management section included in Item 7 of this Annual Report on Form 10-K.

The following are the most significant risk factors that affect the Company. Any one or more of these could have a material adverse impact on the Company's business, financial condition, results of operations, or cash flows, in addition to presenting other possible adverse consequences, many of which are described below. These risk factors and other risks we may face are also discussed further in other sections of this Annual Report on Form 10-K.

Macro-Economic and Political Risks

Given that our loan portfolios are concentrated in the United States, adverse changes affecting the economy of the United States could adversely affect our financial condition.

Our loan portfolios are concentrated in the United States. Accordingly, the recoverability of our loan portfolios and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general are dependent to a significant extent on the level of economic activity in the United States. A return to recessionary conditions in the United States economy would likely have a significant adverse impact on our loan portfolios and, as a result, on our financial condition, results of operations, and cash flows.

We are vulnerable to disruptions and volatility in the global financial markets.

We face, among others, the following risks in the event of an economic downturn or another recession:

Increased regulation of our industry. Compliance with such regulation has increased our costs and may affect the pricing of our products and services and limit our ability to pursue business opportunities.
Reduced demand for our products and services.
Inability of our borrowers to timely or fully comply with their existing obligations.
The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans.
The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan and lease loss allowances.
The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.
Any worsening of economic conditions may delay the recovery of the financial industry and impact our financial condition and results of operations.
Macroeconomic shocks may impact the household income of our retail customers negatively and adversely affect the recoverability of our retail loans, resulting in increased loan and lease losses. 

Despite the long-term expansion of the U.S. economy, some uncertainty remains regarding U.S. monetary policy and the future economic environment. There can be no assurance that economic conditions will continue to improve. Such economic uncertainty could have an adverse effect on our business and results of operations. A downturn of the economic expansion or failure to sustain the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

In addition, these concerns continue even as the global economy recovers, and some previously stressed European economies have experienced at least partial recoveries from their low points during the recession. If measures to address sovereign debt and financial sector problems in Europe are inadequate, they may delay or weaken economic recovery, or result in the further exit of member states from the Eurozone or more severe economic and financial conditions. If realized, these risk scenarios could contribute to severe financial market stress or a global recession, likely affecting the economy and capital markets in the United States as well.


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Increased disruption and volatility in the financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such decrease in capital markets funding availability or increased costs or in deposit rates could have a material adverse effect on our net interest margins and liquidity.

If some or all of the foregoing risks were to materialize, they could have a material adverse effect on us.

Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.

While the United States economy has performed well overall, it has experienced volatility in recent periods, characterized by slow or regressive growth. This volatility has resulted in fluctuations in the levels of deposits at depository institutions and in the relative economic strength of various segments of the economy to which we lend.

Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default on public debt could cause to the banking system as a whole, particularly since commercial banks' exposure to government debt is high in certain Latin American and European regions or countries.

In addition, our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, international ownership legislation, interest rate caps and tax policies. Growth, asset quality and profitability may be affected by volatile macroeconomic and political conditions.

The actions of the U.S. administration could have a material adverse effect on us.

There is uncertainty about how proposals and initiatives of the current U.S. presidential administration or the broader government could directly or indirectly impact the Company. Although certain proposals and initiatives, such as income tax reform or increased spending on infrastructure projects, could result in greater economic activity and more expansive U.S. domestic economic growth,
other initiatives, such as protectionist trade policies or isolationist foreign policies, could constrict economic growth. The continued uncertainty around these proposals and initiatives, could increase market volatility and affect the Company’s businesses directly or indirectly, including through the effects of such proposals and initiatives on the Company’s customers and/or counterparties.

Developments stemming from the U.K.’s referendum on membership in the EU could have a material adverse effect on us.

Implementing the results of the U.K.’s referendum on remaining part of the EU has had and may continue to have negative effects on global economic conditions and global financial markets. The U.K.'s decision to withdraw from the EU, and the U.K.'s implementation of that referendum, means that the U.K.'s EU membership will cease. The long-term nature of the U.K.’s relationship with the EU is unclear (including with respect to the laws and regulations that will apply as the U.K. determines which EU laws to replicate or replace) and, as negotiations continue in 2020, uncertainty remains as to when the framework for any such relationship governing both the access of the U.K. to European markets and the access of EU member states to the U.K.’s markets will be determined and implemented, and whether such a framework will be established prior to the U.K. leaving the EU. The result of the referendum has created an uncertain political and economic environment in the U.K., and may create such environments in other EU member states. The Governor of the Bank of England has warned that the U.K. exiting the EU could lead to considerable financial instability, a very significant fall in property prices, rising unemployment, depressed economic growth, and higher inflation and interest rates. This could affect the U.K.’s attractiveness as a global investment center, and contribute to a detrimental impact on U.K. economic growth. These developments, or the perception that they could occur, could have a material adverse effect on economic conditions and the stability of financial markets in the U.K., and could significantly reduce market liquidity and restrict the ability of key market participants to operate in certain financial markets. While the Company does not maintain a presence in the U.K., political and economic uncertainty in countries with significant economies and relationships to the global financial industry have in the past led to declines in market liquidity and activity levels, volatile market conditions, a contraction of available credit, lower or negative interest rates, weaker economic growth and reduced business confidence on an international level, each of which could adversely affect our business.

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 suggests that LIBOR is likely to be discontinued or modified by 2021.


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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 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 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, the 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. 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.

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. As of December 31, 2019, we have approximately $24 billion of assets and approximately $14 billion of liabilities with LIBOR exposure. We also have approximately $63 billion in notional amounts of off-balance sheet contracts with LIBOR exposure.

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 impacted adversely. 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.

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.



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Risks Relating to Our Business

Legal, Regulatory and Compliance Risks

We are subject to substantial regulation which could adversely affect our business and operations.

As a financial institution, the Company is subject to extensive regulation, which materially affects our businesses. The statutes, regulations, and policies to which the Company is subject may change at any time. In addition, regulators' interpretation and application of the laws and regulations to which the Company is subject may change from time to time. Extensive legislation affecting the financial services industry has been adopted in the United States, and regulations have been and are in the process of being implemented. The manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Any legislative or regulatory actions and any required or other changes to our business operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets we hold, compel us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our businesses. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not affect us adversely.

Regulation of the Company as a BHC includes limitations on permissible activities. Moreover, the Company and the Bank are required to perform stress tests and submit capital plans to the Federal Reserve and the OCC on an annual basis, and receive a notice of non-objection to the plans from the Federal Reserve and the OCC before taking capital actions such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. The Federal Reserve may also impose substantial fines and other penalties and enforcement actions for violations we may commit, and has the authority to disallow acquisitions we or our subsidiaries may contemplate, which may limit our future growth plans. Such constraints currently applicable to the Company and its subsidiaries and/or regulatory actions could have an adverse effect on our financial position and results of operations.

Other regulations that significantly affect the Company, or that could significantly affect the Company in the future, relate to capital requirements, liquidity and funding, taxation of the financial sector, and development of regulatory reforms in the United States.

In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements necessitate a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands that may result in supervisory measures.

Significant United States Regulation

From time to time, we are or may become subject to or involved in formal and informal reviews, investigations, examinations, proceedings, and information gathering requests by federal and state government agencies, including, among others, the FRB, the OCC, the CFPB, the FDIC, the DOJ, the SEC, FINRA the Federal Trade Commission and various state regulatory and enforcement agencies.

The DFA will continue to result in significant structural reforms affecting the financial services industry. This legislation provided for, among other things, the establishment of the CFPB with broad authority to regulate the credit, savings, payment and other consumer financial products and services we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the OTC derivatives market, prohibitions on engaging in certain proprietary trading activities, restrictions on ownership of, investment in or sponsorship of hedge funds and private equity funds and restrictions on interchange fees earned through debit card transactions.

The DFA provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the SEC, the U.S. CFTC or both, and are or will be subject to new capital, margin, business conduct, record-keeping, clearing, execution, reporting and other requirements. We may register as a swap dealer with the CFTC.

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Within the DFA, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading and from sponsoring or investing in covered funds, in each case subject to certain exceptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships. The final regulations implementing the Volcker Rule contain exclusions and certain exemptions for market-making, hedging, underwriting, and trading in United States government and agency obligations as well as certain foreign government obligations, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained.

Our resolution in a bankruptcy proceeding could result in losses for holders of our debt and equity securities.

Under regulations issued by the Federal Reserve and the FDIC, and as required by Section 165(d) of the DFA, we and Santander Puerto Ricomust provide to the Federal Reserve and the FDIC a Section 165(d) Resolution Plan. The purpose of this DFA provision is to provide regulators with plans that would enable them to resolve failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk. The most recently filed Section 165(d) Resolution Plan by Santander, dated as of December 31, 2018, provides a roadmap for the orderly resolution of the material U.S. operations of Santander under hypothetical stress scenarios and the failure of one or more of its U.S. MEs. Material entities are defined as subsidiaries or foreign offices of Santander that are significant to the activities of a critical operation or core business line. The U.S. MEs identified in the 2018 Resolution Plan include, among other entities, the Company, the Bank and SC.

The 2018 Resolution Plan describes a strategy for resolving Santander’s U.S. operations, including its U.S. MEs and the core business lines that operate within those U.S. MEs, in a manner that would substantially mitigate the risk that the resolutions would have serious adverse effects on U.S. or global financial stability. Under the 2018 Resolution Plan’s hypothetical resolutions of the U.S. MEs, the Bank would be placed into FDIC receivership and the Company and SC would be placed into bankruptcy under Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code, respectively.

The strategy described in the 2018 Resolution Plan contemplates a “multiple point of entry” strategy, in which Santander and the Company would each undergo separate resolution proceedings under European regulations and the U.S. Bankruptcy Code, respectively. In a scenario in which the Bank and SC were in resolution, the Company would file a voluntary petition under Chapter 7 of the Bankruptcy Code, and holders of our LTD and other debt securities would be junior to the claims of priority (as determined by statute) and secured creditors of the Company.
The Company, the Federal Reserve and the FDIC are not obligated to follow the Company’s preferred resolution strategy for resolving its U.S. operations under its resolution plan. In addition, Santander could in the future change its resolution strategy for resolving its U.S. operations. In an alternative scenario, the Company alone could enter bankruptcy under the U.S. Bankruptcy Code, and the Company’s subsidiaries would be recapitalized as needed, using assets of the Company, so that they could continue normal operations as going concerns or subsequently be wound down in an orderly manner. As a result, the losses incurred by the Company and its subsidiaries would be imposed first on the holders of the Company’s equity securities and thereafter on unsecured creditors, including holders of our LTD and other debt securities. Holders of our LTD and other debt securities would be junior to the claims of creditors of the Company’s subsidiaries and to the claims of priority (as determined by statute) and secured creditors of the Company. Under either of these scenarios, in a resolution of the Company under Chapter 11 of the U.S. Bankruptcy Code, holders of our LTD and other debt securities would realize value only to the extent available to the Company as a shareholder of the Bank, SC and its other subsidiaries, and only after any claims of priority and secured creditors of the Company have been fully repaid.

The resolution of the Company under the orderly liquidation authority could result in greater losses for holders of our equity and debt securities.

The ability of holders of our LTD and other debt securities to recover the full amount that would otherwise be payable on those securities in a resolution proceeding under Chapter 11 of the U.S. Bankruptcy Code may be impaired by the exercise of the FDIC’s powers under the “orderly liquidation authority” under Title II of the DFA.

Title II of the DFA created a new resolution regime known as the “orderly liquidation authority” to which financial companies, including U.S. IHC of FBOs with assets of $50 billion or more, such as the Company, can be subjected. Under the orderly liquidation authority, the FDIC may be appointed as receiver to liquidate a financial company if, upon the recommendation of applicable regulators, the United States Secretary of the Treasury determines that the entity is in severe financial distress, the entity’s failure would have serious adverse effects on the U.S. financial system, and resolution under the orderly liquidation authority would avoid or mitigate those effects, among other things. Absent such determinations, the Company would remain subject to the U.S. Bankruptcy Code.


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If the FDIC were appointed as receiver under the orderly liquidation authority, then the orderly liquidation authority, rather than the U.S. Bankruptcy Code, would determine the powers of the receiver and the rights and obligations of creditors and other parties who have transacted with the Company. There are substantial differences between the rights available to creditors under the orderly liquidation authority and under the U.S. Bankruptcy Code. For example, under the orderly liquidation authority, the FDIC may disregard the strict priority of creditor claims in some circumstances (which would otherwise be respected under the U.S. Bankruptcy Code), and an administrative claims procedures is used to determine creditors’ claims (as opposed to the judicial procedure utilized in bankruptcy proceedings). Under the orderly liquidation authority, in certain circumstances, the FDIC could elevate the priority of claims if it determines that doing so is necessary to facilitate a smooth and orderly liquidation without the need to obtain the consent of other creditors or prior court review. Furthermore, the FDIC has the right to transfer assets or liabilities of the failed company to a third party or “bridge” entity under the orderly liquidation authority.

Regardless of what resolution strategy Santander might prefer for resolving its U.S. operations, the FDIC could determine that it is a desirable strategy to resolve the Company in a manner that would, among other things, impose losses on the Company’s shareholder, unsecured debtholders (including holders of our LTD) and other creditors, while permitting the Company’s subsidiaries to continue to operate. It is likely that the application of such an entry strategy in which the Company would be the only legal entity in the U.S. to enter resolution proceedings would result in greater losses to holders of our LTD and other debt securities than the losses that would result from the application of a bankruptcy proceeding or a different resolution strategy for the Company. Assuming the Company entered resolution proceedings and support from the Company to its subsidiaries was sufficient to enable the subsidiaries to remain solvent, losses at the subsidiary level could be transferred to the Company and ultimately borne by the Company’s securityholders (including holders of our LTD and other debt securities), with the result that third-party creditors of the Company’s subsidiaries would receive full recoveries on their claims, while the Company’s securityholders (including holders of our LTD) and other unsecured creditors could face significant losses. In addition, in a resolution under the orderly liquidation authority, holders of our LTD and other debt securities of the Company could face losses ahead of our other similarly situated creditors if the FDIC exercised its right, to disregard the strict priority of creditor claims described above.

The orderly liquidation authority also requires that creditors and shareholders of the financial company in receivership must bear all losses before taxpayers are exposed to any losses, and amounts owed by the financial company or the receivership to the U.S. government would generally receive a statutory payment priority over the claims of private creditors, including holders of our LTD and other debt securities. In addition, under the orderly liquidation authority, claims of creditors (including holders of our LTD and other debt securities) could be satisfied through the issuance of equity or other securities in a bridge entity to which the Company’s assets are transferred, as described above. If securities were to be delivered in satisfaction of claims, there can be no assurance that the value of the securities of the bridge entity would be sufficient to repay all or any part of the creditor claims for which the securities were exchanged.

Although the FDIC has issued regulations to implement the orderly liquidation authority, not all aspects of how the FDIC might exercise this authority are known, and additional rulemaking is possible.

United States stress testing, capital planning, and related supervisory actions

The Company is subject to stress testing and capital planning requirements under regulations implementing the DFA and other banking laws and policies. Effective January 2017, the Federal Reserve finalized a rule adjusting its capital plan and stress testing rules, exempting from the qualitative portion of the CCAR certain BHCs and U.S. IHCs of FBOs with total consolidated assets between $50 billion and $250 billion and total nonbank assets of less than $75 billion, and that are not identified as global systemically important banks. Such firms, including the Company, are still required to meet CCAR’s quantitative requirements and are subject to regular supervisory assessments that examine their capital planning processes. In 2017, 2018, and 2019 the Federal Reserve provided its non-objection to SHUSA’s capital plan; however, in 2015 and 2016, the Federal Reserve, as part of its CCAR process, objected on qualitative grounds to the capital plans the Company submitted. There is risk that the Federal Reserve could object to the Company’s future capital plans, which would limit the Company's ability to make capital distributions or take certain capital actions.

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Other supervisory actions and restrictions on U.S. activities

In addition to the foregoing, U.S. bank regulatory agencies from time to time take supervisory actions under certain circumstances that restrict or limit a financial institution’s activities. In many instances, we are subject to significant legal restrictions on our ability to disclose these actions or the full details of these actions publicly. In addition, as part of the regular examination process, certain U.S. subsidiaries’ regulators may advise the subsidiary to operate under various restrictions as a prudential matter. The U.S. supervisory environment has become significantly more demanding and restrictive since the financial crisis of 2008. Under the BHC Act, the Federal Reserve has the authority to disallow us and certain of our U.S. subsidiaries from engaging in certain categories of new activities in the United States or acquiring shares or control of other companies in the United States. Such actions and restrictions currently applicable to us or certain of our U.S. subsidiaries could adversely affect our costs and revenues. Moreover, efforts to comply with nonpublic supervisory actions or restrictions could require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions could have a material adverse effect on our business and results of operations, and we may be subject to significant legal restrictions on our ability to publicly disclose these matters or the full details of these actions.

We are subject to potential intervention by any of our regulators or supervisors, particularly in response to customer complaints.

As noted above, our business and operations are subject to increasingly significant rules and regulations relating to the banking and financial services business. These apply to business operations, affect financial returns, include reserve and reporting requirements, and the conduct of our business. These requirements are established by the relevant central banks and regulatory authorities that authorize, regulate and supervise us in the jurisdictions in which we operate. The relationship between the Company and its customers is also regulated extensively under federal and state consumer protection laws. Among other things, these prohibit unfair, deceptive and abusive trading practices, require disclosures of the cost of credit, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, and restrict our ability to raise interest rates.

In their supervisory roles, regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening, but not guaranteeing, the protection of customers and the financial system. Supervisors' continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, regulators have an outcome-focused regulatory approach that involves proactive enforcement and penalties for infringement. As a result, we face increased supervisory intrusion and scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines.

Some of the regulators focus strongly on consumer protection and on conduct risk. This has included a focus on the design and operation of products, the behavior of customers and the operation of markets. Some of the laws in the relevant jurisdictions in which we operate give regulators the power to make temporary product intervention rules either to improve a company's systems and controls in relation to product design, product management and implementation, or address problems identified with financial products. These problems may potentially cause significant detriment to consumers because of certain product features, governance flaws or distribution strategies. Such rules may prevent institutions from entering into product agreements with customers until such problems have been solved. Some regulators in the jurisdictions in which we operate also require us to be in compliance with training, authorization and supervision of personnel, systems, processes and documentation requirements. Sales practices with retail customers, including incentive compensation structures related to such practices, have recently been a focus of various regulatory and governmental agencies. If we fail to be compliant with such regulations, there would be a risk of an adverse impact on our business from sanctions, fines or other actions imposed by regulatory authorities.

We are exposed to risk of loss from legal and regulatory proceedings.

As noted above, we face risk of loss from legal and regulatory proceedings, including tax proceedings that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory environment reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs. In general, amounts financial institutions pay in settlements of regulatory proceedings or investigations and the severity of terms of regulatory settlements have been increasing. In certain cases, regulatory authorities have required criminal pleas, admissions of wrongdoing, limitations on asset growth, managerial changes, and other extraordinary terms as part of such settlements, all of which could have significant economic consequences for a financial institution.


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We are subject to civil and tax claims and party to certain legal proceedings incidental to the normal course of our business from time to time, including in connection with lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly when the claimants seek very large or indeterminate damages, or when the cases present novel legal theories, involve a large number of parties or are in the early stages of investigation or discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have established adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves we have currently accrued. As a result, the outcome of a particular matter may materially and adversely affect our financial condition and results of operations for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.

In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by the SEC and law enforcement authorities.

Often, the announcement or other publication of claims or actions that may arise from such litigation and regulatory proceedings or of any related settlement may spur the initiation of similar claims by other customers, clients or governmental entities. In any such claim or action, demands for substantial monetary damages may be asserted against us and may result in financial liability, changes in our business practices or an adverse effect on our reputation or client demand for our products and services. In regulatory settlements since the financial crisis, fines imposed by regulators have increased substantially and may in some cases exceed the profit earned or harm caused by the breach.

Regular and ongoing inspection by our banking and other regulators may result in the need to enhance our regulatory compliance or risk management practices. Such remedial actions may entail significant costs, management attention, and systems development, and such efforts may affect our ability to expand our business until those remedial actions are completed. In some instances, we are subjected to significant legal restrictions on our ability to disclose these types of actions or the full detail of these actions publicly. Our failure to implement enhanced compliance and risk management procedures in a manner and timeframe deemed to be responsive by the applicable regulatory authority could adversely impact our relationship with that regulatory authority and lead to restrictions on our activities or other sanctions.

The magnitude and complexity of projects required to address the Company’s regulatory and legal proceedings, in addition to the challenging macroeconomic environment and pace of regulatory change, may result in execution risk and adversely affect the successful execution of such regulatory or legal priorities.

In many cases, we are required to self-report inappropriate or non-compliant conduct to regulatory authorities, and our failure to do so may represent an independent regulatory violation. Even when we promptly bring matters to the attention of appropriate authorities, we may nonetheless experience regulatory fines, liabilities to clients, harm to our reputation or other adverse effects in connection with self-reported matters.

We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with anti-money laundering, anti-terrorism and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems and sophisticated monitoring and compliance personnel, and have become the subject of enhanced government supervision.

While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, those policies and procedures may not completely eliminate instances in which we may be used by other parties to engage in money laundering and other illegal or improper activities. Emerging technologies, such as cryptocurrencies and blockchain, could limit our ability to track the movement of funds. Our ability to comply with legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability.

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These require implementing and embedding effective controls and monitoring within our business and on-going changes to systems and operations. Financial crime is continually evolving and subject to increasingly stringent regulatory oversight and focus. Even known threats can never be fully eliminated, and there will be instances in which we may be used by other parties to engage in money laundering or other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the authority to impose fines and other penalties on us. In addition, our business and reputation could suffer if customers use our banking network for money laundering or other illegal or improper purposes.

While we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree we rely on our counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our and our counterparties’ services as conduits for money laundering (including illegal cash operations) or other illegal activities without our and our counterparties’ knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering or other illegal activities, our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

An incorrect interpretation of tax laws and regulations may adversely affect us.

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations, and is subject to review by taxing authorities. We are subject to the requirementsincome tax laws of the CRA,United States and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which requiresare sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the appropriate federal financial supervisory agencyapplication of these inherently complex tax laws. If the judgments, estimates, and assumptions we use in preparing our tax returns are subsequently found to assess an institution's recordbe incorrect, there could be a material effect on our results of helping to meetoperations.

Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the credit needs of the local communitiesjurisdictions in which it is located. Banco Santander Puerto Rico’s current CRA rating is “Outstanding.” SBNA’s mostwe operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that such reforms would not have an adverse effect upon our business. Aspects of recent public CRA reportU.S. federal income tax reform such as the Tax Cuts and Jobs Act of examination rated2017 limit or eliminate certain income tax deductions, including the Bank as “Needs to Improve” forhome mortgage interest deduction, the January 1, 2011 through December 31, 2013 evaluation period. The Bank’s rating based solelydeduction of interest on home equity loans and a limitation on the applicable CRA lending, servicedeductibility of property taxes. These limitations and investment tests would have been “satisfactory.” However, the overall rating was lowered to “Needs to Improve” due to previously disclosed instanceseliminations could affect demand for some of non-compliance by the Bank that are being remediated. The OCC takes into account the Bank’s CRA rating in considering certain regulatory applications the Bank makes, including applications related to establishing and relocating branches,our retail banking products and the Federal Reserve doesvaluation of assets securing certain of our loans adversely, increasing our provision for loan losses and reducing profitability.

Credit Risks

If the same with respectlevel of our NPLs increases or our credit quality deteriorates in the future, or if our loan and lease loss reserves are insufficient to certain regulatory applicationscover loan and lease losses, this could have a material adverse effect on us.

Risks arising from changes in credit quality and the Company makes.recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted and can continue to
negatively impact our results of operations. In addition, thereparticular, the amount of our reported NPLs may be some negative impacts on aspects ofincrease in the Bank’s businessfuture as a result of growth in our total loan portfolio, including as a result of loan portfolios we may acquire in the downgrade.future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in the United States, the impact of political events, events affecting certain industries or events affecting financial markets. There can be no assurance that we will be able to effectively control the level of the NPLs in our loan portfolio.


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Our loan and lease loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the last global financial crisis demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and there can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates for any reason, including an increase in lending to individuals and small and medium enterprises, a volume increase in our credit card portfolio or the introduction of new products, or if future actual losses exceed our estimates of incurred losses, we may be required to increase our loan and lease loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this also could have a material adverse effect on us.

In addition, the FASB’s ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments was adopted by the Company on January 1, 2020 and increased our ACL by approximately $2.5 billion. This standard replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. Upon adoption of this standard, companies must recognize credit losses on these assets equal to management’s estimate of credit losses over the assets’ remaining expected lives. It is possible that our ongoing reported earnings and lending activity will be impacted negatively in periods following adoption of this ASU. See “Changes in accounting standards could impact reported earnings” below.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, and this reduces the weighted average life of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent in our commercial activity, and an increase in prepayments could have a material adverse effect on us.

The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting the United States. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events such as natural disasters, particularly in locations in which a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and have an adverse impact on the economy of the affected region. We also may not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment of impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses on our loans, which may materially and adversely affect our results of operations and financial condition.

In addition, auto industry technology changes, accelerated by environmental rules, could affect our auto consumer business, particularly the residual values of leased vehicles, which could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivatives contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearinghouses or other financial intermediaries.


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We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. We rely on information provided by or on behalf of counterparties, such as financial statements, and we may rely on representations of our counterparties as to the accuracy and completeness of that information. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

Liquidity and Financing Risks

Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they become due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate these risks completely. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements as well as limit growth possibilities.

Our cost of obtaining funding is directly related to prevailing market interest rates and our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

If wholesale markets financing ceases to be available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.

We rely, and will continue to rely, primarily on deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of depositors in the economy in general, and the financial services industry in particular, as well as competition among banks for deposits. Any of these factors could significantly increase the amount of deposit withdrawals in a short period of time, thereby reducing our ability to access deposit funding in the future on appropriate terms, or at all. If these circumstances were to arise, they could have a material adverse effect on our operating results, financial condition and prospects.

We anticipate that our customers will continue to make deposits (particularly demand deposits and short-term time deposits) in the near future, and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits, or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

There can be no assurance that, in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments, or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally.


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Any downgrade in our or Santander's debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivatives contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain categories of depositorsour products, engage in certain longer-term and derivatives transactions and retain customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivatives contracts, we may be required to maintain a minimum credit rating or terminate the contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

We conduct a significant number of our material derivatives activities through Santander and Santander UK. We estimate that, as of December 31, 2018, if all of the rating agencies were to downgrade Santander’s or Santander UK’s long-term senior debt ratings, we would be required to post additional collateral pursuant to derivatives and other financial contracts. Refer to further discussion in Note 14 of the Notes to the Consolidated Financial Statements.

While certain potential impacts of these downgrades are restrictedcontractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend on numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a company's long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example depending on certain factors, including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on the Company, the Bank, and SC.

In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace those contracts, our market risk profile could be altered.

There can be no assurance that the rating agencies will maintain their current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase the cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

Market Risks

We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rates, exchange rates or equity prices. Changes in interest rates affect the following areas, of our business, among others:

net interest income;
the volume of loans originated;
the market value of our securities holdings;
the value of our loans and deposits;
gains from sales of loans and securities; and
gains and losses from derivatives.

Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions, and other factors. Variations in interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. This is a result of the different effect a change in interest rates may have on the interest earned on our assets and the interest paid on our borrowings. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure.

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and the collateral used to secure our loans, and may reduce gains or require us to record losses on sales of our loans or securities.


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In addition, we may experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.

Some of our investment management services fees are based on financial market valuations of assets certain of our subsidiaries manage or hold in custody for clients. Changes in these valuations can affect noninterest income positively or negatively, and ultimately affect our financial results. Significant changes in the volume of activity in the capital markets, and in the number of assignments we are awarded, could also affect our financial results.

We are also exposed to equity price risk in our investments in equity securities. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to economic uncertainty and sovereign debt concerns has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income and the market value of our assets and liabilities could be materially adversely affected.

Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

In recent years, financial markets have been subject to volatility and the resulting widening of credit spreads. We have material exposures to securities and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets, and also may translate into increased impairments. In addition, the value we ultimately realize on
disposal of the asset may be lower than its current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition and prospects.

In addition, to the extent fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain. In addition, valuation models are complex, making them inherently imperfect predictors of actual results. Any resulting impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to market, operational and other related risks associated with our derivatives transactions that could have a material adverse effect on us.

We enter into derivatives transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).

The execution and performance of derivatives transactions depend on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivatives transactions continues to depend, to a great extent, on our IT systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.

In addition, disputes with counterparties may arise regarding the terms or the settlement procedures of derivatives contracts, including with respect to the value of underlying collateral, which could cause us to incur unexpected costs, including transaction, operational, legal and litigation costs, or result in credit losses, all of which may impair our ability to manage our risk exposure from these products.


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Risk Management

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. Although we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.

We rely on quantitative models to measure risks and estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, and calculating economic and regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating models will be adversely affected due to the inadequacy of that information. Also, information we provide to the public or our regulators based on poorly designed or implemented models could be inaccurate or misleading.

Some of our qualitative tools and metrics for managing risk are based on our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses therefore could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions based on models that are poorly developed, implemented, or used, or as a result of a modeled outcome being misunderstood or used of for purposes for which it was not designed. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere or seek to limit transactions with us. This could have a material adverse effect on our reputation, operating results, financial condition, and prospects.

As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management is to employ an internal credit rating system to assess the particular risk profile of a customer. Since this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human and IT systems errors. In exercising their judgment on the current and future credit risk of our customers, our employees may not always assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.

We have been refining our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect all possible risks before they occur or, due to limited tools available to us, our employees may not be able to implement them effectively, which may increase our credit risk. Failure to effectively implement,
consistently follow or continuously refine our credit risk management system may result in an increase in the level of NPLs and a higher risk exposure for us, which could have a material adverse effect on us.

General Business and Industry Risks

The financial problems our customers face could adversely affect us.

Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial condition of our borrowers, which could in turn increase our NPL ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds significantly, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.


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We depend in part upon dividends and other funds from subsidiaries.

Most of our operations are conducted through our subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent on our subsidiaries’ earnings and business considerations, and are limited by legal and regulatory restrictions. Additionally, our right to receive any assets of our subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.

Increased competition and industry consolidation may adversely affect our results of operations.

We face substantial competition in all parts of our business from numerous banks and non-bank providers of financial services, including in originating loans and attracting deposits, providing customer service, the quality and range of products and services, technology, interest rates and overall reputation, and we expect competitive conditions to continue to intensify. Our competition comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.

There has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. Some of our competitors are substantially larger than we are, which may give those competitors advantages such as a “Needsmore diversified product and customer base, the ability to Improve” rating.reach more customers and potential customers, operational efficiencies, lower-cost funding and larger branch networks. Many competitors are also focused on cross-selling their products, which could affect our ability to maintain or grow existing customer relationships or require us to offer lower interest rates or fees on our lending products or higher interest rates on deposits. There can be no assurance that increased competition will not adversely affect our growth prospects and therefore our operations. We also face competition from non-bank competitors such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

Interchange RuleNon-traditional providers of banking services, such as internet based e-commerce providers, mobile telephone companies and internet search engines, may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to the same regulatory or legislative requirements to which we are subject. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing.

UnderNew competitors may enter the Durbin Amendmentmarket or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to compete successfully with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to anticipate or adapt to emerging technologies or changes in customer behavior effectively, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business. Furthermore, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies and the rise in customer use of internet and mobile banking platforms in recent years could negatively impact our investments in bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in demand towards internet and mobile banking may necessitate changes to our retail distribution strategy, which may include closing and/or selling certain branches and restructuring our remaining branches and workforce. These actions could lead to losses on these assets and increased expenditures to renovate, reconfigure or close a number of our remaining branches or otherwise reform our retail distribution channel. Furthermore, our failure to keep pace with innovation or to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect on our competitive position.

If our customer service levels were perceived by the market to be materially below those of our competitors, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.


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Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

The success of our operations and our profitability depend, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive, and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the DFA,changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients and the significant and ongoing investments required to bring new products and services to market in
a timely manner at competitive prices. Our failure to manage these risks and uncertainties also exposes us to the enhanced risk of operational lapses, which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine whether initiatives can be brought to market in a manner that is timely and attractive to our clients. Failure to manage these risks in the development and implementation of new products or services successfully could have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

Goodwill impairments may be required in relation to acquired businesses.

We have made business acquisitions for which it is possible that the goodwill which has been attributed to those businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in the business’ underlying profitability, asset quality or other relevant matters. Impairment testing with respect to goodwill is performed annually, more frequently if impairment indicators are present, and includes a comparison of the carrying amount of the reporting unit with its fair value. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as this excess of carrying value over fair value. We recognized a $10.5 million impairment of goodwill in 2017 primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effect of Hurricane Maria. We did not recognize any impairments of goodwill in 2018 or 2019. It is reasonably possible we may be required to record impairment of $4.5 billion of goodwill attributable to SC and SBNA in the future. There can be no assurance that we will not have to write down the value attributed to goodwill further in the future, which would not impact risk-based capital ratios adversely, but would adversely affect our results of operations and stockholder's equity.

We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

The financial industry in the United States has experienced and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. In addition, due to our relationship with Santander, we are subject to indirect regulation by the European Central Bank, which has recently imposed compensation restrictions that may apply to certain of our executive officers and other employees under the CRD IV prudential rules. These restrictions may impact our ability to retain our experienced management team and key employees and our ability to attract appropriately qualified personnel, which could have a material adverse impact on our business, financial condition, and results of operations.

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We rely on third parties for important products and services.

Third-party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting those parties. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct could adversely affect our ability to deliver products and services to customers and otherwise to conduct business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third-party vendors could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure them.  Any restructuring could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, financial condition and operations.

If a third party obtains access to our customer information and that third party experiences a cyberattack or breach of its systems, this could result in several negative outcomes for us, including losses from fraudulent transactions, potential legal and regulatory liability and associated damages, penalties and restitution, increased operational costs to remediate the consequences of the third party’s security breach, and harm to our reputation from the perception that our systems or third-party systems or services that we rely on may not be secure.

Damage to our reputation could cause harm to our business prospects.

Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees and conducting business transactions with our counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, dealing with sectors that are not well perceived by the public (e.g., weapons industries), dealing with customers on sanctions lists, ratings downgrades, compliance failures, unethical
behavior, and the activities of customers and counterparties, including activities that affect the environment negatively. Further, adverse publicity, regulatory actions or fines, litigation, operational failures or the failure to meet client expectations or other obligations could materially and adversely affect our reputation, our ability to attract and retain clients or our sources of funding for the same or other businesses.

Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement have caused public perception of us and others in the financial services industry to decline. Activists increasingly target financial services firms with criticism for relationships with clients engaged in businesses whose products are perceived to be harmful to the health of customers, or whose activities are perceived to affect public safety affect the environment, climate or workers’ rights negatively. Such criticism could increase dissatisfaction among customers, investors and employees of the Company and damage the Company’s reputation. Alternatively, yielding to such activism could damage the Company’s reputation with groups whose views are not aligned with those of the activists. In either case, certain clients and customers may cease to do business with the Company, and the Company’s ability to attract new clients and customers may be diminished.

Preserving and enhancing our reputation also depends on maintaining systems, procedures and controls that address known risks and regulatory requirements, as well as our ability to timely identify, understand and mitigate additional risks that arise due to changes in our businesses and the markets in which we operate, the regulatory environment and customer expectations.

We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

We may be the subject of misinformation and misrepresentations propagated deliberately to harm our reputation or for other deceitful purposes, including by others seeking to gain an illegal market advantage by spreading false information about us. There can be no assurance that we will be able to neutralize or contain false information that may be propagated regarding the Company, which could have an adverse effect on our operating results, financial condition and prospects effectively.


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Fraudulent activity associated with our products or networks could cause us to suffer reputational damage, the use of our products to decrease and our fraud losses to be materially adversely affected. We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling customer information. The risk of fraud continues to increase for the financial services industry in general. Credit and debit card fraud, identity theft and related crimes are prevalent, and perpetrators are growing more sophisticated. Our resources, customer authentication methods and fraud prevention tools may not be sufficient to accurately predict or prevent fraud. Additionally, our fraud risk continues to increase as third parties that handle confidential consumer information suffer security breaches and we expand our direct banking business and introduce new products and features. Our financial condition, the level of our fraud charge-offs and other results of operations could be materially adversely affected if fraudulent activity were to increase significantly. High-profile fraudulent activity could negatively impact our brand and reputation. In addition, significant increases in fraudulent activity could lead to regulatory intervention and reputational and financial damage to our brands, which could negatively impact the use of our products and services and have a material adverse effect on our business.

The Bank engages in transactions with its subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.

The Bank and its subsidiaries have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

United States law applicable to certain financial institutions, including the Bank and other Santander entities and offices in the U.S., establish several procedures designed to ensure that the transactions entered into with or among our subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions.

The Bank and its affiliates are likely to continue to engage in transactions with their respective affiliates. Future conflicts of interests among our affiliates may arise, which conflicts are not required to be and may not be resolved in SHUSA's favor.

Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, terrorist activities or international hostilities.

Neither the occurrence nor potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, and other significant public health emergencies, dislocations, fires, explosions, or other catastrophic accidents or events), terrorist activities or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities, preventing a subset of our employees from working for a prolonged period and otherwise preventing us from conducting our business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies and defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning and our ability to anticipate the nature of any such event that may occur. The adverse impact of disasters, terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses with which we deal.

Technology and Cybersecurity Risks

Any failure to effectively maintain, secure, improve or upgrade our IT infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Our ability to remain competitive depends in part on our ability to maintain, protect and upgrade our IT on a timely and cost-effective basis. We must continually make significant investments and improvements in our IT infrastructure in order to remain competitive. There can be no assurance that we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our IT infrastructure in the future. Any failure to improve or upgrade our IT infrastructure and management information systems effectively and in a timely manner could have a material adverse effect on us.


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Risks relating to data collection, processing, storage systems and security are inherent in our business.

Like other financial institutions with a large customer base, we have been subject to and are likely to continue to be the subject of attempted cyberattacks in light of the fact that we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Our business depends on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and e-mail services, spreadsheets, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial controls, accounting and other data collection and processing systems is critical to our businesses and our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures proves to be inadequate or is circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent information security risk, we routinely exchange personal, confidential and proprietary information by electronic means, which may be a target for attempted cyberattacks.

Many companies across the country and in the financial services industry have reported significant breaches in the security of their websites or other systems. Cybersecurity risks have increased significantly in recent years due to the development and proliferation of new technologies, increased use of the internet and telecommunications technology to conduct financial transactions, and increased sophistication and activities of organized crime groups, state-sponsored and individual hackers, terrorist organizations, disgruntled employees and vendors, activists and other third parties. Financial institutions, the government and retailers have in recent years reported cyber incidents that compromised data, resulted in the theft of funds or the theft or destruction of corporate information and other assets.

We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. We have policies, practices and controls designed to prevent or limit disruptions to our systems and enhance the security of our infrastructure. These include performing risk management for information systems that store, transmit or process information assets identifying and managing risks to information assets managed by third-party service providers through
on-going oversight and auditing of the service providers’ operations and controls. We develop controls regarding user access to software on the principle that access is forbidden to a system unless expressly permitted, limited to the minimum amount necessary for business purposes, and terminated promptly when access is no longer required. We seek to educate and make our employees aware of information security and privacy controls and their specific responsibilities on an ongoing basis.

Nevertheless, while we have not experienced material losses or other material consequences relating to cyberattacks or other information or security breaches, whether directed at us or third parties, our systems, software and networks, as well as those of our clients, vendors, service providers, counterparties and other third parties, may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code, cyberattacks such as denial of service, malware, ransomware, phishing, and other events that could result in security breaches or give rise to the manipulation or loss of significant amounts of personal, proprietary or confidential information of our customers, employees, suppliers, counterparties and other third parties, disrupt, sabotage or degrade service on our systems, or result in the theft or loss of significant levels of liquid assets, including cash. As cybersecurity threats continue to evolve and increase in sophistication, we cannot guarantee the effectiveness of our policies, practices and controls to protect against all such circumstances that could result in disruptions to our systems. This is because, among other reasons, the techniques used in cyberattacks change frequently, cyberattacks can originate from a wide variety of sources, and third parties may seek to gain access to our systems either directly or by using equipment or passwords belonging to employees, customers, third-party service providers or other authorized users of our systems. In the event of a cyberattack or security breach affecting a vendor or other third party entity on whom we rely, our ability to conduct business, and the security of our customer information, could be impaired in a manner to that of a cyberattack or security breach affecting us directly. We also may not receive information or notice of the breach in a timely manner, or we may have limited options to influence how and when the cyberattack or security breach is addressed.

As financial institutions are becoming increasingly interconnected with central agents, exchanges and clearinghouses, they may be increasingly susceptible to negative consequences of cyberattacks and security breaches affecting the systems of such third parties. It could take a significant amount of time for a cyberattack to be investigated, during which time we may not be in a position to fully understand and remediate the attack, and certain errors or actions could be repeated or compounded before they are discovered and remediated, any or all of which could further increase the costs and consequences associated with a particular cyberattack. The perception of a security breach affecting us or any part of the financial services industry, whether correct or not, could result in a loss of confidence in our cybersecurity measures or otherwise damage our reputation with customers and third parties with whom we do business. Should such adverse events occur, we may not have indemnification or other protection from the third party sufficient to compensate or protect us from the consequences.


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As attempted cyberattacks continue to evolve in scope and sophistication, we may incur significant costs in our attempts to modify or enhance our protective measures against such attacks to investigate or remediate any vulnerability or resulting breach, or in communicating cyberattacks to our customers. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party or a cyberattack could result in our inability to recover or restore data that has been stolen, manipulated or destroyed, damage to our systems and those of our clients, customers and counterparties, violations of applicable privacy and other laws, or other significant disruption of operations, including disruptions in our ability to use our accounting, deposit, loan and other systems and our ability to communicate with and perform transactions with customers, vendors and other parties. These effects could be exacerbated if we would need to shut down portions of our technology infrastructure temporarily to address a cyberattack, if our technology infrastructure is not sufficiently redundant to meet our business needs while an aspect of our technology is compromised, or if a technological or other solution to a cyberattack is slow to be developed. Even if we timely resolve the technological issues in a cyberattack, a temporary disruption in our operations could adversely affect customer satisfaction and behavior, expose us to reputational damage, contractual claims, regulatory, supervisory or enforcement actions, or litigation.

U.S. banking agencies and other federal and state government agencies have increased their attention on cybersecurity and data privacy risks, and have proposed enhanced risk management standards that would apply to us. Such legislation and regulations relating to cybersecurity and data privacy may require that we modify systems, change service providers, or alter business practices or policies regarding information security, handling of data and privacy. Changes such as these could subject us to heightened operational costs. To the extent we do not successfully meet supervisory standards pertaining to cybersecurity, we could be subject to supervisory actions, litigation and reputational damage.

Financial Reporting and Control Risks

Changes in accounting standards could impact reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our Consolidated Financial Statements. These changes can materially impact how we record and report our financial condition and results of operations, as well as affect the calculation of our capital ratios. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

For example, as noted in Note 2 to the Consolidated Financial Statements in this Form 10-K, in June 20112016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The adoption of this standard resulted in the increase in the ACL of approximately $2.5 billion and a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase is based on 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. The standard did not have a material impact on the Company’s other financial instruments. Additionally, we elected to utilize regulatory relief which will permit us to phase in 25 percent of the capital impact of CECL in our calculation of regulatory capital amounts and ratios in 2020, and an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023.

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

The preparation of consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect our Consolidated Financial Statements and accompanying notes. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provisions for liabilities.

The ACL is a significant critical estimate. Due to the inherent nature of this estimate, we cannot provide assurance that the Company will not significantly increase the ACL or sustain credit losses that are significantly higher than the provided allowance.


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The valuation of financial instruments measured at fair value can be subjective, in particular when models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove inaccurate.

If the judgments, estimates and assumptions we use in preparing our Consolidated Financial Statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

Disclosure controls and procedures over financial reporting and internal controls over financial reporting may not prevent or detect all errors or acts of fraud, and lapses in these controls could materially and adversely affect our operations, liquidity and/or reputation.

Disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We also maintain a system of internal controls over financial reporting. However, these controls may not achieve their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgement and breakdowns resulting from human failures. Controls can be circumvented by collusion or improper management override. Because of these limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis.

Further, there can be no assurance that we will not suffer from material weaknesses in disclosure controls and processes over financial reporting in the future. If we fail to remediate any future material weaknesses or fail to otherwise maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements and limit our ability to raise capital. Additionally, failure to remediate the material weaknesses or otherwise failing to maintain effective internal controls over financial reporting may negatively impact our operating results and financial condition, impair our ability to timely file our periodic reports with the SEC, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.

Failure to satisfy obligations associated with public securities filings may have adverse regulatory, economic, and reputational consequences.

We filed our Annual Report on Form 10-K for 2015 and certain Quarterly Reports on Form 10-Q in 2016 after the time periods prescribed by the SEC’s regulations. Those failures to file our periodic reports within the time periods prescribed by the SEC, among other consequences, resulted in the suspension of our eligibility to use Form S-3 registration statements until we timely filed our SEC periodic reports for a period of 12 months. We timely filed our SEC periodic reports for 12 consecutive months as of November 13, 2017. If in the future we are not able to file our periodic reports within the time periods prescribed by the SEC, among other consequences, we would be unable to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 consecutive months. Our inability to use Form S-3 registration statements would increase the time and resources we need to spend if we choose to access the public capital markets.

Risks Associated with our Majority-Owned Consolidated Subsidiary

The financial results of SC could have a negative impact on the Company's operating results and financial condition.

SC historically has provided a significant source of funding to the Company through earnings. Our investment in SC involves risk, including the possibility that poor operating results of SC could negatively affect the operating results of SHUSA.

Factors that affect the financial results of SC in addition to those which have been previously addressed include, but are not limited to:
Periods of economic slowdown may result in decreased demand for automobiles as well as declining values of automobiles and other consumer products used as collateral to secure outstanding loans. Higher gasoline prices, the general availability of consumer credit, and other factors which impact consumer confidence could increase loss frequency and decrease consumer demand for automobiles. In addition, during an economic slowdown, servicing costs may increase without a corresponding increase in finance charge income. Changes in the economy may impact the collateral value of repossessed automobiles and repossession, and foreclosure sales may not yield sufficient proceeds to repay the receivables in full and result in losses.

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SC’s growth strategy is subject to significant risks, some of which are outside its control, including general economic conditions, the ability to obtain adequate financing for growth, laws and regulatory environments in the states in which the business seeks to operate, competition in new markets, the ability to attract new customers, the ability to recruit qualified personnel, and the ability to obtain and maintain all required approvals, permits, and licenses on a timely basis
SC’s business may be negatively impacted if it is unsuccessful in developing and maintaining relationships with automobile dealerships that correlate to SC’s ability to acquire loans and automotive leases. In addition, economic downturns may result in the closure of dealerships and corresponding decreases in sales and loan volumes.
SC's business could be negatively impacted if it is unsuccessful in developing and maintaining its serviced for others portfolio. As this is a significant and growing portion of SC's business strategy, if an institution for which SC currently services assets chooses to terminate SC's rights as a servicer or if SC fails to add additional institutions or portfolios to its servicing platform, SC may not achieve the desired revenue or income from this platform.
SC has repurchase obligations in its capacity as a servicer in securitizations and whole loan sales. If significant repurchases of assets or other payments are required under its responsibility as a servicer, this could have a material adverse effect on SC’s financial condition, results of operations, and liquidity.
The obligations associated with being a public company require significant resources and management attention, which increases the costs of SC's operations and may divert focus from business operations. As a result of its IPO, SC is now required to remain in compliance with the reporting requirements of the SEC and the NYSE, maintain corporate infrastructure required of a public company, and incur significant legal and financial compliance costs, which may divert SC management’s attention and resources from implementing its growth strategy.
The market price of SC Common Stock may be volatile, which could cause the value of an investment in SC Common Stock to decline. Conditions affecting the market price of SC Common Stock may be beyond SC’s control and include general market conditions, economic factors, actual or anticipated fluctuations in quarterly operating results, changes in or failure to meet publicly disclosed expectations related to future financial performance, analysts’ estimates of SC’s financial performance or lack of research or reports by industry analysts, changes in market valuations of similar companies, future sales of SC Common Stock, or additions or departures of its key personnel.
SC's business and results of operations could be negatively impacted if it fails to manage and complete divestitures. SC regularly evaluates its portfolio in order to determine whether an asset or business may no longer be aligned with its strategic objectives. For example, in October 2015, SC disclosed a decision to exit the personal lending business and to explore strategic alternatives for its existing personal lending assets. Of its two primary lending relationships, SC completed the sale of substantially all of its loans associated with the LendingClub relationship in February 2016. SC continues to classify loans from its other primary lending relationship, Bluestem, as held-for-sale. SC remains a party to agreements with Bluestem that obligate it to purchase new advances originated by Bluestem, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and which is renewable through April 2022 at Bluestem's option. Both parties have the right to terminate this agreement upon written notice if certain events were to occur, including if there is a material adverse change in the financial reporting condition of either party. Although SC is seeking a third party willing and able to take on this obligation, it may not be successful in finding such a party, and Bluestem may not agree to the substitution. SC has recorded significant lower-of-cost-or-market adjustments on this portfolio and may continue to do so as long as the portfolio is held, particularly due to the new volume it is committed to purchase. Until SC finds a third party to assume this obligation, there is a risk that material changes to its relationship with Bluestem, or the loss or discontinuance of Bluestem’s business, would materially and adversely affect SC’s business, financial condition and results of operations. On March 9, 2020, Bluestem Brands, Inc., together with certain of its affiliates, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.
SC's business could be negatively impacted if access to funding is reduced. Adverse changes in SC's ABS program or in the ABS market generally could materially adversely affect its ability to securitize loans on a timely basis or upon terms acceptable to SC. This could increase its cost of funding, reduce its margins, or cause it to hold assets until investor demand improves.
As with SHUSA, adverse outcomes to current and future litigation against SC may negatively impact its financial position, results of operations, and liquidity. SC is party to various litigation claims and legal proceedings. In particular, as a consumer finance company, it is subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against it could take the form of class action complaints by consumers. As the assignee of loans originated by automotive dealers, it also may be named as a co-defendant in lawsuits filed by consumers principally against automotive dealers.

The Chrysler Agreement may not result in currently anticipated levels of growth and is subject to certain performance conditions that could result in termination of the agreement. If SC fails to meet certain of these performance conditions, FCA may seek to terminate the agreement. In addition, FCA has the option to acquire an equity participation in the Chrysler Capital portion of SC's business.


33





In February 2013, SC entered into the Chrysler Agreement with FCA through which SC launched the Chrysler Capital brand on May 1, 2013. Through the Chrysler Capital brand, SC originates private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services SC provides under the Chrysler Agreement include providing (1) credit lines to finance FCA-franchised dealers’ acquisitions of vehicles and other products FCA sells or distributes, (2) automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, (3) financing for commercial and fleet customers, and (4) ancillary services. In addition, SC may facilitate, for an affiliate, offerings to dealers for dealer loan financing, construction loans, real estate loans, working capital loans, and revolving lines of credit. On June 28, 2019, the Company entered into an amendment of the Chrysler Agreement which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. This amendment also terminated a previously disclosed tolling agreement, dated July 11, 2018, between SC and FCA.

In May 2013, in accordance with the terms of the Chrysler Agreement, SC paid FCA a $150 million upfront, nonrefundable payment, to be amortized over ten years. In addition, in June 2019, in connection with the execution of the amendment to the Chrysler Agreement, SC paid a $60 million upfront fee to FCA. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement were terminated in accordance with its term.

As part of the Chrysler Agreement, SC received limited exclusivity rights to participate in specified minimum percentages of certain of FCA's financing incentive programs, which include loan rate subvention and automotive lease residual support subvention. Among other covenants, SC has committed to certain revenue sharing arrangements. SC bears the risk of loss on loans originated pursuant to the Chrysler Agreement, while FCA shares in any residual gains and losses in respect of automotive leases, subject to specific provisions in the Chrysler Agreement, including limitations on SC’s participation in such gains and losses.

The Chrysler Agreement is subject to early termination in certain circumstances, including SC's failure to meet certain key performance metrics, provided FCA treats SC in a manner consistent with other comparable OEMs. FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or SC's other stockholders owns 20% or more of SC’s common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC controls, or becomes controlled by, an OEM that competes with FCA or (iii) certain of SC’s credit facilities become impaired. In addition, under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. There is no maximum limit on the size of FCA’s potential equity participation. Although the Chrysler Agreement contains provisions that are designed to address a situation in which the parties disagree on the fair market value of the equity participation interest, there is a risk that SC ultimately receives less than what it believes to be the fair market value for such interest, and the loss of its associated revenue and profits may not be offset fully by the immediate proceeds for such interest. There can be no assurance that SC would be able to re-deploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing SC’s profitability.

SC’s ability to realize the full strategic and financial benefits of its relationship with FCA depends in part on the successful development of its Chrysler Capital business, which requires a significant amount of management's time and effort as well as the success of FCA's business. If FCA exercises its equity option, if the Chrysler Agreement (or FCA's limited exclusivity obligations thereunder) were to terminate, or if SC otherwise is unable to realize the expected benefits of its relationship with FCA, including as a result of FCA's bankruptcy or loss of business, there could be a materially adverse impact to SHUSA's and SC’s business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of SHUSA's and SC’s portfolio, liquidity, reputation, funding costs and growth, and SHUSA's and SC's ability to obtain or find other OEM relationships or to otherwise implement our business strategy could be materially adversely affected.


ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

34





ITEM 2 - PROPERTIES

As of December 31, 2019, the Company utilized 760 buildings that occupy a total of 6.7 million square feet, including 184 owned properties with 1.4 million square feet, 453 leased properties with 3.8 million square feet, and 123 sale-and-leaseback properties with 1.5 million square feet. The executive and primary administrative offices for SHUSA and the Bank are located at 75 State Street, Boston, Massachusetts. The Company leases this location. SC's corporate headquarters are located at 1601 Elm Street, Dallas, Texas. SC leases this location.

Eleven major buildings serve as the headquarters or house significant operational and administrative functions, and are : Operations Center - 2 Morrissey Boulevard, Dorchester, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-Santander Way; 95 Amaral Street, Riverside, Rhode Island-Leased; SHUSA/SBNA Administrative Offices-75 State Street, Boston, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-450 Penn Street, Reading; Pennsylvania-Leased; Loan Processing Center-601 Penn Street; Reading, Pennsylvania-Owned; Operations and Administrative Offices-1130 Berkshire Boulevard, Wyomissing, Pennsylvania-Owned; Operations and Administrative Offices-1401 Brickell Avenue, Miami, Florida-Owned; Operations and Administrative Offices - San Juan, Puerto Rico-Leased; Computer Data Center - Hato Rey, Puerto Rico-Leased; SAM Administrative Offices-Guaynabo Puerto Rico-leased; and SC Administrative Offices-1601 Elm Street, Dallas, Texas-Leased.

The majority of these eleven Company properties identified above are utilized for general corporate purposes. The remaining 749 properties consist primarily of bank branches and lending offices. Of the total number of buildings, the Bank has 588 retail branches, and BSPR has 27 retail branches.

For additional information regarding the Company's properties refer to Note 6 - "Premises and Equipment" and Note 9 - "Other Assets" in the Notes to Consolidated Financial Statements in Item 8 of this Report.


ITEM 3 - LEGAL PROCEEDINGS

Refer to Note 15 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the IRS and Note 20 to the Consolidated Financial Statements for SHUSA’s litigation disclosures, which are incorporated herein by reference.


ITEM 4 - MINE SAFETY DISCLOSURES

None.


PART II


ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company has one class of common stock. The Company’s common stock was traded on the NYSE under the symbol “SOV” through January 29, 2009. On January 30, 2009, all shares of the Company's common stock were acquired by Santander and de-listed from the NYSE. Following this de-listing, there has not been, nor is there currently, an established public trading market in shares of the Company’s common stock. As of the date of this filing, Santander was the sole holder of the Company’s common stock.

At February 28, 2019, 530,391,043 shares of common stock were outstanding. There were no issuances of common stock during 2019, 2018, or 2017.

During the years ended December 31, 2019, 2018, and 2017 the Company declared and paid cash dividends of $400.0 million, $410.0 million, and $10.0 million respectively, to its shareholder.

Refer to the "Liquidity and Capital Resources" section in Item 7 of the MD&A for the two most recent fiscal years' activity on the Company's common stock.


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ITEM 6 - SELECTED FINANCIAL DATA
  SELECTED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands) 
2019 (1)
 
2018 (1)
 
2017 (1)
 
2016 (1)
 2015
Balance Sheet Data          
Total assets $149,499,477
 $135,634,285
 $128,274,525
 $138,360,290
 $141,106,832
Loans HFI, net of allowance 89,059,251
 83,148,738
 76,795,794
 82,005,321
 83,779,641
Loans held-for-sale 1,420,223
 1,283,278
 2,522,486
 2,586,308
 3,190,067
Total investments (2)
 19,274,235
 15,189,024
 16,871,855
 19,415,330
 22,768,783
Total deposits and other customer accounts 67,326,706
 61,511,380
 60,831,103
 67,240,690
 65,583,428
Borrowings and other debt obligations (2)(3)
 50,654,406
 44,953,784
 39,003,313
 43,524,445
 49,828,582
Total liabilities 125,100,647
 111,787,053
 104,583,693
 115,981,532
 119,259,732
Total stockholder's equity 24,398,830
 23,847,232
 23,690,832
 22,378,758
 21,847,100
Summary Statement of Operations         
Total interest income $8,650,195
 $8,069,053
 $7,876,079
 $7,989,751
 $8,137,616
Total interest expense 2,207,427
 1,724,203
 1,452,129
 1,425,059
 1,236,210
Net interest income 6,442,768
 6,344,850
 6,423,950
 6,564,692
 6,901,406
Provision for credit losses (4)
 2,292,017
 2,339,898
 2,759,944
 2,979,725
 4,079,743
Net interest income after provision for credit losses 4,150,751
 4,004,952
 3,664,006
 3,584,967
 2,821,663
Total non-interest income (5)
 3,729,117
 3,244,308
 2,901,253
 2,755,705
 2,905,035
Total general, administrative and other expenses (6)
 6,365,852
 5,832,325
 5,764,324
 5,386,194
 9,381,892
Income/(loss) before income taxes 1,514,016
 1,416,935
 800,935
 954,478
 (3,655,194)
Income tax provision/(benefit) (7)
 472,199
 425,900
 (157,040) 313,715
 (599,758)
Net income / (loss) (9)
 $1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)
Selected Financial Ratios (8)
          
Return on average assets 0.73% 0.76% 0.71% 0.45% (2.18)%
Return on average equity 4.23% 4.11% 4.10% 2.88% (11.98)%
Average equity to average assets 17.31% 18.37% 17.39% 15.67% 18.15 %
Efficiency ratio 62.58% 60.82% 61.81% 57.79% 95.67 %
(1)On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with Accounting Standards Codification ("ASC") 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. On July 2, 2018, an additional Santander subsidiary, SAM, an investment adviser located in Puerto Rico, was transferred to the Company. SFS and SAM are entities under common control of Santander; however, their results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company on both an individual and aggregate basis. As a result, the Company has reported the results of SFS on a prospective basis beginning July 1, 2017 and the results of SAM on a prospective basis beginning July 1, 2018.
(2)The increase in total investments from 2018 to 2019 was due to the purchase of additional AFS treasury securities. The decreases in Total investments and corresponding decreases in Borrowings and other debt obligations from 2016 to 2017 and 2015 to 2016 were primarily driven by the use of proceeds from the sales of investment securities to repurchase and pay off its outstanding borrowings.
(3)The increase in Borrowings and other debt obligations from 2018 to 2019 was primarily a result of the Company funding the growth of the loan portfolio and operating lease portfolio.
(4)The decrease in the Provision for credit losses from 2017 to 2018 was primarily due to lower net charge-offs on the RIC portfolio, accompanied by a recovery on the purchased RIC portfolio and lower provision on the originated RIC portfolio and the commercial loan portfolio. The decrease from 2015 to 2016 was primarily due to significantly lower provision on the purchased RIC portfolio, accompanied by slightly lower net charge-offs across the total loan portfolio.
(5)The increase in Non-interest income from 2018 to 2019 and 2017 to 2018 is primarily attributable to an increase in lease income corresponding to the growth of the operating lease portfolio.
(6)General, administrative, and other expenses increased annually between 2016 and 2019, primarily due to growth in compensation and benefits and lease expense, driven by corresponding growth of the operating lease portfolio. In 2015, this line included a $4.5 billion goodwill impairment charge on SC.
(7)Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information on the Company's income taxes. The income tax benefit in 2017 was due to the impact of the TCJA, resulting in a tax benefit to the Company. The income tax benefit in 2015 was primarily the result of the release of the deferred tax liability in conjunction with the goodwill impairment charge.
(8)For the calculation components of these ratios, see the Non-GAAP Financial Measures section of the MD&A.
(9)Includes net income/(loss) attributable to NCI of $288.6 million, $283.6 million, $405.6 million, $277.9 million, and $(1.7) billion for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively.

36






ITEM 7 - MD&A

EXECUTIVE SUMMARY

SHUSA is the parent holding company of SBNA, a national banking association, and owns approximately 72.4% (as of December 31, 2019) of 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 Santander. SHUSA is also the parent company of Santander BanCorp , a holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, BSPR; SSLLC, a registered broker-dealer headquartered in Boston; BSI, a financial services company headquartered in Miami that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; SIS, a registered broker-dealer headquartered 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 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 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 specialized consumer finance company focused on vehicle finance and third-party servicing. SC's primary business is the indirect origination and securitization of 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 is managed through a single reporting segment which included vehicle financial products and services, including RICs, vehicle leases, and dealer loans, as well as financial products and services related to recreational and marine vehicles and other consumer finance products.

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 holds other consumer finance products. However, in 2015, SC announced its exit from personal lending and, accordingly, all of its personal lending assets are classified as HFS at December 31, 2019.

Chrysler Capital

 Since May 2013, under the ten-year private label financing agreement with 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 provides 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.

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. The Company's average penetration rate for the third quarter of 2019 was 34%, an increase from 30% for the same period in 2018.

SC has dedicated financing facilities in place for its Chrysler Capital business and has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. During the year ended December 31, 2019, SC originated $12.8 billion in Chrysler Capital loans, which represented 56% of the UPB of its total RIC originations, with an approximately even share between prime and non-prime, as well as $8.5 billion in Chrysler Capital leases. Additionally, substantially all of the leases originated by SC during the year ended December 31, 2019 were under the Chrysler Agreement. Since its May 2013 launch, Chrysler Capital has originated more than $65.9 billion in retail loans (excluding the SBNA RIC origination program) and purchased $41.9 billion in leases.

37





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the fourth 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 December 31, 2019 was 3.5% compared to 3.5% at September 30, 2019, and was lower compared to 3.9% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose in the retail trade, and healthcare, while mining employment decreased.

The BEA advance estimate indicates that real gross domestic product grew at an annualized rate of 2.1% for the fourth quarter of 2019, consistent with the advance estimated growth of 2.1% for the third quarter of 2019. Growth continued to be driven by increases in personal consumption expenditures, federal government spending, and state and local government spending. In addition, imports, which are a subtraction to in the calculation of the gross domestic product, decreased. These positive contributions were offset by decreases to private inventory investment and non-residential fixed investments.

Market year-to-date returns for the following indices based on closing prices at December 31, 2019 were:
December 31, 2019
Dow Jones Industrial Average22.0%
S&P 50028.5%
NASDAQ Composite34.8%

At its December 2019 meeting, the Federal Open Market Committee decided to maintain the federal funds rate target at 1.50%, to continue to support economic expansion, current strength in labor market conditions, and inflation near its targeted objective. Overall inflation remains below the targeted rate of 2.0%.

The ten-year Treasury bond rate at December 31, 2019 was 1.90%, down from 2.69% at December 31, 2018. Within the industry, changes in 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 September 2019 statistics, mortgage originations increased 29.74% year-over-year, which included an increased 6.21% in mortgage originations for home purchases and an increased 103.1% 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 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 0.87% of loans using the latest available data, which was as of the third quarter of 2019, compared to 0.95% for the prior year.

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.

38





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Credit Rating Actions

The following table presents Moody’s, S&P and Fitch credit ratings for the Bank, BSPR, SHUSA, Santander, and the Kingdom of Spain, as of December 31, 2019:
BANK
BSPR(1)(2)
SHUSA
Moody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
Long-TermBaa1A-BBB+Baa1N/ABBB+Baa3BBB+BBB+
Short-TermP-1A-2F-2P-1/P-2N/AF-2n/aA-2F-2
OutlookStableStableStableStableN/AStableStableStableStable

SANTANDERSPAIN
Moody'sS&PFitchMoody'sS&PFitch
Long-TermA2AA-Baa1AA-
Short-TermP-1A-1F-2P-2A-1F-1
OutlookStableStableStableStableStableStable
(1)    P-1 Short Term Deposit Rating; P-2 Short Term Debt Rating.
(2)    Outlook currently is Stable and under review with the possibility of a downgrade.

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

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. The Company is regulated on a consolidated basis by the Federal Reserve, including the FRB of Boston, and the CFPB. The Company's banking and bank holding company subsidiaries are further supervised by the FDIC and 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. 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.


39





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



FBOs

In February 2014, the Federal Reserve issued the final rule implementing debit card interchange feecertain EPS mandated by the DFA. 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. In addition, the Final Rule required U.S. BHCs and routing regulation.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 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

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 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 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 establishes standardswhich includes simplifications for assessing whether debit card interchange fees received by debit card issuers, includingnon-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 are “reasonableRegulatory Capital section of this MD&A for the Company's capital ratios under Basel III standards. The implementation of certain regulations and proportional”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 costs incurred by issuers for electronic debit transactions, and prohibits network exclusivity arrangements on debit cards to ensure merchants have choices in how debit card transactions are routed.same regulatory requirements as the Company.

CFPB
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Item 7.    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 December 31, 2019, the Bank met the criteria to be classified as “well-capitalized.”

On April 10, 2018, the Federal Reserve issued a 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 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 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, if finalized as proposed, to have a material impact on its current or future planned capital actions. This rule was finalized on March 4, 2020, and its impact is being evaluated.

Stress Testing and Capital Planning

The CFPB has broad regulatoryDFA also requires certain banks and supervisory powers with respect to federal consumer protection laws. As a result, the CFPB has the authority to regulateBHCs, including the Company, to perform a stress test and submit a capital plan to the Bank, SCFederal 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 SHUSA subsidiariesless 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, offer consumer products. The CFPB’s oversight includes deposit products, credit cards, mortgage lending, and automobile loans. In addition,for the CFPB has broad powers with respectperiod beginning July 1, 2019 through June 30, 2020, the Company would be allowed to unfair, deceptive, or abusive acts or practicesmake capital distributions up to the amount that would have allowed it to remain above all minimum capital requirements in connection withCCAR 2018, adjusted for any transaction with a consumer.changes in the Company’s regulatory capital ratios since the Federal Reserve acted on the 2018 capital plan.

In March 2013,October 2019, the CFPB issuedFederal Reserve finalized rules that tailor the stress testing and capital actions a bulletin recommending that indirect vehicle lenders, including SC, take stepscompany is required to monitorperform based on the company’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and impose controls over vehicle dealer "mark-up" policies under which dealers impose higher interest ratesoff-balance sheet exposure. Under the tailoring rules, the Company is required to submit a capital plan to the Federal Reserve on certain consumers, with the mark-up shared between the dealer and the lender. In accordance with SC's policy, dealers were allowedan annual basis. The Company is also subject to mark-up interest rates bysupervisory stress testing on a maximum of 2.00%, but in October 2014 SC reduced the maximum compensation (participation) from 2.00% (industry practice) to 1.75%. SC plans to continuetwo-year cycle. The Company continues to evaluate this policy for effectivenessplanned capital actions in its annual capital plan and may make further changes to strengthen oversight of dealers and mark-up rates.on an ongoing basis.

Regulation AB II

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

BHC Activity and Acquisition Restrictions

Federal laws restrict the types of activities in which BHCs may engage, and subject them to a range of supervisory requirements, including regulatory enforcement actions for violations of laws and policies. BHCs may engage in the business of banking and managing and controlling banks, as well as closely-related activities.

The Company would be required to obtain approval from the Federal Reserve if the Company were to acquire shares of any depository institution or any holding company of a depository institution, or any financial entity that is not a depository institution, such as a lending company.

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Control of the Company or the Bank

Under the Change in Bank Control Act, individuals, corporations or other entities acquiring SHUSA's common stock may, alone or together with other investors, be deemed to control the Company and thereby the Bank. Ownership of more than 10% of SHUSA’s capital stock may be deemed to constitute “control” if certain other control factors are present. If deemed to control the Company, those persons or groups would be required to obtain the Federal Reserve's approval to acquire the Company’s common stock and could be subject to certain ongoing reporting procedures and restrictions under federal law and regulations.

Standards for Safety and Soundness

The federal banking agencies adopted certain operational and managerial standards for depository institutions, including internal audit system components, loan documentation requirements, asset growth parameters, information technology and data security practices, and compensation standards for officers, directors and employees. The implementation or enforcement of these guidelines has not had a material adverse effect on the Company’s results of operations.

Insurance of Accounts and Regulation by the FDIC

The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. DepositsThe Bank's and BSPR's deposits are insured up to the applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the U.S. government.FDIC. The FDIC imposesassesses deposit insurance premiums and is authorized to conduct examinations of, and require reporting by, FDIC-insured institutions.institutions like the Bank and BSPR. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the Deposit Insurance Fund. The FDIC also has the authority to initiate enforcement actions against banking institutions and may terminate an institution’s deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC-insured limits, which is currently $250,000 per depositor per ownership category for each ownership deposit account category.

FDIC insurance premium expenses were $61.3$60.5 million for the year ended December 31, 2017.

In addition to deposit insurance premiums, all insured institutions are required to pay a Financing Corporation assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. In 2017, the Bank paid Financing Corporation assessments of $4.0 million, compared to $4.5 million in 2016. The annual rate for all insured institutions dropped to $0.046 for every $1,000 in domestic deposits in 2017, compared to $0.056 in 2016. The assessments are revised quarterly and continued until the bonds matured between 2017 and 2019.

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

Restrictions on Subsidiary Banking Institution Capital Distributions

Under the FDIA, insured depository institutions must be classified in one of five defined tiers (well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Under OCC regulations, an institution is considered “well-capitalized” if it (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a CET1 capital ratio of 6.5% or greater, (iv) has a Tier 1 leverage ratio of 5% or greater and (v) is not subject to any order or written directive to meet and maintain a specific capital level. As of December 31, 2019, the Bank met the criteria to be classified as “well capitalized.”

If capital levels fall to 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 FDIA and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions and repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the institution’s capital account. At December 31, 2017, the Bank met the criteria to be classified as “well-capitalized.”


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Federal banking laws, regulations and policies 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 the Company within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) the Bank is not adequately capitalized at the time. In addition, the OCC's prior approval is required if the OCC deems it to be in troubled condition or a problem institution.

Any dividends declared and paid have the effect of reducing the Bank’s Tier 1 capital to average consolidated assets and risk-based capital ratios. TheDuring 2019, 2018, and 2017, the Company paid cash dividends on common stock of $400.0 million, $410.0 million and $10.0 million, inrespectively. During 2019, 2018 and 2017, while nothe Company paid cash dividends were declared or paid in 2016. The Company returned capitalto preferred shareholders of $11.7zero, $11.0 million in 2017 while no capital was returned in 2016.and $14.6 million, respectively. During the third quarter of 2018, SHUSA redeemed all of its outstanding preferred stock.

Federal Reserve Regulation

Under Federal Reserve regulations, the Bank is required to maintain a reserve against its transaction accounts (primarily interest-bearing and non-interest-bearing checking accounts). Because reserves must generally be maintained in cash or in low-interest-bearing accounts, the effect of the reserve requirements is to reduce an institution’s asset yields.

The amount of total reserve requirements at December 31, 20172019 and 20162018 were $294.2$534.6 million and $244.7$429.0 million, respectively. At December 31, 20172019 and 2016,2018, the Company complied with thethese reserve requirements.

Federal Home Loan Bank ("FHLB")FHLB System

The FHLB system was created in 1932 and consists of 11 regional FHLBs. FHLBs are federally-chartered but privately owned institutions created by Congress. The Federal Housing Finance Agency is an agency of the federal government that is charged with overseeing the FHLBs. Each FHLB is owned by its member institutions. The primary purpose of the FHLBs is to provide funding to their members for making housing loans as well as for affordable housing and community development lending. FHLBs are generally able to make advances to their member institutions at interest rates that are lower than could otherwise be obtained by such institutions. As a member, the Bank is required to make minimum investments in FHLB stock based on its level of borrowings from the FHLB. The Bank is a member of and held investments in the FHLB of Pittsburgh which totaled $116.1$316.4 million as of December 31, 2017,2019, compared to $280.3$230.1 million at December 31, 2016.2018. The Bank utilizes advances from the FHLB to fund balance sheet growth, provide liquidity and for asset and liability management purposes. The Bank had access to advances with the FHLB of up to $17.7$17.3 billion at December 31, 2017,2019, and had outstanding advances of $1.95$7.0 billion or 11%41% of total availability at that date. The level of borrowing capacity the Bank has with the FHLB of Pittsburgh is contingent upon the level of qualified collateral the Bank holds at a given time.

The Bank received $12.9$16.6 million and $24.2$6.6 million in dividends on its stock in the FHLB of Pittsburgh in 20172019 and 2016,2018, respectively.

Anti-Money Laundering and the USA Patriot Act

Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act, and the USA Patriot Act require all financial institutions to, among other things, implement policies and procedures relating to anti-money laundering, compliance, suspicious activities, currency transaction reporting and due diligence on customers. The USA Patriot Act substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the U.S.;, imposed compliance and due diligence obligations;obligations, created criminal penalties;penalties, compelled the production of documents located both inside and outside the U.S., including those of non-U.S. institutions that have a correspondent relationship in the U.S.;, and clarified the safe harbor from civil liability to clients. The U.S. Treasury has issued a number of regulations that further clarify the USA Patriot Act’s requirements and provide more specific guidance on their application.

Financial Privacy

Under the Gramm-Leach-Bliley Act (the "GLBA"),GLBA, financial institutions are required to disclose to their retail customers their policies and practices with respect to sharing nonpublic customer information with their affiliates and non-affiliates, how they maintain customer confidentiality, and how they secure customer information. Customers are required under the GLBA to be provided with the opportunity to “opt out” of information sharing with non-affiliates, subject to certain exceptions.


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Environmental Laws

Environmentally relatedEnvironmentally-related hazards have becomeare a source of high risk and potentially significant liability for financial institutions related to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental cleanup costs to the borrower affecting its ability to repay its loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean-up costs, and liability to the institution for cleanup costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. To minimize this risk, the Bank may require an environmental examination of, and reports with respect to, the property of any borrower or prospective borrower if circumstances affecting the property indicate a potential for contamination, taking into consideration the potential loss to the institution in relation to the burdens to the borrower. Such examination must be performed by an engineering firm experienced in environmental risk studies and acceptable to the institution, and the costs of such examinations and reports are the responsibility of the borrower. These costs may be substantial and may deter a prospective borrower from entering into a loan transaction with the Bank. The Company is not aware of any borrower which is currently subject to any environmental investigation or clean-up precedingproceeding or any other environmental matter that is likely to have a material adverse effect on the financial condition or results of operations of SHUSA or its subsidiaries.

Securities and Investment Regulation

The Company conducts its securities and investment business activities through its subsidiaries SIS and SSLLC. SIS and SSLLC are registered broker-dealerbroker-dealers with the Securities and Exchange Commission (the “SEC”)SEC and members of the Financial Industry Regulatory Authority, Inc. (“FINRA”).FINRA. SIS’s activities include investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed income securities. SIS, SSLLC is aand SAM are also registered investment advisor.advisers with the SEC, and BSI conducts certain securities transactions exempt from SEC registration on behalf of its clients.

Written Agreements and Regulatory Actions

See the “Regulatory Matters” section of the MD&A and Note 1922 of the Consolidated Financial Statements in this Form 10-K for a description of current regulatory actions.

Corporate Information

All reports filed electronically by the Company with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, are accessible on the SEC’s website at www.sec.gov. Our filings are also accessible through our website at https://www.santanderus.com/us/investorshareholderrelations. The information contained on our website is not being incorporated herein and is provided for the information of the reader and are not intended to be active links.


ITEM 1A - RISK FACTORS

Summary Risk Factors

The Company is subject to a number of risks potentially impactingthat if realized could affect its business, financial condition, results of operations, cash flows and cash flows.access to liquidity materially. As a financial services organization, certain elements of risk are inherent in our transactions and are present in the business decisions made by the Company.businesses. Accordingly, the Company encounters risk as part of the normal course of its businesses. Some of the Company’s more significant challenges and risks include the following:

We are vulnerable to disruptions and volatility in the global financial markets. Disruptions and volatility in financial markets can have a material adverse effect on our ability to access capital and liquidity on acceptable financial terms. Negative and fluctuating economic conditions, such as a changing interest rate environment, may cause our lending margins to decrease and reduce customer demand for our higher margin products and services.

Uncertainty regarding LIBOR may affect our business adversely. We have established an enterprise-wide initiative to identify, asses and monitor risks associated with the anticipated discontinuation of LIBOR. However, there can be no assurance that we and other market participants will be adequately prepared for the potential disruption to financial markets and potential adverse effects to interest rates on our loans, deposits, derivatives and other financial instruments currently tied to LIBOR.

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We are subject to substantial regulation. As a financial institution, we are subject to extensive regulation by government agencies, including limitations on permissible activities, required financial stress tests, required non-objection to certain actions, investigations and other regulatory proceedings. If we are unable to meet the expectations of our regulators fully, we may need to divert significant resources to remedial actions, be unable to take planned capital actions, and/or be subject to fines or other enforcement actions, among other things. These circumstances could affect our revenues and expenses and other aspects of our business and operations adversely.

We may not be able to detect money laundering or other illegal or improper activities fully or on a timely basis. We work regularly to improve our policies, procedures and capabilities to detect and prevent financial crimes. However, such crimes are evolving continually, and there will be instances in which we may be used by other parties to engage in money laundering or other illegal or improper activities. These instances may result in regulatory fines, sanctions and/or legal enforcement, which could have a material adverse effect on our operating results, financial condition and prospects.

Credit risk managementis inherent in our business. Our customers’ and counterparties’ financial condition, repayment abilities, repayment intentions, the value of their collateral, and government economic policies, market interest rates and other factors affect the quality of our loan portfolio. Many of these factors are beyond our control, and there can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses.

Liquidity and funding risks are inherent in our business. Changes in market interest rates and our credit spreads occur continuously, may be unpredictable and highly volatile and can significantly increase our cost of funding. We rely primarily on deposits to fund lending activities. However, our ability to maintain or grow deposits depends on factors outside our control, such as general economic conditions and confidence of depositors in the economy and the financial services industry. If deposit withdrawals increase significantly in a short period of time, it could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to fluctuations in interest rates. Interest rates are highly sensitive to factors beyond our control, such as increased regulation of the financial sector, monetary policies, economic and political conditions, and other factors. Variations in interest rates could impact net interest income, which comprises the majority of our revenue, reducing our growth and potentially resulting in losses.

We are subject to significant competition. We compete with banks that are larger than us and non-traditional providers of banking services who may not be subject to the same regulatory or legislative requirements to which we are subject. If we are unable to compete successfully with current and new competitors and anticipate changing banking industry trends, our business may be affected adversely.
We rely on third parties for important products and services. We rely on third-party vendors for key components of our business infrastructure such as loan and deposit servicing systems, custody and clearing services, internet connections and network access. Cyberattacks and breaches of the systems of those vendors could lead to operational and reputational risk and losses for SHUSA.

Risks relating to data collection, processing, storage systems and data security.Proper functioning of financial controls, accounting and other data collection and processing systems is critical to our businesses and our ability to compete effectively. Inadequate personnel, inadequate or failed internal control processes or systems, or external events that interrupt normal business operations could each impair our data collection, processing, storage systems and data security and result in losses.

We and others in our industry face cybersecurity risks. We take protective measures and monitor and develop our systems continuously to protect our technology infrastructure and data from cyberattacks. However, cybersecurity risks continue to increase for our industry, and the proliferation of new technologies and the increased sophistication and activities of the actors behind such attacks present risks for compromised data, theft of funds or theft or destruction of corporate information and assets.

Disclosure controls and procedures over financial reporting and internal controls over financial reporting may not prevent or detect all errors or acts of fraud. The Company’s system of internal controls over financial reporting may not achieve their intended objectives. There are designedrisks that material misstatements due to help manage theseerror or fraud may not be prevented or detected in all cases, and that information may not be reported on a timely basis.


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SC’s financial results could impact our results. SC’s earnings have historically been a significant source of funding for the Company. Factors that could negatively affect SC’s financial results could consequently affect SHUSA’s financial results.

The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the information in this Form-K including matters set forth in this "Risk Factors" section.

Risk Factors

Risk management is anand mitigation are important partparts of the Company's business model.model and integrated into the Company's day-to-day operations. The success of the Company's business is dependent on management's ability to identify, understand, manage and managemitigate the risks presented by business activities so that management can appropriately balance revenue generationin light of the Company's strategic and profitability.financial objectives. These risks include credit risk, market risk, capital risk, liquidity risk, operational risk, model risk, investment risk, compliance and legal risk, and strategic and reputationreputational risk. We discuss our principal risk management processes in the Risk Management section included in Item 7 of this Report.Annual Report on Form 10-K.

The following are the most significant risk factors that affect the Company. Any one or more of these risk factors could have a material adverse impact on the Company's business, financial condition, results of operations, or cash flows, in addition to presenting other possible adverse consequences, many of which are described below. These risk factors and other risks we may face are also discussed further in other sections of this Report.


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Annual Report on Form 10-K.

Macro-Economic and Political Risks

Given that our loan portfolios are concentrated in the United States, adverse changes affecting the economy of the United States could adversely affect our financial condition.

Our loan portfolios are concentrated in the United States. Accordingly, the recoverability of our loan portfolios and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general are dependent to a significant extent on the level of economic activity in the United States. A return to recessionary conditions in the United States economy would likely have a significant adverse impact on our loan portfolios and, as a result, on our financial condition, results of operations, and cash flows.

We are vulnerable to disruptions and volatility in the global financial markets.

Global economic conditions deteriorated significantly between 2007 and 2009, and the United States fell into recession. Many major financial institutions, including some of the country's largest commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, including us, experienced significant difficulties.

We face, among others, the following risks in the event of an economic downturn:downturn or another recession:

Increased regulation of our industry. Compliance with such regulation has increased our costs and may affect the pricing of our products and services and limit our ability to pursue business opportunities.
Reduced demand for our products and services.
Inability of our borrowers to timely or fully comply with their existing obligations.
The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans.
The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan and lease loss allowances.
The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.
Any worsening of economic conditions may delay the recovery of the financial industry and impact our financial condition and results of operations.
Macroeconomic shocks may impact the household income of our retail customers negatively and adversely affect the recoverability of our retail loans, resulting in increased loan and lease losses. 

Despite recent improvements in the long-term expansion of the U.S. economy, some uncertainty remains concerningregarding U.S. monetary policy and the future economic environment. There can be no assurance that economic conditions will continue to improve. Such economic uncertainty could have a negative impactan adverse effect on our business and results of operations. A slowingdownturn of the economic expansion or failing offailure to sustain the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

In addition, the global recession and disruption of the financial markets led to concerns over the solvency of certain European countries, affecting those countries’ capital markets access and in some cases sovereign credit ratings, as well as market perception of financial institutions that have significant direct or indirect exposure to these countries. These concerns continue even as the global economy is recovering,recovers, and some previously stressed European economies have experienced at least partial recoveries from their low points during the recession. If measures to address sovereign debt and financial sector problems in Europe are inadequate, they may delay or weaken economic recovery, or result in the further exit of member states from the Eurozone or more severe economic and financial conditions. If realized, these risk scenarios could contribute to severe financial market stress or a global recession, likely affecting the economy and capital markets in the United States as well.


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Increased disruption and volatility in the financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such decrease in capital markets funding availability or increased costs or in deposit rates could have a material adverse effect on our net interest margins and liquidity.

If some or all of the foregoing risks were to materialize, they could have a material adverse effect on us.

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Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.

While the United States economy has recently shown signs of expansion, the economyperformed well overall, it has experienced volatility in recent periods, characterized by slow or regressive growth. This volatility has resulted in fluctuations in the levels of deposits at depository institutions and in the relative economic strength of various segments of the economy to which we lend.

Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default inon public debt could cause to the banking system as a whole, particularly since commercial banks' exposure to government debt is high in certain Latin American and European regions or countries.

In addition, our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, international ownership legislation, interest-rateinterest rate caps and tax policies. Growth, asset quality and profitability may be affected by volatile macroeconomic and political conditions.

The actions of the U.S. administration could have a material adverse effect on us.

It is unclear what impact, if any, the current U.S. presidential administration and broader government, including regulatory agency leadership and/or the current Congress, will have on the laws, regulations and policies affecting the supervision of banking organizations. Although the administration has indicated its intention to approach regulation of the financial services industry differently than was the case under the previous administration, there remains significant uncertainty regarding the direction the administration will take and its ability to achieve its stated objectives, as well as how some existing laws and regulations will be enforced. In addition, thereThere is uncertainty about how proposals and initiatives of the current U.S. presidential administration or the broader government could directly or indirectly impact the Company. Although certain proposals and initiatives, such as income tax reform or increased spending on infrastructure projects, could result in greater economic activity and more expansive U.S. domestic economic growth,
other initiatives, such as protectionist trade policies or isolationist foreign policies, could constrict economic growth. The continued uncertainty around these proposals and initiatives, if enacted, could increase market volatility and affect the Company’s businesses directly or indirectly, including through the effects of such proposals and initiatives on the Company’s customers and/or counterparties.

Developments stemming from the U.K.’s referendum on membership in the EU could have a material adverse effect on us.

The resultImplementing the results of the United Kingdom’s (“UK’s”)U.K.’s referendum on whether to remainremaining part of the European Union (“EU”)EU has had and may continue to have negative effects on global economic conditions and global financial markets. The results of the UK's referendum in 2016U.K.'s decision to withdraw from the EU, and the UK'sU.K.'s implementation of that referendum, means that the UK'sU.K.'s EU membership will cease. The long-term nature of the UK’sU.K.’s relationship with the EU is unclear (including with respect to the laws and regulations that will apply as the UKU.K. determines which EU laws to replicate or replace), and, there is considerableas negotiations continue in 2020, uncertainty remains as to when the framework for any such relationship governing both the access of the UKU.K. to European markets and the access of EU member states to the UK’sU.K.’s markets will be determined and implemented.implemented, and whether such a framework will be established prior to the U.K. leaving the EU. The result of the referendum has created an uncertain political and economic environment in the UK,U.K., and may create such environments in other EU member states. PoliticalThe Governor of the Bank of England has warned that the U.K. exiting the EU could lead to considerable financial instability, a very significant fall in property prices, rising unemployment, depressed economic growth, and higher inflation and interest rates. This could affect the U.K.’s attractiveness as a global investment center, and contribute to a detrimental impact on U.K. economic growth. These developments, or the perception that they could occur, could have a material adverse effect on economic conditions and the stability of financial markets in the U.K., and could significantly reduce market liquidity and restrict the ability of key market participants to operate in certain financial markets. While the Company does not maintain a presence in the U.K., political and economic uncertainty hasin countries with significant economies and relationships to the global financial industry have in the past led to declines in market liquidity and activity levels, volatile market conditions, a contraction of available credit, lower or negative interest rates, weaker economic growth and reduced business confidence on an international level, each of which could adversely affect our business.

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 suggests that LIBOR is likely to be discontinued or modified by 2021.


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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 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 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, the 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. 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.

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. As of December 31, 2019, we have approximately $24 billion of assets and approximately $14 billion of liabilities with LIBOR exposure. We also have approximately $63 billion in notional amounts of off-balance sheet contracts with LIBOR exposure.

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 impacted adversely. 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.

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.



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Risks Relating to Our Business

Legal, Regulatory and Compliance Risks

We are subject to substantial regulation which could adversely affect our business and operations.

As a financial institution, the Company is subject to extensive regulation, which materially affects our businesses. The statutes, regulations, and policies to which the Company is subject may change at any time. In addition, the regulators' interpretation and application of the laws and regulations to which the Company is subject may change from time to time. Extensive legislation affecting the financial services industry has been adopted in the United States, and regulations have been and are in the process of being implemented. The manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Any legislative or regulatory actions and any required or other changes to our business operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets we hold, requirecompel us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our businesses. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not affect us adversely.

Regulation of the Company as a BHC includes limitations on permissible activities. Moreover, as described above, the Company and the Bank are required to perform stress tests and submit capital plans to the Federal Reserve and the OCC on an annual basis, and receive a notice of non-objection to the plans from the Federal Reserve and the OCC before taking capital actions such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. The Federal Reserve may also impose substantial fines and other penalties and enforcement actions for violations we may commit, and has the authority to disallow acquisitions we or our subsidiaries may contemplate, which may limit our future growth plans. Such constraints currently applicable to the Company and its subsidiaries and/or regulatory actions could have an adverse effect on our financial position and results of operations.

Other regulations whichthat significantly affect the Company, or whichthat could significantly affect the Company in the future, relate to capital requirements, liquidity and funding, taxation of the financial sector, and development of regulatory reforms in the United States.

In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements necessitate a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands that may result in supervisory measures.

Significant United States Regulation

From time to time, we are or may become subject to or involved in formal and informal reviews, investigations, examinations, proceedings, and information gathering requests by federal and state government agencies, including, among others, the FRB, the OCC, the CFPB, the Department of Justice (the "DOJ"),FDIC, the DOJ, the SEC, FINRA the Federal Trade Commission and various state regulatory and enforcement agencies.

The DFA will continue to result in significant structural reforms affecting the financial services industry. This legislation provided for, among other things, the establishment of the CFPB with broad authority to regulate the credit, savings, payment and other consumer financial products and services we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the over-the-counterOTC derivatives market, prohibitions on engaging in certain proprietary trading activities, restrictions on ownership of, investment in or sponsorship of hedge funds and private equity funds and restrictions on interchange fees earned through debit card transactions, and a requirement that bank regulators phase out the treatment of trust preferred capital instruments as Tier 1 capital for regulatory capital purposes.transactions.

The DFA provides for an extensive framework for the regulation of over-the-counter ("OTC")OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the SEC, or the U.S. Commodity Futures Trading Commission (the "CFTC"),CFTC or both, and are or will be subject to new capital, margin, business conduct, record-keeping, clearing, execution, reporting and other requirements. We may register as a swap dealer with the CFTC.


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In February 2014, the Federal Reserve issued the Final Rule to enhance its supervision and regulation of certain FBOs. Among other things, this rule required FBOs, such as the Company, with over $50 billion of United States non-branch assets to establish or designate a United States IHC and to transfer its entire ownership interest in substantially all of its United States subsidiaries to that IHC by July 1, 2016. United States branches and agencies were not required to be transferred to the IHC. As a result of this rule, Santander transferred substantially all of its equity interests in its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as several other subsidiaries. The entities transferred approximately $14.1 billion of assets and approximately $11.8 billion of liabilities to the Company on July 1, 2016. On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. (“SFS”), a finance company located in Puerto Rico, was transferred to SHUSA. The contribution of SFS to the Company transferred approximately $679 million of assets, which were primarily comprised of cash and cash equivalents and loans held for sale, approximately $357 million of liabilities and approximately $322 million of equity to the Company. The IHC is subject to an enhanced supervision framework, including enhanced risk-based and leverage capital requirements, liquidity requirements, risk/management requirements, and stress-testing requirements. A phased-in approach is being used for those standards and requirements. SHUSA's status as an IHC will require it to invest significant management attention and resources.

Within the DFA, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading orand from sponsoring or investing in covered funds, in each case subject to certain exceptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships. The final regulations implementing the Volcker Rule contain exclusions and certain exemptions for market-making, hedging, underwriting, and trading in United States government and agency obligations as well as certain foreign government obligations, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained.

In December 2016, the Federal Reserve adopted a final rule on TLAC, LTD, and clean holding company requirements for systemically important U.S. BHCs and IHCs of systemically important FBOs. Covered institutions must be in compliance with this rule by January 1, 2019 and SHUSA, as the IHC for Santander in the U.S., will be subject to these requirements. The TLAC requirement will create additional material quantitative requirements for the Company, including new minimum risk-based and leverage TLAC ratios of (i) the Company's regulatory capital plus certain types of long-term unsecured debt instruments and other eligible liabilities that can be written down or converted into equity during resolution to (ii) the Company's RWA and the Basel III leverage ratio denominator. Actions we are required to take to comply with the TLAC requirement by January 1, 2019 could impact our cost of funding and liquidity risk management.

Each of these aspects of the DFA, as well as other changes in United States banking regulations, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the DFA, including the Volcker Rule, poses to us is not yet known. However, such risks could be material and could materially and adversely affect us.

Our resolution in a bankruptcy proceeding could result in losses for holders of our debt and equity securities.

Under regulations issued by the Federal Reserve and the FDIC, and as required by Section 165(d) of the DFA, we and Santander must provide to the Federal Reserve and the FDIC a plan (a “SectionSection 165(d) Resolution Plan”) for our rapid and orderly resolution in the event of material financial distress affecting the Company or the failure of the Company.Plan. The purpose of this DFA provision of the DFA is to provide regulators with plans that would enable them to resolve failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk. The most recently filed Section 165(d) Resolution Plan by Santander, dated as of December 16, 2015 (the “2015 Resolution Plan”),31, 2018, provides a roadmap for the orderly resolution of the material U.S. operations of Santander under hypothetical stress scenarios and the failure of one or more of its U.S. material entities (“U.S. MEs”).MEs. Material entities are defined as subsidiaries or foreign offices of Santander that are significant to the activities of a critical operation or core business line. The U.S. MEs identified in the 20152018 Resolution Plan include, among other entities, the Company, the Bank and SC.

The 20152018 Resolution Plan describes a strategy for resolving Santander’s U.S. operations, including its U.S. MEs and the core business lines that operate within those U.S. MEs, in a manner that would substantially mitigate the risk that the resolutions would have serious adverse effects on U.S. or global financial stability. Under the 20152018 Resolution Plan’s hypothetical resolutions of the U.S. MEs, the Bank would be placed into FDIC receivership and the Company and SC would be placed into bankruptcy under Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code, respectively.

The strategy described in the 20152018 Resolution Plan contemplates a “multiple point of entry” strategy, in which Santander and the Company would each undergo separate resolution proceedings under the laws of SpainEuropean regulations and the U.S. Bankruptcy Code, respectively. In a scenario in which the Bank and SC were in resolution, the Company would file a voluntary petition under Chapter 7 of the Bankruptcy Code, and holders of our LTD and other debt securities would be junior to the claims of priority (as determined by statute) and secured creditors of the Company.

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The Company, the Federal Reserve and the FDIC are not obligated to follow the Company’s preferred resolution strategy for resolving its U.S. operations under its resolution plan. In addition, Santander could in the future change its resolution strategy for resolving its U.S. operations. In an alternative scenario, the Company alone could enter bankruptcy under the U.S. Bankruptcy Code, and the Company’s subsidiaries would be recapitalized as needed, using assets of the Company, so that they could continue normal operations as going concerns or subsequently be wound down in an orderly manner. As a result, the losses incurred by the Company and its subsidiaries would be imposed first on the holders of the Company’s equity securities and thereafter on unsecured creditors, including holders of our LTD and other debt securities. Holders of our LTD and other debt securities would be junior to the claims of creditors of the Company’s subsidiaries and to the claims of priority (as determined by statute) and secured creditors of the Company. Under either of these scenarios, in a resolution of the Company under Chapter 11 of the U.S. Bankruptcy Code, holders of our LTD and other debt securities would realize value only to the extent available to the Company as a shareholder of the Bank, SC and its other subsidiaries, and only after any claims of priority and secured creditors of the Company have been fully repaid.

In December 2016, the Federal Reserve finalized rules requiring intermediate holding companies of foreign global systematically important banks ("G-SIBs"), including the Company, to maintain minimum amounts of LTD and TLAC. It is possible that the Company’s resolution strategy in connection with the implementation of those rules, which will become effective on January 1, 2019, could change on or before that date. Further, even if Santander’s and the Company’s strategy for resolving its U.S. operations does not change, it is possible that the Federal Reserve or the FDIC could choose not to follow the current strategy.

The resolution of the Company under the orderly liquidation authority could result in greater losses for holders of our equity and debt securities.

The ability of holders of our LTD and other debt securities to recover the full amount that would otherwise be payable on those securities in a resolution proceeding under Chapter 11 of the U.S. Bankruptcy Code may be impaired by the exercise of the FDIC’s powers under the “orderly liquidation authority” under Title II of the DFA.

Title II of the DFA created a new resolution regime known as the “orderly liquidation authority” to which financial companies, including U.S. IHC of FBOs with assets of $50 billion or more, such as the Company, can be subjected. Under the orderly liquidation authority, the FDIC may be appointed as receiver in order to liquidate a financial company if, upon the recommendation of applicable regulators, the United States Secretary of the Treasury determines that the entity is in severe financial distress, the entity’s failure would have serious adverse effects on the U.S. financial system, and resolution under the orderly liquidation authority would avoid or mitigate those effects, among other things. Absent such determinations, the Company would remain subject to the U.S. Bankruptcy Code.


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If the FDIC iswere appointed as receiver under the orderly liquidation authority, then the orderly liquidation authority, rather than the U.S. Bankruptcy Code, would determine the powers of the receiver and the rights and obligations of creditors and other parties who have transacted with the Company. There are substantial differences between the rights available to creditors under the orderly liquidation authority and under the U.S. Bankruptcy Code. For example, under the orderly liquidation authority, the FDIC may disregard the strict priority of creditor claims in some circumstances (which would otherwise be respected under the U.S. Bankruptcy Code), and an administrative claims procedures is used to determine creditors’ claims (as opposed to the judicial procedure utilized in bankruptcy proceedings). Under the orderly liquidation authority, in certain circumstances, the FDIC could elevate the priority of claims if it determines that doing so is necessary to facilitate a smooth and orderly liquidation without the need to obtain the consent of other creditors or prior court review. Furthermore, the FDIC has the right to transfer assets or liabilities of the failed company to a third party or “bridge” entity under the orderly liquidation authority.

Regardless of what resolution strategy Santander might prefer for resolving its U.S. operations, the FDIC could determine that it is a desirable strategy to resolve the Company in a manner that would, among other things, impose losses on the Company’s shareholder, unsecured debt holdersdebtholders (including holders of our LTD) and other creditors, while permitting the Company’s subsidiaries to continue to operate. It is likely that the application of such an entry strategy in which the Company would be the only legal entity in the U.S. to enter resolution proceedings would result in greater losses to holders of our LTD and other debt securities than the losses that would result from the application of a bankruptcy proceeding or a different resolution strategy for the Company. Assuming the Company entered resolution proceedings and support from the Company to its subsidiaries was sufficient to enable the subsidiaries to remain solvent, losses at the subsidiary level could be transferred to the Company and ultimately borne by the Company’s security holderssecurityholders (including holders of our LTD and other debt securities), with the result that third-party creditors of the Company’s subsidiaries would receive full recoveries on their claims, while the Company’s security holderssecurityholders (including holders of our LTD) and other unsecured creditors could face significant losses. In addition, in a resolution under the orderly liquidation authority, holders of our LTD and other debt securities of the Company could face losses ahead of our other similarly situated creditors if the FDIC exercised its right, described above, to disregard the strict priority of creditor claims.


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claims described above.

The orderly liquidation authority also requires that creditors and shareholders of the financial company in receivership must bear all losses before taxpayers are exposed to any losses, and amounts owed by the financial company or the receivership to the U.S. government would generally receive a statutory payment priority over the claims of private creditors, including holders of our LTD and other debt securities. In addition, under the orderly liquidation authority, claims of creditors (including holders of our LTD and other debt securities) could be satisfied through the issuance of equity or other securities in a bridge entity to which the Company’s assets are transferred, as described above. If securities were to be delivered in satisfaction of claims, there can be no assurance that the value of the securities of the bridge entity would be sufficient to repay all or any part of the creditor claims for which the securities were exchanged.

Although the FDIC has issued regulations to implement the orderly liquidation authority, not all aspects of how the FDIC might exercise this authority are known, and additional rulemaking is possible.

United States stress testing, capital planning, and related supervisory actions

The Company is subject to stress testing and capital planning requirements under regulations implementing the DFA and other banking laws and policies. Effective January 2017, the Federal Reserve finalized a rule adjusting its capital plan and stress testing rules, exempting from the qualitative portion of the Comprehensive Capital Analysis and Review (“CCAR")CCAR certain BHCs and U.S. IHCs of FBOs with total consolidated assets between $50 billion and $250 billion and total nonbank assets of less than $75 billion, and that are not identified as G-SIBS.global systemically important banks. Such firms, including the Company, are still required to meet CCAR’s quantitative requirements and are subject to regular supervisory assessments that examine their capital planning processes. In 2017, 2018, and 2019 the Federal Reserve provided its non-objection to SHUSA’s capital plan; however, in 2015 and 2016, the Federal Reserve, as part of its CCAR process, objected on qualitative grounds to the capital plans the Company submitted. There is the risk that the Federal Reserve could object to the Company’s future capital plans, which would result inlimit the Company being requiredCompany's ability to obtain the Federal Reserve’s approval prior to making amake capital distributiondistributions or takingtake certain capital actions.

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Other supervisory actions and restrictions on U.S. activities

In addition to the foregoing, U.S. bank regulatory agencies from time to time take supervisory actions under certain circumstances that restrict or limit a financial institution’s activities. In somemany instances, we are subject to significant legal restrictions on our ability to publicly disclose these actions or the full details of these actions.actions publicly. In addition, as part of the regular examination process, certain U.S. subsidiaries’ regulators may advise certain U.S. subsidiariesthe subsidiary to operate under various restrictions as a prudential matter. The U.S. supervisory environment has become significantly more demanding and restrictive since the financial crisis of 2008. Under the BHC Act, the Federal Reserve has the authority to disallow us and certain of our U.S. subsidiaries from engaging in certain categories of new activities in the United States or acquiring shares or control of other companies in the United States. Such actions and restrictions currently applicable to us or certain of our U.S. subsidiaries could adversely affect our costs and revenues. Moreover, efforts to comply with nonpublic supervisory actions or restrictions could require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions could have a material adverse effect on our business and results of operations, and we may be subject to significant legal restrictions on our ability to publicly disclose these matters or the full details of these actions.

We are subject to potential intervention by any of our regulators or supervisors, particularly in response to customer complaints.

As noted above, our business and operations are subject to increasingly significant rules and regulations relating to the banking and financial services business. These apply to business operations, affect financial returns, include reserve and reporting requirements, and prudential andthe conduct of business regulations.our business. These requirements are setestablished by the relevant central banks and regulatory authorities that authorize, regulate and supervise us in the jurisdictions in which we operate.


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the cost of credit, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, and restrict our ability to raise interest rates.

In their supervisory roles, regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening, but not guaranteeing, the protection of customers and the financial system. Supervisors' continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, regulators have an outcome-focused regulatory approach that involves proactive enforcement and penalties for infringement. As a result, we face increased supervisory intrusion and scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines.

Some of the regulators focus strongly on consumer protection and on conduct risk and will continue to do so.risk. This has included a focus on the design and operation of products, the behavior of customers and the operation of markets. Some of the laws in the relevant jurisdictions in which we operate give regulators the power to make temporary product intervention rules either to improve a company's systems and controls in relation to product design, product management and implementation, or address problems identified with financial products. These problems may potentially cause significant detriment to consumers because of certain product features, governance flaws or distribution strategies. Such rules may prevent institutions from entering into product agreements with customers until such problems have been solved. Some regulators in the jurisdictions in which we operate also require us to be in compliance with training, authorization and supervision of personnel, systems, processes and documentation requirements. Sales practices with retail customers, including incentive compensation structures related to such practices, have recently been a focus of various regulatory and governmental agencies. If we fail to be compliant with such regulations, there would be a risk of an adverse impact on our business from sanctions, fines or other actions imposed by regulatory authorities. Customers of financial services institutions, including our customers, may seek redress if they consider that they have suffered loss as a result of the mis-selling of a particular product, or through incorrect application of the terms and conditions of a particular product. Given the inherent unpredictability of litigation and the evolution of judgments by the relevant authorities, it is possible that an adverse outcome in some matters could harm our reputation or have a material adverse effect on our operating results, financial condition and prospects arising from any penalties imposed or compensation awarded, together with the costs of defending such actions, thereby reducing our profitability.

We are exposed to risk of loss from legal and regulatory proceedings.

As noted above, we face risk of loss from legal and regulatory proceedings, including tax proceedings that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory environment reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs. In general, amounts financial institutions pay in settlements of regulatory proceedings or investigations and the severity of terms of regulatory settlements have been increasing. In certain cases, regulatory authorities have required criminal pleas, admissions of wrongdoing, limitations on asset growth, managerial changes, and other extraordinary terms as part of such settlements, all of which could have significant economic consequences for a financial institution.


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We are subject to certaincivil and tax claims and party to certain legal proceedings incidental to the normal course of our business from time to time, including in connection with lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly when the claimants seek very large or indeterminate damages, or when the cases present novel legal theories, involve a large number of parties or are in the early stages of investigation or discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have established adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves we have currently accrued. As a result, the outcome of a particular matter may materially and adversely affect our financial condition and results of operations for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.

In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by the SEC and law enforcement authorities.

Often, the announcement or other publication of claims or actions that may arise from such litigation and regulatory proceedings or of any related settlement may spur the initiation of similar claims by other customers, clients or governmental entities. In any such claim or action, demands for substantial monetary damages may be asserted against us and may result in financial liability, changes in our business practices or an adverse effect on our reputation or client demand for our products and services. In regulatory settlements since the financial crisis, fines imposed by regulators have increased substantially and may in some cases exceed the profit earned or harm caused by the breach.


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Our operations are subject to regularRegular and ongoing inspection by our banking and other regulators which may result in the need to enhance our regulatory compliance or risk management practices. Such remedial actions may entail significant costs, management attention, and systems development, and such efforts may affect our ability to expand our business until those remedial actions are completed. In some instances, we are subjected to significant legal restrictions on our ability to disclose these types of actions or the full detail of these actions publicly. Our failure to implement enhanced compliance and risk management procedures in a manner and timeframe deemed to be responsive by the applicable regulatory authority could adversely impact our relationship with that regulatory authority and lead to restrictions on our activities or other sanctions.

In addition, theThe magnitude and complexity of projects required to address the expectations of the Company’s regulators’regulatory and legal proceedings, in addition to the challenging macroeconomic environment and pace of regulatory change, may result in execution risk and adversely affect the successful execution of such regulatory or legal priorities.

In many cases, we are required to self-report inappropriate or non-compliant conduct to regulatory authorities, and our failure to do so may represent an independent regulatory violation. Even when we promptly bring matters to the attention of appropriate authorities, we may nonetheless experience regulatory fines, liabilities to clients, harm to our reputation or other adverse effects in connection with self-reported matters.

We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with anti-money laundering, anti-terrorism and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems and sophisticated monitoring and compliance personnel, and have become the subject of enhanced government supervision.

While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, those policies and procedures may not completely eliminate instances in which we may be used by other parties to engage in money laundering and other illegal or improper activities. Emerging technologies, such as cryptocurrencies and blockchain, could limit our ability to track the movement of funds. Our ability to comply with legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability.

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These require implementing and embedding effective controls and monitoring within our business and on-going changes to systems and operations. Financial crime is continually evolving and subject to increasingly stringent regulatory oversight and focus. Even known threats can never be fully eliminated, and there will be instances in which we may be used by other parties to engage in money laundering or other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the authority to impose fines and other penalties on us. In addition, our business and reputation could suffer if customers use our banking network for money laundering or other illegal or improper purposes.

While we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree we rely on our relevant counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our and our relevant counterparties’ services as conduits for money laundering (including illegal cash operations) or other illegal activities without our and our counterparties’ knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering or other illegal activities, our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

An incorrect interpretation of tax laws and regulations may adversely affect us.

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations, and is subject to review by taxing authorities. We are subject to the income tax laws of the United States and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgments, estimates, and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material effect on our results of operations.

Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business. Aspects of recent U.S. federal income tax reform such as the Tax Cuts and Jobs Act of 2017 limit or eliminate certain income tax deductions, including the home mortgage interest deduction, the deduction of interest on home equity loans and a limitation on the deductibility of property taxes. These limitations and eliminations could affect demand for some of our retail banking products and the valuation of assets securing certain of our loans adversely, increasing our provision for loan losses and reducing profitability.

Credit Risks

If the level of our NPLs increases or our credit quality deteriorates in the future, or if our loan and lease loss reserves are insufficient to cover loan and lease losses, this could have a material adverse effect on us.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted and can continue to
negatively impact our results of operations. In particular, the amount of our reported NPLs may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in the United States, the impact of political events, events affecting certain industries or events affecting financial markets. There can be no assurance that we will be able to effectively control the level of the NPLs in our loan portfolio.


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Our loan and lease loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the last global financial crisis demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and there can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates for any reason, including an increase in lending to individuals and small and medium enterprises, a volume increase in our credit card portfolio or the introduction of new products, or if future actual losses exceed our estimates of incurred losses, we may be required to increase our loan and lease loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this also could have a material adverse effect on us.

In addition, the FASB’s ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments was adopted by the Company on January 1, 2020 and increased our ACL by approximately $2.5 billion. This standard replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. Upon adoption of this standard, companies must recognize credit losses on these assets equal to management’s estimate of credit losses over the assets’ remaining expected lives. It is possible that our ongoing reported earnings and lending activity will be impacted negatively in periods following adoption of this ASU. See “Changes in accounting standards could impact reported earnings” below.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, and this reduces the weighted average life of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent in our commercial activity, and an increase in prepayments could have a material adverse effect on us.

The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting the United States. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events such as natural disasters, particularly in locations in which a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and have an adverse impact on the economy of the affected region. We also may not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment of impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses on our loans, which may materially and adversely affect our results of operations and financial condition.

In addition, auto industry technology changes, accelerated by environmental rules, could affect our auto consumer business, particularly the residual values of leased vehicles, which could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivatives contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearinghouses or other financial intermediaries.


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We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. We rely on information provided by or on behalf of counterparties, such as financial statements, and we may rely on representations of our counterparties as to the accuracy and completeness of that information. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

Liquidity and Financing Risks

Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they become due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate these risks completely. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements as well as limit growth possibilities.

Our cost of obtaining funding is directly related to prevailing market interest rates and our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

If wholesale markets financing ceases to becomebe available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.

We rely, and will continue to rely, primarily on deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of depositors in the economy in general, and the financial services industry in particular, as well as competition betweenamong banks for deposits. Any of these factors could significantly increase the amount of deposit withdrawals in a short period of time, thereby reducing our ability to access deposit funding in the future on appropriate terms, or at all. If these circumstances were to arise, they could have a material adverse effect on our operating results, financial condition and prospects.

We anticipate that our customers will continue to make deposits (particularly demand deposits and short-term time deposits) in the near future, and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits, or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

There can be no assurance that, in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments, or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally.


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Any downgrade in our or Santander's debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivativederivatives contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivativederivatives contracts, we may be required to maintain a minimum credit rating or terminate the contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.


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We conduct a significant number of our material derivativederivatives activities through Santander and Santander UK. We estimate that, as of December 31, 2017,2018, if all of the rating agencies were to downgrade Santander’s or Santander UK’s long-term senior debt ratings, we would be required to post additional collateral pursuant to derivativederivatives and other financial contracts. Refer to further discussion in Note 14 of the Notes to the Consolidated Financial Statements.

While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend uponon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a company's long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example depending on certain factors, including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on the Company, the Bank, and SC.

In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace those contracts, our market risk profile could be altered.

There can be no assurance that the rating agencies will maintain their current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase the cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

Credit Risks

If the level of our non-performing loans increases or our credit quality deteriorates in the future, or if our loan and lease loss reserves are insufficient to cover loan and lease losses, this could have a material adverse effect on us.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted and can continue to negatively impact our results of operations. In particular, the amount of our reported non-performing loans ("NPLs") may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in the United States, the impact of political events, events affecting certain industries or events affecting financial markets. There can be no assurance that we will be able to effectively control the level of the NPLs in our loan portfolio.

Our loan and lease loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the last global financial crisis demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and there can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates for any reason, including an increase in lending to individuals and small and medium enterprises, a volume increase in our credit card portfolio or the introduction of new products, or if future actual losses exceed our estimates of incurred losses, we may be required to increase our loan and lease loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this also could have a material adverse effect on us.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, and this reduces the weighted average life of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent in our commercial activity, and an increase in prepayments could have a material adverse effect on us.


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The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting the United States. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events such as natural disasters, particularly in locations in which a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and have an adverse impact on the economy of the affected region. We also may not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment of impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses on our loans, which may materially and adversely affect our results of operations and financial condition.

We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivatives contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearinghouses or other financial intermediaries.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. We rely on information provided by or on behalf of counterparties, such as financial statements, and we may rely on representations of our counterparties as to the accuracy and completeness of that information. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

Market Risks

We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rates, exchange rates or equity prices. Changes in interest rates affect the following areas, among others, of our business:business, among others:

net interest income;
the volume of loans originated;
the market value of our securities holdings;
the value of our loans and deposits:deposits;
gains from sales of loans and securities; and
gains and losses from derivatives.

Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions, and other factors. Variations in interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. This is a result of the different effect a change in interest rates may have on the interest earned on our assets and the interest paid on our borrowings. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure.

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and the collateral used to secure our loans, and may reduce gains or require us to record losses on sales of our loans or securities.


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In addition, we may experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.


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We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.

Some of our investment management services fees are based on financial market valuations of assets certain of our subsidiaries manage or hold in custody for clients. Changes in these valuations can affect noninterest income positively or negatively, and ultimately affect our financial results. Significant changes in the volume of activity in the capital markets, and in the number of assignments we are awarded, could also affect our financial results.

We are also exposed to equity price risk in our investments in equity securities. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to economic uncertainty and sovereign debt concerns has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income and the market value of our assets and liabilities could be materially adversely affected.

Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

In the recent years, financial markets have been subject to volatility and the resulting widening of credit spreads. We have material exposures to securities and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets, and also may translate into increased impairments. In addition, the value we ultimately realize on
disposal of the asset may be lower than its current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition and prospects.

In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain. In addition, valuation models are complex, making them inherently imperfect predictors of actual results. Any resulting impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to market, operational and other related risks associated with our derivatives transactions that could have a material adverse effect on us.

We enter into derivatives transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).

The execution and performance of derivatives transactions depend on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivativederivatives transactions continues to depend, to a great extent, on our information technologyIT systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.

In addition, disputes with counterparties may arise regarding the terms or the settlement procedures of derivativederivatives contracts, including with respect to the value of underlying collateral, which could cause us to incur unexpected costs, including transaction, operational, legal and litigation costs, or result in credit losses, all of which may impair our ability to manage our risk exposure from these products.


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Risk Management

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. Although we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.

We rely on quantitative models to measure risks and estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, and calculating economic and regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating models will be adversely affected due to the inadequacy of that information. Also, information we provide to the public or our regulators based on poorly designed or implemented models could be inaccurate or misleading.

Some of our qualitative tools and metrics for managing risk are based on our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses therefore could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions based on models that are poorly developed, implemented, or used, or as a result of a modeled outcome being misunderstood or used of for purposes for which it was not designed. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere or seek to limit transactions with us. This could have a material adverse effect on our reputation, operating results, financial condition, and prospects.

As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management is to employ an internal credit rating system to assess the particular risk profile of a customer. Since this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human and IT systems errors. In exercising their judgment on the current and future credit risk of our customers, our employees may not always assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.

We have been refining our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect all possible risks before they occur or, due to limited tools available to us, our employees may not be able to implement them effectively, which may increase our credit risk. Failure to effectively implement,
consistently follow or continuously refine our credit risk management system may result in an increase in the level of NPLNPLs and a higher risk exposure for us, which could have a material adverse effect on us.

General Business and Industry Risks

The financial problems our customers face could adversely affect us.

Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial conditionscondition of our borrowers, which could in turn increase our NPL ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds significantly, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.


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We depend in part upon dividends and other funds from subsidiaries.

SomeMost of our operations are conducted through our subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent on our subsidiaries’ earnings and business considerations, and are limited by legal regulatory, and contractualregulatory restrictions. Additionally, our right to receive any assets of any of our subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.

Increased competition and industry consolidation may adversely affect our results of operations.

We face substantial competition in all parts of our business from numerous banks and non-bank providers of financial services, including in originating loans and attracting deposits.deposits, providing customer service, the quality and range of products and services, technology, interest rates and overall reputation, and we expect competitive conditions to continue to intensify. Our competition in originating loans comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.

There has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. Some of our competitors are substantially larger than we are, which may give those competitors advantages such as a more diversified product and customer base, the ability to reach more customers and potential customers, operational efficiencies, lower-cost funding and larger branch networks. Many competitors are also focused on cross-selling their products, which could affect our ability to maintain or grow existing customer relationships or require us to offer lower interest rates or fees on our lending products or higher interest rates on deposits. There can be no assurance that increased competition will not adversely affect our growth prospects and therefore our operations. We also face competition from non-bank competitors such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

Non-traditional providers of banking services, such as internet based e-commerce providers, mobile telephone companies and internet search engines, may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation.the same regulatory or legislative requirements to which we are subject. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing.

New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to compete successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior effectively, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business.

The Furthermore, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies and the rise in customer use of internet and mobile banking platforms in recent years could negatively impact our investments in bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in demand towards internet and mobile banking may necessitate changes to our retail distribution strategy, which may include closing and/or selling certain branches and restructuring our remaining branches and workforce. These actions could lead to losses on these assets and increased expenditures to renovate, reconfigure or close a number of our remaining branches or otherwise reform our retail distribution channel. Furthermore, our failure to keep pace with innovation or to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect on our competitive position.

Increasing competition could require that we increase the rates we offer on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including on our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.

In addition, ifIf our customer service levels were perceived by the market to be materially below those of our competitors, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.


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Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

The success of our operations and our profitability depend, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive, and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients and the significant and ongoing investments required to bring new products and services to market in
a timely manner at competitive prices. Our failure to manage these risks and uncertainties also exposes us to the enhanced risk of operational lapses, which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine whether initiatives can be brought to market in a manner that is timely and attractive to our clients. Failure to successfully manage these risks in the development and implementation of new products or services successfully could have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition.

As we expand the range of our products and services, some of which may be at an early stage of development in the markets of certain regions in which we operate, we will be exposed to new and potentially increasingly complex risks and development expenses. Our employees and risk management systems as well as our experience and that of our partners may not be adequate to enable us to handle or manage such risks properly. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

If we are unable to manage the growth of our operations, this could have an adverse impact on our profitability.

We cannot ensure that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

manage efficiently the operations and employees of expanding businesses;
maintain or grow our existing customer base;
align our current information technology ("IT") systems adequately with those of an enlarged group;
apply our risk management policies effectively to an enlarged group; and
manage a growing number of entities without over-committing management or losing key personnel.

Any failure to manage growth effectively, including any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operating results, financial condition and prospects.


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Goodwill impairments may be required in relation to acquired businesses.

We have made business acquisitions for which it is possible that the goodwill which has been attributed to those businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in the business’ underlying profitability, asset quality or other relevant matters. Impairment testing with respect to goodwill is performed annually, more frequently if impairment indicators are present, and includes a comparison of the carrying amount of the reporting unit with its fair value. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as this excess of carrying value over fair value. We recognized a $10.5 million impairment of goodwill in 2017 primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effect of Hurricane Maria. We did not recognize any impairments of goodwill in 2016. The Company recorded a goodwill impairment in the fourth quarter of 2015 related to the goodwill from the first quarter 2014 consolidation and Change in Control of SC.2018 or 2019. It is reasonably possible we may be required to record impairment of our remaining $4.5 billion of goodwill attributable to SC and SBNA in the future. There can be no assurance that we will not have to write down the value attributed to goodwill further in the future, which would not impact risk-based capital ratios adversely, but would adversely affect our results of operations and stockholder's equity.

We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

The financial industry in the United States has experienced and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. In addition, due to our relationship with Santander, we are subject to indirect regulation by the European Central Bank, which has recently imposed compensation restrictions that may apply to certain of our executive officers and other employees under the Capital Requirements DirectiveCRD IV prudential rules. These restrictions may impact our ability to retain our experienced management team and key employees and our ability to attract appropriately qualified personnel, which could have a material adverse impact on our business, financial condition, and results of operations.

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We rely on third parties for important products and services.

Third-party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting those parties. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct could adversely affect our ability to deliver products and services to customers and otherwise to conduct business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third-party vendors could also entail significant delays and expense.

Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure them.  Any restructuring could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, financial condition and operations.

If a third party obtains access to our customer information and that third party experiences a cyberattack or breach of its systems, this could result in several negative outcomes for us, including losses from fraudulent transactions, potential legal and regulatory liability and associated damages, penalties and restitution, increased operational costs to remediate the consequences of the third party’s security breach, and harm to our reputation from the perception that our systems or third-party systems or services that we rely on may not be secure.

Damage to our reputation could cause harm to our business prospects.

Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees and conducting business transactions with our counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, dealing with sectors that are not well perceived by the public (e.g., weapons industries), dealing with customers on sanctions lists, ratings downgrades, compliance failures, unethical
behavior, and the activities of customers and counterparties.counterparties, including activities that affect the environment negatively. Further, adverse publicity, regulatory actions or fines, litigation, operational failures or the failure to meet client expectations or other obligations could materially and adversely affect our reputation, our ability to attract and retain clients or our sources of funding for the same or other businesses.


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Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement hashave caused public perception of us and others in the financial services industry to decline. Activists increasingly target financial services firms with criticism for relationships with clients engaged in businesses whose products are perceived to be harmful to the health of customers, or whose activities are perceived to affect public safety affect the environment, climate or workers’ rights negatively. Such criticism could increase dissatisfaction among customers, investors and employees of the Company and damage the Company’s reputation. Alternatively, yielding to such activism could damage the Company’s reputation with groups whose views are not aligned with those of the activists. In either case, certain clients and customers may cease to do business with the Company, and the Company’s ability to attract new clients and customers may be diminished.

Preserving and enhancing our reputation also depends on maintaining systems, procedures and controls that address known risks and regulatory requirements, as well as our ability to timely identify, understand and mitigate additional risks that arise due to changes in our businesses and the markets in which we operate, the regulatory environment and customer expectations.

We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

We may be the subject of misinformation and misrepresentations propagated deliberately to harm our reputation or for other deceitful purposes, including by others seeking to gain an illegal market advantage by spreading false information about us. There can be no assurance that we will be able to neutralize or contain false information that may be propagated regarding the Company, which could have an adverse effect on our operating results, financial condition and prospects effectively.


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Fraudulent activity associated with our products or networks could cause us to suffer reputational damage, the use of our products to decrease and our fraud losses to be materially adversely affected. We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling customer information. The risk of fraud continues to increase for the financial services industry in general. Credit and debit card fraud, identity theft and related crimes are prevalent, and perpetrators are growing more sophisticated. Our resources, customer authentication methods and fraud prevention tools may not be sufficient to accurately predict or prevent fraud. Additionally, our fraud risk continues to increase as third parties that handle confidential consumer information suffer security breaches and we expand our direct banking business and introduce new products and features. Our financial condition, the level of our fraud charge-offs and other results of operations could be materially adversely affected if fraudulent activity were to increase significantly. High-profile fraudulent activity could negatively impact our brand and reputation. In addition, significant increases in fraudulent activity could lead to regulatory intervention and reputational and financial damage to our brands, which could negatively impact the use of our products and services and have a material adverse effect on our business.

The Bank engages in transactions with its subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.

The Bank and its subsidiaries have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

United States law applicable to public companiescertain financial institutions, including the Bank and financial groupsother Santander entities and institutions provide foroffices in the U.S., establish several procedures designed to ensure that the transactions entered into with or among our subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions.

The Bank isand its affiliates are likely to continue to engage in transactions with ourtheir respective affiliates. Future conflicts of interests between us and any of affiliates, or among our affiliates may arise, which conflicts are not required to be and may not be resolved in ourSHUSA's favor.

Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, terrorist activities or international hostilities.

Neither the occurrence nor potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, and other significant public health emergencies, dislocations, fires, explosions, or other catastrophic accidents or events), terrorist activities or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities, orpreventing a subset of our employees from working for a prolonged period and otherwise preventing us from conducting our business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies and defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning and our ability to anticipate the nature of any such event that may occur. The adverse impact of disasters, terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses with which we deal.

Technology and Cybersecurity Risks

Any failure to effectively maintain, secure, improve or upgrade our IT infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Our ability to remain competitive depends in part on our ability to maintain, protect and upgrade our IT on a timely and cost-effective basis. We must continually make significant investments and improvements in our IT infrastructure in order to remain competitive. There can be no assurance that we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our IT infrastructure in the future. Any failure to improve or upgrade our IT infrastructure and management information systems effectively and in a timely manner could have a material adverse effect on us.


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Risks relating to data collection, processing, storage systems and security are inherent in our business.

Like other financial institutions with a large customer base, we have been subject to and are likely to continue to be the subject of attempted cyberattacks in light of the fact that we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Our business depends on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and e-mail services, spreadsheets, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial controls, accounting and other data collection and processing systems is critical to our businesses and our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures proves to be inadequate or is circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent information security risk, we routinely exchange personal, confidential and proprietary information by electronic means, and wewhich may be thea target offor attempted cyber-attacks.cyberattacks.

Many companies across the country and in the financial services industry have reported significant breaches in the security of their websites or other systems. Cybersecurity risks have increased significantly in recent years due to the development and proliferation of new technologies, increased use of the internet and telecommunications technology to conduct financial transactions, and increased sophistication and activities of organized crime groups, state-sponsored and individual hackers, terrorist organizations, disgruntled employees and vendors, activists and other third parties. Financial institutions, the government and retailers have in recent years reported cyber incidents that compromised data, resulted in the theft of funds or the theft or destruction of corporate information and other assets.

We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. We have policies, practices and controls designed to prevent or limit disruptions to our systems and enhance the security of our infrastructure. These include performing risk management for information systems that store, transmit or process information assets identifying and managing risks to information assets managed by third-party service providers through
on-going oversight and auditing of the service providers’ operations and controls. We develop controls regarding user access to software on the principle that access is forbidden to a system unless expressly permitted, limited to the minimum amount necessary for business purposes, and terminated promptly when access is no longer required. We seek to educate and make our employees aware of information security and privacy controls and their specific responsibilities on an ongoing basis.

Nevertheless, while we have not experienced any material losses or other material consequences relating to cyber-attackscyberattacks or other information or security breaches, whether directed at us or third parties, our systems, software and networks, as well as those of our clients, vendors, service providers, counterparties and other third parties, may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code, cyber-attackscyberattacks such as denial of service, malware, ransomware, phishing, and other events that could result in security breaches or give rise to the manipulation or loss of significant amounts of customer datapersonal, proprietary or confidential information of our customers, employees, suppliers, counterparties and other sensitive information,third parties, disrupt, sabotage or degrade service on our systems, or result in the theft or loss of significant levels of liquid assets, including cash. As cybersecurity threats continue to evolve and increase in sophistication, we cannot guarantee the effectiveness of our policies, practices and controls to protect against all such circumstances that could result in disruptions to our systems. This is because, among other reasons, the techniques used in cyberattacks change frequently, cyberattacks can originate from a wide variety of sources, and third parties may seek to gain access to our systems either directly or by using equipment or passwords belonging to employees, customers, third-party service providers or other authorized users of our systems. In the event of a cyber-attackcyberattack or security breach affecting a vendor or other third party entity on whom we rely, our ability to conduct business, and the security of our customer information, could be impaired in a manner to that of a cyber-attackcyberattack or security breach affecting us directly. We also may not receive information or notice of the breach in a timely manner, or we may have limited options to influence how and when the cyber-attackcyberattack or security breach is addressed. In addition, as

As financial institutions are becoming increasingly interconnected with central agents, exchanges and clearing houses,clearinghouses, they may be increasingly susceptible to negative consequences of cyber-attackscyberattacks and security breaches affecting the systems of such third parties. It could take a significant amount of time for a cyber-attackcyberattack to be investigated, during which time we may not be in a position to fully understand and remediate the attack, and certain errors or actions could be repeated or compounded before they are discovered and remediated, any or all of which could further increase the costs and consequences associated with a particular cyber-attack.cyberattack. The perception of a security breach affecting us or any part of the financial services industry, whether correct or not, could result in a loss of confidence in our cybersecurity measures or otherwise damage our reputation with customers and third parties with whom we do business. Should such adverse events occur, we may not have indemnification or other protection from the third party sufficient to compensate or protect us from the consequences.


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As attempted cyber-attackscyberattacks continue to evolve in scope and sophistication, we may incur significant costs in our attempts to modify or enhance our protective measures against such attacks to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attackscyberattacks to our customers. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party or a cyber-attackcyberattack could result in our inability to recover or restore data that has been stolen, manipulated or destroyed, damage to our systems and those of our clients, customers and counterparties, violations of applicable privacy and other laws, or other significant disruption of operations, including disruptions in our ability to use our accounting, deposit, loan and other systems and our ability to communicate with and perform transactions with customers, vendors and other parties. These effects could be exacerbated if we would need to shut down portions of our technology infrastructure temporarily to address a cyber-attack,cyberattack, if our technology infrastructure is not sufficiently redundant to meet our business needs while an aspect of our technology is compromised, or if a technological or other solution to a cyber-attackcyberattack is slow to be developed. Even if we timely resolve the technological issues in a cyber-attack,cyberattack, a temporary disruption in our operations could adversely affect customer satisfaction and behavior, expose us to reputational damage, contractual claims, regulatory, supervisory or enforcement actions, or litigation.

U.S. banking agencies and other federal and state government agencies have increased their attention on cybersecurity and data privacy risks, and have proposed enhanced risk management standards that would apply to us. Such legislation and regulations relating to cybersecurity and data privacy may require that we modify systems, change service providers, or alter business practices or policies regarding information security, handling of data and privacy. Changes such as these could subject us to heightened operational costs. To the extent we do not successfully meet supervisory standards pertaining to cybersecurity, we could be subject to supervisory actions, litigation and reputational damage.

Financial Reporting and Control Risks

Changes in accounting standards could impact reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our Consolidated Financial Statements. These changes can materially impact how we record and report our financial condition and results of operations.operations, as well as affect the calculation of our capital ratios. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

For example, as noted in Note 2 to the Consolidated Financial Statements in this Form 10-K, in June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The adoption of this standard resulted in the increase in the ACL of approximately $2.5 billion and a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase is based on 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. The standard did not have a material impact on the Company’s other financial instruments. Additionally, we elected to utilize regulatory relief which will permit us to phase in 25 percent of the capital impact of CECL in our calculation of regulatory capital amounts and ratios in 2020, and an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023.

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles ("GAAP")GAAP requires management to make judgments, estimates and assumptions that affect our Consolidated Financial Statements and accompanying notes. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provisions for liabilities.

The allowance for credit losses ("ACL")ACL is a significant critical estimate. Due to the inherent nature of this estimate, we cannot provide assurance that the Company will not significantly increase the ACL or sustain credit losses that are significantly higher than the provided allowance.


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The valuation of financial instruments measured at fair value can be subjective, in particular when models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove inaccurate.

If the judgments, estimates and assumptions we use in preparing our Consolidated Financial Statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.


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Disclosure controls and procedures over financial reporting and internal controls over financial reporting may not prevent or detect all errors or acts of fraud, and lapses in these controls could materially and adversely affect our operations, liquidity and/or reputation.

Disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We also maintain a system of internal controls over financial reporting. However, these controls may not achieve and in some cases have not achieved, their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgement and breakdowns resulting from human failures. Controls can be circumvented by collusion or improper management override. Because of these limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis.

We have identified control deficiencies in our financial reporting process and for which remediation was still in process as of December 31, 2017. These control deficiencies contributed to the restatement of the audited Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2015 and the unaudited financial statements included in certain of our previously filed Quarterly Reports on Form 10-Q. See Part II, Item 9A in this Form 10-K. We have initiated certain measures, including increasing the number of employees on, and the expertise of, our financial reporting team, and the enhancement of our model risk management framework and documentation process to remediate these weaknesses, and plan to implement additional appropriate measures as part of this effort. There can be no assurance that we will be able to fully remediate our existing material weaknesses. Further, there can be no assurance that we will not suffer from other material weaknesses in disclosure controls and processes over financial reporting in the future. If we fail to remediate theseany future material weaknesses or fail to otherwise maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements and limit our ability to raise capital. Additionally, failure to remediate the material weaknesses or otherwise failing to maintain effective internal controls over financial reporting may negatively impact our operating results and financial condition, impair our ability to timely file our periodic reports with the SEC, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.

Failure to satisfy obligations associated with being a public companysecurities filings may have adverse regulatory, economic, and reputational consequences.

As a public company, we are required to prepare and distribute periodic reports containing our Consolidated Financial Statements with the SEC, evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board, and maintain internal policies, including those relating to disclosure controls and procedures.

We filed our Annual Report on Form 10-K for 2015 and certain Quarterly Reports on Form 10-Q in 2016 after the time periods prescribed by the SEC’s regulations. Those failures to file our periodic reports within the time periods prescribed by the SEC, among other consequences, resulted in the suspension of our eligibility to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 months. We timely filed our SEC periodic reports for 12 consecutive months as of November 13, 2017. If in the future we are not able to file our periodic reports within the time periods prescribed by the SEC, among other consequences, we would be unable to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 consecutive months. Our inability to use Form S-3 registration statements would increase the time and resources we need to spend if we choose to access the public capital markets.

Risks Associated with our Majority-Owned Consolidated Subsidiary

The financial results of SC could have a negative impact on the Company's operating results and financial condition.

SC historically has provided a significant source of funding to the Company through earnings. Our investment in SC involves risk, including the possibility that poor operating results of SC could negatively affect the operating results of SHUSA.

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Factors that affect the financial results of SC in addition to those which have been previously addressed include, but are not limited to:
Periods of economic slowdown may result in decreased demand for automobiles as well as declining values of automobiles and other consumer products used as collateral to secure outstanding loans. Higher gasoline prices, the general availability of consumer credit, and other factors which impact consumer confidence could increase loss frequency and decrease consumer demand for automobiles. In addition, during an economic slowdown, servicing costs may increase without a corresponding increase in finance charge income. Changes in the economy may impact the collateral value of repossessed automobiles and repossession, and foreclosure sales may not yield sufficient proceeds to repay the receivables in full and result in losses.

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SC’s growth strategy is subject to significant risks, some of which are outside its control, including general economic conditions, the ability to obtain adequate financing for growth, laws and regulatory environments in the states in which the business seeks to operate, competition in new markets, the ability to attract new customers, the ability to recruit qualified personnel, and the ability to obtain and maintain all required approvals, permits, and licenses on a timely basis
SC’s business may be negatively impacted if it is unsuccessful in developing and maintaining relationships with automobile dealerships that correlate to SC’s ability to acquire loans and automotive leases. In addition, economic downturns may result in the closure of dealerships and corresponding decreases in sales and loan volumes.
SC's business could be negatively impacted if it is unsuccessful in developing and maintaining its serviced for others portfolio. As this is a significant and growing portion of SC's business strategy, if an institution for which SC currently services assets chooses to terminate SC's rights as a servicer or if SC fails to add additional institutions or portfolios to its servicing platform, SC may not achieve the desired revenue or income from this platform.
SC has repurchase obligations in its capacity as a servicer in securitizations and whole loan sales. If significant repurchases of assets or other payments are required under its responsibility as a servicer, this could have a material adverse effect on SC’s financial condition, results of operations, and liquidity.
The obligations associated with being a public company require significant resources and management attention, which increases the costs of SC's operations and may divert focus from business operations. As a result of its initial public offering ("IPO"),IPO, SC is now required to remain in compliance with the reporting requirements of the SEC and the New York Stock Exchange ("NYSE"),NYSE, maintain corporate infrastructure required of a public company, and incur significant legal and financial compliance costs, which may divert SC management’s attention and resources from implementing its growth strategy.
The market price of SC common stock ("SC Common Stock")Stock may be volatile, which could cause the value of an investment in SC Common Stock to decline. Conditions affecting the market price of SC Common Stock may be beyond SC’s control and include general market conditions, economic factors, actual or anticipated fluctuations in quarterly operating results, changes in or failure to meet publicly disclosed expectations related to future financial performance, analysts’ estimates of SC’s financial performance or lack of research or reports by industry analysts, changes in market valuations of similar companies, future sales of SC Common Stock, or additions or departures of its key personnel.
SC's business and results of operations could be negatively impacted if it fails to manage and complete divestitures. SC regularly evaluates its portfolio in order to determine whether an asset or business may no longer be aligned with its strategic objectives. For example, in October 2015, SC disclosed a decision to exit the personal lending business and to explore strategic alternatives for its existing personal lending assets. Of its two primary lending relationships, SC completed the sale of substantially all of its loans associated with the LendingClub relationship in February 2016. SC continues to classify loans from its other primary lending relationship, Bluestem, as held-for-sale. SC remains a party to agreements with Bluestem that obligate it to purchase new advances originated by Bluestem, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and which is renewable through April 2022 at Bluestem's option. Both parties have the right to terminate this agreement upon written notice if certain events were to occur, including if there is a material adverse change in the financial reporting condition of either party. Although SC is seeking a third party willing and able to take on this obligation, it may not be successful in finding such a party, and Bluestem may not agree to the substitution. SC has recorded significant lower-of-cost-or-market adjustments on this portfolio and may continue to do so as long as the portfolio is held, particularly due to the new volume it is committed to purchase. Until SC finds a third party to assume this obligation, there is a risk that material changes to its relationship with Bluestem, or the loss or discontinuance of Bluestem’s business, would materially and adversely affect SC’s business, financial condition and results of operations. On March 9, 2020, Bluestem Brands, Inc., together with certain of its affiliates, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.
SC's business could be negatively impacted if access to funding is reduced. Adverse changes in SC's ABS program or in the ABS market generally could materially adversely affect its ability to securitize loans on a timely basis or upon terms acceptable to SC. This could increase its cost of funding, reduce its margins, or cause it to hold assets until investor demand improves.
As with SHUSA, adverse outcomes to current and future litigation against SC may negatively impact its financial position, results of operations, and liquidity. SC is party to various litigation claims and legal proceedings. In particular, as a consumer finance company, it is subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against it could take the form of class action complaints by consumers. As the assignee of loans originated by automotive dealers, it also may be named as a co-defendant in lawsuits filed by consumers principally against automotive dealers.


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SC's agreement with FCAThe Chrysler Agreement may not result in currently anticipated levels of growth and is subject to certain performance conditions that could result in termination of the agreement. If we failSC fails to meet certain of these performance conditions, FCA may electseek to terminate the agreement. In addition, FCA has the option to acquire an equity participation in the Chrysler Capital portion of SC's business.


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In February 2013, SC entered into the Chrysler Agreement with FCA underthrough which SC launched the Chrysler Capital brand whichon May 1, 2013. Through the Chrysler Capital brand, SC originates private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services that SC provides under the Chrysler Agreement which launched May 1, 2013, include providing (1) credit lines to finance FCA-franchised dealers’ acquisitions of vehicles and other products that FCA sells or distributes, (2) automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, (3) financing for commercial and fleet customers, and (4) ancillary services. In addition, SC may facilitate, for an affiliate, offerings to dealers for dealer loan financing, construction loans, real estate loans, working capital loans, and revolving lines of credit. On June 28, 2019, the Company entered into an amendment of the Chrysler Agreement which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. This amendment also terminated a previously disclosed tolling agreement, dated July 11, 2018, between SC and FCA.

In May 2013, in accordance with the terms of the Chrysler Agreement, in May 2013 SC paid FCA a $150 million upfront, nonrefundable payment, which willto be amortized over ten years. In addition, in June 2019, in connection with the execution of the amendment to the Chrysler Agreement, SC paid a $60 million upfront fee to FCA. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement iswere terminated in accordance with its terms.term.

As part of the Chrysler Agreement, SC received limited exclusivity rights to participate in specified minimum percentages of certain of FCA's financing incentive programs, which include loan rate subvention and automotive lease residual support subvention. Among other covenants, SC has committed to certain revenue sharing arrangements. SC bears the risk of loss on loans originated pursuant to the Chrysler Agreement, while FCA shares in any residual gains and losses in respect of automotive leases, subject to specific provisions in the Chrysler Agreement, including limitations on ourSC’s participation in such gains and losses.

The Chrysler Agreement is subject to early termination in certain circumstances, including SC's failure to meet certain key performance metrics, provided FCA treats SC in a manner consistent with other comparable OEMs. FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or SC's other stockholders owns 20% or more of SC’s common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC controls, or becomes controlled by, an OEM that competes with FCA or (iii) certain of SC’s credit facilities become impaired. In addition, under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in an operating entity through whichthe business offering and providing the financial services contemplated by the Chrysler Agreement are offered and provided, through either an equity interest in the new entity or participation in a joint venture or other similar business relationship or structure.Agreement. There is no maximum limit on the size of FCA’s potential equity participation. Although the Chrysler Agreement contains provisions that are designed to address a situation in which the parties disagree on the fair market value of the equity participation interest, there is a risk that SC ultimately receives less than what SCit believes to be the fair market value for such interest, and the loss of its associated revenue and profits may not be offset fully by the immediate proceeds for such interest. There can be no assurance that SC would be able to re-deploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing SC’s profitability.

The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of their ongoing obligations under the Chrysler Agreement. These obligations include the Company's meeting specified escalating penetration rates for the first five years of the agreement. SC has not met these penetration rates in the past and may not meet these penetration rates in the future. If SC continues not to meet these specified penetration rates, FCA may elect to terminate the Chrysler Agreement. FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or our other stockholders owns 20% or more of our common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC becomes, control, or become controlled by, an OEM that competes with FCA or (iii) certain of our credit facilities become impaired.

The loans and leases originated through Chrysler Capital are expected to provide us with a significant portion of our projected growth over the next several years. OurSC’s ability to realize the full strategic and financial benefits of ourits relationship with FCA depends in part on the successful development of ourits Chrysler Capital business, which will requirerequires a significant amount of management’smanagement's time and effort.effort as well as the success of FCA's business. If FCA exercises its equity option, if the Chrysler Agreement (or FCA's limited exclusivity obligations thereunder) were to terminate, or if SC otherwise is unable to realize the expected benefits of ourits relationship with FCA, including as a result of FCA's bankruptcy or if the Chrysler Agreement were to terminate,loss of business, there wouldcould be a materially adverse impact to ourSHUSA's and SC’s business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of ourSHUSA's and SC’s portfolio, liquidity, reputation, funding costs and growth, and the Company’sSHUSA's and SC's ability to obtain or find other OEM relationships or to otherwise implement itsour business strategy wouldcould be materially adversely affected.


ITEM 1B - UNRESOLVED STAFF COMMENTS

The Company currently has the following open comment letters from the Division of Corporation Finance of the SEC.None.

1.Comment letter on SHUSA’s Form 10-K for the fiscal year ended December 31, 2014, as filed on March 18, 2015, Form 10-Q for the quarter ended March 31, 2015, as filed on May 13, 2015, and Form 10-Q for the quarter ended September 30, 2015, as filed on November 13, 2015, with respect to accounting methodologies for the fair value option ("FVO") loan portfolios associated with our RICs and auto loan portfolio, the ACL associated with our RICs and auto loan portfolio, executive compensation, and certain loan credit quality disclosures.

2.Comment letter on SHUSA’s Form 10-K for the fiscal year ended December 31, 2016, as filed on March 20, 2017, and Form 10-Q for the quarter ended September 30, 2017, as filed on November 13, 2017, primarily with respect to clarification of certain of our disclosures in future filings.

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ITEM 2 - PROPERTIES

As of December 31, 2017,2019, the Company utilized 796760 buildings that occupy a total of 6.86.7 million square feet, including 196184 owned properties with 1.4 million square feet, 475453 leased properties with 3.63.8 million square feet, and 125 sale and leaseback123 sale-and-leaseback properties with 1.71.5 million square feet. The executive and primary administrative offices for SHUSA and the Bank are located at 75 State Street, Boston, Massachusetts. This location is leased by the Company.The Company leases this location. SC's corporate headquarters are located at 1601 Elm Street, Dallas, Texas. This location is leased by SC.SC leases this location.

Eleven major buildings serve as the headquarters or house significant operational and administrative functions, and are : Operations Center - 2 Morrissey Boulevard, Dorchester, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-Santander Way; 95 Amaral Street, Riverside, Rhode Island-Leased; SHUSA/SBNA Administrative Offices-75 State Street, Boston, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-450 Penn Street, Reading; Pennsylvania-Leased; Loan Processing Center-601 Penn Street; Reading, Pennsylvania-Owned; Operations and Administrative Offices-1130 Berkshire Boulevard, Wyomissing, Pennsylvania-Owned; Administrative Offices and Branch-446 Main Street, Worcester, Massachusetts-Leased; Operations and Administrative Offices-1401 Brickell Avenue, Miami, Florida-Owned; Operations and Administrative Offices - San Juan, Puerto Rico-Leased; Computer Data Center - Hato Rey, Puerto Rico-Leased; SAM Administrative Offices-Guaynabo Puerto Rico-leased; and SC Administrative Offices-1601 Elm Street, Dallas, Texas-Leased.

The majority of these eleven Company properties of the Company identified above are utilized for general corporate purposes. The remaining 785749 properties consist primarily of bank branches and lending offices. Of the total number of buildings, 647 buildings arethe Bank has 588 retail branches, of the Bank and BSPR has 27 are retail branches of Banco Santander Puerto Rico.branches.

For additional information regarding the Company's properties refer to Note 6 - "Premises and Equipment" and Note 199 - "Commitments, Contingencies and Guarantees""Other Assets" in the Notes to Consolidated Financial Statements in Item 8 of this Report.


ITEM 3 - LEGAL PROCEEDINGS

Refer to Note 15 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service (“IRS”)IRS and Note 1920 to the Consolidated Financial Statements for SHUSA’s litigation disclosures, which are incorporated herein by reference.


ITEM 4 - MINE SAFETY DISCLOSURES

None.


PART II


ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company has one class of common stock. The Company’s common stock was traded on the NYSE under the symbol “SOV” through January 29, 2009. On January 30, 2009, all shares of the Company's common stock were acquired by Santander and de-listed from the NYSE. Following this de-listing, there has not been, nor is there currently, an established public trading market in shares of the Company’s common stock. As of the date of this filing, Santander was the sole holder of the Company’s common stock.

At December 31, 2017,February 28, 2019, 530,391,043 shares of common stock were outstanding. There were no issuances of common stock during 2017, 2016,2019, 2018, or 2015.2017.

During the yearyears ended December 31, 2019, 2018, and 2017 the Company declared and paid cash dividends of $400.0 million, $410.0 million, and $10.0 million respectively, to its shareholder. The Company did not pay any cash dividends on its common stock in 2016 or 2015.

Refer to the "Liquidity and Capital Resources" section in Item 7 of the MD&A for the two most recent fiscal years' activity on the Company's common stock.


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ITEM 6 - SELECTED FINANCIAL DATA
 SELECTED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31, SELECTED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands) 
2017 (1)(2)(12)
 
2016 (1)(2)
 
2015 (1)(2)
 
2014(1)(2)
 
2013(1)
 
2019 (1)
 
2018 (1)
 
2017 (1)
 
2016 (1)
 2015
Balance Sheet Data                    
Total assets (3)
 $128,294,030 $138,360,290 $141,106,832 $132,839,460 $92,909,464 $149,499,477
 $135,634,285
 $128,274,525
 $138,360,290
 $141,106,832
Loans held for investment, net of allowance 76,829,277 82,005,321 83,779,641 81,961,652 56,642,671
Loans HFI, net of allowance 89,059,251
 83,148,738
 76,795,794
 82,005,321
 83,779,641
Loans held-for-sale 2,522,486 2,586,308 3,190,067 294,261 144,266 1,420,223
 1,283,278
 2,522,486
 2,586,308
 3,190,067
Total investments(2) 16,871,855 19,415,330 22,768,783 18,083,235 12,644,597 19,274,235
 15,189,024
 16,871,855
 19,415,330
 22,768,783
Total deposits and other customer accounts 60,831,103 67,240,690 65,583,428 62,148,002 60,079,462 67,326,706
 61,511,380
 60,831,103
 67,240,690
 65,583,428
Borrowings and other debt obligations(4)
(4)
 39,003,313 43,524,445 49,828,582 40,381,582 14,025,101
Borrowings and other debt obligations (2)(3)
 50,654,406
 44,953,784
 39,003,313
 43,524,445
 49,828,582
Total liabilities 104,588,399 115,981,532 119,259,732 107,919,751 77,259,026 125,100,647
 111,787,053
 104,583,693
 115,981,532
 119,259,732
Total stockholder's equity (5)
 23,705,631 22,378,758 21,847,100 24,919,709 15,650,438 24,398,830
 23,847,232
 23,690,832
 22,378,758
 21,847,100
Summary Statement of OperationsSummary Statement of Operations         Summary Statement of Operations         
Total interest income $7,786,134 $7,989,751 $8,137,616 $7,330,742 $2,706,915 $8,650,195
 $8,069,053
 $7,876,079
 $7,989,751
 $8,137,616
Total interest expense 1,452,129 1,425,059 1,236,210 1,087,642 837,364 2,207,427
 1,724,203
 1,452,129
 1,425,059
 1,236,210
Net interest income 6,334,005 6,564,692 6,901,406 6,243,100 1,869,551 6,442,768
 6,344,850
 6,423,950
 6,564,692
 6,901,406
Provision for credit losses (6)(4)
 2,650,494 2,979,725 4,079,743 2,459,998 108,279 2,292,017
 2,339,898
 2,759,944
 2,979,725
 4,079,743
Net interest income after provision for credit losses 3,683,511 3,584,967 2,821,663 3,783,102 1,761,272 4,150,751
 4,004,952
 3,664,006
 3,584,967
 2,821,663
Total non-interest income (7)(5)
 2,929,576 2,766,759 2,905,035 5,059,462 1,552,830 3,729,117
 3,244,308
 2,901,253
 2,755,705
 2,905,035
Total general and administrative expenses(8)
 5,570,159 5,122,211 4,724,400 3,777,173 2,215,411
Total other expenses (9)
 222,488 275,037 4,657,492 358,173 170,475
Total general, administrative and other expenses (6)
 6,365,852
 5,832,325
 5,764,324
 5,386,194
 9,381,892
Income/(loss) before income taxes 820,440 954,478 (3,655,194) 4,707,218 928,216 1,514,016
 1,416,935
 800,935
 954,478
 (3,655,194)
Income tax provision/(benefit) (10)
 (152,334) 313,715 (599,758) 1,673,123 145,012
Net income / (loss) (13)
 $972,774 $640,763 $(3,055,436) $3,034,095 $783,204
Selected Financial Ratios (11)
          
Income tax provision/(benefit) (7)
 472,199
 425,900
 (157,040) 313,715
 (599,758)
Net income / (loss) (9)
 $1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)
Selected Financial Ratios (8)
          
Return on average assets 0.72% 0.45% (2.18)% 2.46% 0.81% 0.73% 0.76% 0.71% 0.45% (2.18)%
Return on average equity 4.16% 2.88% (11.98)% 12.95% 5.10% 4.23% 4.11% 4.10% 2.88% (11.98)%
Average equity to average assets 17.39% 15.67% 18.15 % 18.99% 15.96% 17.31% 18.37% 17.39% 15.67% 18.15 %
Efficiency ratio 62.53% 57.84% 95.67 % 36.59% 69.71% 62.58% 60.82% 61.81% 57.79% 95.67 %
(1)On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with Accounting Standards Codification ("ASC") 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. On July 2, 2018, an additional Santander subsidiary, SAM, an investment adviser located in Puerto Rico, was transferred to the Company. SFS and SAM are entities under common control of Santander; however, their results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company on both an individual and aggregate basis. As a result, the Company has reported the results of SFS on a prospective basis beginning July 1, 2017 and the results of SAM on a prospective basis beginning July 1, 2018.
(2)Financial results for the years ended 2017, 2016, 2015 and 2014 include the impact of the changeThe increase in control of SC in the first quarter of 2014 (the "Change in Control"). Priortotal investments from 2018 to 2019 was due to the Changepurchase of additional AFS treasury securities. The decreases in Control, the Company accounted for its investmentTotal investments and corresponding decreases in SC as an equity method investment. The Company owned approximately 68%, 59%, 59%, and 60%, of SC as of December 31, 2017, 2016, 2015, and 2014, respectively.
(3)The change in total assets was primarily attributable to changes in the investment securities, loan, and operating lease portfolios. The decrease in investment securities from 2016 to 2017 and from 2015 to 2016 reflects sales used to pay down borrowed funds. The increase from 2014 to 2015 is due to an increase in the investment portfolio as the Company invested in high quality liquid assets as well as growth in the loan portfolio and the operating lease portfolio.
(4)The decrease in borrowingsBorrowings and other debt obligations from 2016 to 2017 and from 2015 to 2016 reflectswere primarily driven by the Company's use of portions of the proceeds from the salesales of investment securities to repurchase and pay off borrowed funds. its outstanding borrowings.
(3)The increase in Borrowings and other debt obligations from 20142018 to 2015 is2019 was primarily a result of the Company funding the growth of the loan portfolio and operating lease portfolio.
(5)(4)The decrease in Stockholders Equitythe Provision for credit losses from 20142017 to 2018 was primarily due to lower net charge-offs on the RIC portfolio, accompanied by a recovery on the purchased RIC portfolio and lower provision on the originated RIC portfolio and the commercial loan portfolio. The decrease from 2015 reflectsto 2016 was primarily due to significantly lower provision on the goodwill impairment recordedpurchased RIC portfolio, accompanied by slightly lower net charge-offs across the total loan portfolio.
(5)The increase in Non-interest income from 2018 to 2019 and 2017 to 2018 is primarily attributable to an increase in lease income corresponding to the growth of $4.5 billion in 2015.the operating lease portfolio.
(6)The provision for credit losses decreased fromGeneral, administrative, and other expenses increased annually between 2016 to 2017,and 2019, primarily due to a decreasegrowth in the loan portfolio. The provision for credit losses in 2015compensation and 2016 was primarilybenefits and lease expense, driven by SC's RICcorresponding growth of the operating lease portfolio. In 2015, this line included a $4.5 billion goodwill impairment charge on SC.
(7)Non-interest income in 2014 includes a $2.4 billion gain on acquisition, which is related to the Change in Control.
(8)Increases in general and administrative expenses from 2016 to 2017 are primarily due to increases in compensation costs and legal expenses and increases in lease expenses relating to SC's leased vehicle portfolio. Increases from 2015 to 2016 are primarily related to increased compensation costs, technology expenses, and increased lease expenses relating to the SC's leased vehicle portfolio. Additional increases from 2014 to 2015 are a result of an increase in head count resulting in additional compensation and benefit expenses, increases in professional services related to consulting costs due to the Change in Control, preparation for and implementation of new capital requirements, and other regulatory and governance related-projects Refer to the Management’s Discussion and Analysis and Results of Operations (the “MD&A") for further discussion.
(9)Other expenses in 2015 included an impairment charge to goodwill in the amount of $4.5 billion on the Company's consumer finance subsidiary.
(10)Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information on the Company's income taxes. The income tax benefit in 2017 was due to the impact of the TCJA, resulting in a tax reform.benefit to the Company. The income tax benefit in 2015 was primarily the result of the benefit recorded for the release of the deferred tax liability in conjunction with the goodwill impairment charge. The higher income tax provision in 2014 was primarily attributable to the deferred tax expense recorded on the book gain resulting from the Change in Control.
(11)(8)For further information onthe calculation components of these ratios, see the Non-GAAP Financial Measures section of the MD&A.
(12)On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. (“SFS”), a finance company located in Puerto Rico, was transferred to the Company. SFS is an entity under common control of Santander; however, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company has determined that it will report the results of SFS on a prospective basis beginning July 1, 2017 rather than retrospectively restate its financial statements for the contribution of SFS, as required by GAAP. Refer to Note 1 for additional information.
(13)(9)Includes net income/(loss) attributable to non-controlling interestNCI of $411.7$288.6 million, $283.6 million, $405.6 million, $277.9 million, and $(1.7) billion $464.6 million, and $0.0 million for the years ended December 31, 2019, 2018, 2017, 2016 2015, 2014 and 2013,2015, respectively.

3936





Item 7.    Management’s Discussion and AnalysisTable of Financial Condition and Results of Operations



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")&A


EXECUTIVE SUMMARY

Santander Holdings USA, Inc. ("SHUSA" or the "Company")SHUSA is the parent holding company of Santander Bank, National Association, (the "Bank" or "SBNA"),SBNA, a national banking association, and owns approximately 68%72.4% (as of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"),December 31, 2019) of SC, a specialized consumer finance company focused on vehicle finance and third-party servicing.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").Santander. SHUSA is also the parent company of Santander BanCorp (together with its subsidiaries, “Santander BanCorp”), a holding company headquartered in Puerto Rico whichthat offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico; Santander Securities LLC (“SSLLC”),BSPR; SSLLC, a registered broker-dealer headquartered in Boston; Banco Santander International (“BSI”),BSI, a financial services company locatedheadquartered 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”),SIS, a registered broker-dealer locatedheadquartered 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 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").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 specialized consumer finance company focused on vehicle finance and third-party servicing. SC's primary business is the indirect origination and securitization of retail installment contracts ("RICs"),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 loansis managed through a web-based direct lending program, purchasessingle reporting segment which included 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.

In 2014, an initial public offering ("IPO") of shares of SC's common stock (the “SC Common Stock”) was completed. The IPO resulted in a change in control and consolidation of SC (the “Change in Control”).

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

Chrysler Capital

SC offers a full spectrum of auto financing products and services, to Chrysler customers and dealers under the Chrysler Capital brand ("Chrysler Capital"), the trade name used in providing services under the ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC, signed by SC in 2013 (the "Chrysler Agreement"). These products and services include consumerincluding RICs, and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit.

Under the terms of the Chrysler Agreement, certain standards were agreed to, including SC meeting specified escalating penetration rates for the first five years, and FCA treating SC in a manner consistent with comparable original equipment manufacturers ("OEMs'") treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet its obligations under the agreement could result in the agreement being terminated. The targeted and actual penetration rates under the terms of the Chrysler Agreement are as follows:

40





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  
Program Year (1)
  1 2 3 4 5-10
Retail 20% 30% 40% 50% 50%
Lease 11% 14% 14% 14% 15%
Total 31% 44% 54% 64% 65%
           
Actual Penetration (2)
 30% 29% 26% 19% 18%
(1)Each program year runs from May 1 to April 30. Retail and lease penetration is based on a percentage of FCA retail sales.
(2) Actual penetration rates shown for program year 1, 2, 3 and 4 are as of April 30, 2014, 2015, 2016 and 2017, respectively, the end date of each of those program years. Actual penetration rate shown for program year 5, which ends April 30, 2018, is as of December 31, 2017.

The target penetration rate as of April 30, 2018 is 65%. SC's actual penetration rate as of December 31, 2017 was 18%, an increase from 17% as of December 31, 2016. The penetration rate has been constrained due to a more competitive landscape and low interest rates, causing SC's subvented loan offers not to be materially more attractive than other lenders' offers. While SC has not achieved the targeted penetration rates to date, Chrysler Capital continues to be a focal point of its strategy, SC continues to work with FCA to improve penetration rates, and SC remains committed to the Chrysler Agreement.

SC has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. SC has partnered with FCA to roll out two new pilot programs, including a dealer rewards program and a nonprime subvention program. During the year ended December 31, 2017, SC originated more than $6.7 billion in Chrysler Capital loans, which represents approximately 50% of its total RIC originations, with an approximately even share between prime and non-prime, as well as more than $6.0 billion in Chrysler Capital leases. Additionally, substantially all of the leases originated by SC during the year ended December 31, 2017 were made under the Chrysler Agreement. Since its May 1, 2013 launch, Chrysler Capital has originated more than $45.2 billion in retail loans and $23.6 billion in leases, and facilitated the origination of $3.0 billion invehicle leases, and dealer loans, for the Bank. As of December 31, 2017, SC's auto RIC portfolio consisted of $8.2 billion of Chrysler Capital loans, which represents 37% of SC's auto RIC portfolio.as well as financial products and services related to recreational and marine vehicles and other consumer finance products.

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 severalother relationships through which it has providedholds other consumer finance products. In OctoberHowever, in 2015, SC announced its planned exit from the personal lending business.and, accordingly, all of its personal lending assets are classified as HFS at December 31, 2019.

Chrysler Capital

 Since May 2013, under the ten-year private label financing agreement with 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 provides 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.

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. The Company's average penetration rate for the third quarter of 2019 was 34%, an increase from 30% for the same period in 2018.

SC has dedicated financing facilities in place for its Chrysler Capital business.business and has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. During the year ended December 31, 2019, SC periodically sells consumer RICs through these flow agreementsoriginated $12.8 billion in Chrysler Capital loans, which represented 56% of the UPB of its total RIC originations, with an approximately even share between prime and when market conditions are favorable, it accessesnon-prime, as well as $8.5 billion in Chrysler Capital leases. Additionally, substantially all of the asset-backed securities ("ABS") market through securitizations of consumer RICs.leases originated by SC also periodically enters into bulk sales of consumer vehicle leases with a third party. SC typically retains servicing ofduring the year ended December 31, 2019 were under the Chrysler Agreement. Since its May 2013 launch, Chrysler Capital has originated more than $65.9 billion in retail loans (excluding the SBNA RIC origination program) and leases sold or securitized, and may also retain some residual riskpurchased $41.9 billion in sales of leases. SC has also entered into an agreement with a third party whereby SC will periodically sell charged-off loans.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the fourth quarter of 2017,2019, unemployment declined, whileremained low and year-to-date market results improved and the preliminary gross domestic product ("GDP") growth rate rosewere positive, recovering from the prior quarter.a volatile fourth quarter of 2018.

The unemployment rate at December 31, 2017 decreased to 4.1%2019 was 3.5% compared to 4.2%3.5% at September 30, 20172019, and 4.7%was lower compared to 3.9% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose in health care, construction jobs and food services, but declined inthe retail trade, employment.and healthcare, while mining employment decreased.

The Bureau of Economic Analysis ("BEA")BEA advance estimate indicates that real GDPgross domestic product grew at an annualized rate of 2.6%2.1% for the fourth quarter of 2017, compared to 3.0% in2019, consistent with the advance estimated growth of 2.1% for the third quarter of 2017. According2019. Growth continued to the BEA, the change was positively affectedbe driven by changesincreases in personal consumption expenditures, non-residential fixed investment, exports, residential fixed investment,federal government spending, and state and local government spending, and federal government spending, and negatively affectedspending. In addition, imports, which are a subtraction to in the calculation of the gross domestic product, decreased. These positive contributions were offset by a change indecreases to private inventory investment.

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Item 7.    Management’s Discussioninvestment and Analysis of Financial Condition and Results of Operations


non-residential fixed investments.

Market year-to-date returns for the following indices based on closing prices at December 31, 20172019 were:
  December 31, 20172019
Dow Jones Industrial Average 25.1%22.0%
S&P 500 19.4%28.5%
NASDAQ Composite 28.2%34.8%

At its December 20172019 meeting, the Federal Open Market Committee decided to raisemaintain the federal funds rate target at 1.50%, to 1.25-1.50%, indicating that thecontinue to support economic expansion, current strength in labor market has continued to strengthenconditions, and that economic activity has continued to expand at a solid pace. Inflationinflation near its targeted objective. Overall inflation remains below the targeted rate of 2.0%.

The 10-yearten-year Treasury bond rate at December 31, 20172019 was 2.40%1.90%, down from 2.45%2.69% at December 31, 2016.2018. Within the industry, changes withinin this metric are often considered to correspond to changes in the 15-year and 30-year mortgage rates.

AtCurrent mortgage origination and refinancing information is not yet available. Based on the time of filing this Form 10-K,most current year 2017 information was not available; however, for the third quarter of 2017,released based on September 2019 statistics, mortgage originations increased approximately 1.73% over the prior quarter, but decreased 25.99% year-over-year. Similarly,29.74% year-over-year, which included an increased 6.21% in mortgage originations for home purchases and an increased 103.1% in mortgage originations from refinancing activity showed an increasefrom the same period in 2018. These rates are representative of approximately 2.72% over the prior quarter, but a decrease of 54.49% year-over- year.U.S. national average mortgage origination activity.

After reaching its peak in 2009, theThe ratio of nonperforming loans ("NPLs")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 flatlow since that time. NPLs for U.S. commercial banks were approximately 1.17%0.87% of loans using the latest available data, forwhich was as of the fourththird quarter of 2017,2019, compared to 1.17%0.95% for the prior quarter.year.

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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Credit Rating Actions

The following table presents Moody's, Standard & Poor's ("Moody’s, S&P")&P and Fitch credit ratings for the Bank, and Banco Santander Puerto Rico ("BSPR"),BSPR, SHUSA, Santander, and the Kingdom of Spain, as of December 31, 2017:2019:
  BANK 
BSPR(1)(2)
 SHUSA
  Moody'sS&P
Fitch(2)
 Moody'sS&P
Fitch (2)
 Moody'sS&PFitch
Long-Term Baa1BBB+A-BBB+ Baa1N/ABBB+ Baa3BBBBBB+BBB+
Short-Term P-1A-2F-2 P-1/P-2N/AF-2 n/aA-2F-2
Outlook StableStableStable StableN/AStable StableStableStable

   SANTANDER SPAIN
   Moody'sS&PFitch Moody'sS&PFitch
Long-Term  A3A2A-AA- Baa2Baa1BBB+ABBB+A-
Short-Term  P-2P-1A-2A-1F-2 P-2A-2A-1F-2F-1
Outlook  StableStableStable StablePositiveStableStable
(1)    P-1 Short Term Deposit Rating; P-2 Short Term Debt Rating.
(2)    Short Term DebtOutlook currently is Stable and Short Term Deposit Ratings are both F-2.under review with the possibility of a downgrade.

On February 9, 2017 StandardMoody's announced completion of its periodic reviews and Poor’s raisedaffirmed its outlook on Santander’s credit rating to “positive” from “stable” reflecting Santander’s issuance of debt to meet total loss absorbing capital ("TLAC") requirements.

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

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

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

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

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

On November 17, 2017, Fitch initiated coverage of SHUSA and assigned ratings of F-2/BBB+/Stable to SHUSA, SBNA and BSPR.

On December 4, 2017, Standard & Poor's lowered the long term issuer credit rating for SHUSA by one notch to BBBBSPR in March 2019. Spain in August 2019 and keptSantander in June 2019. Fitch affirmed its ratings and outlook for SHUSA at Stable.

OnSpain in December 13, 2017, Moody's upgrades Santander Bank N.A.2019 and Banco Santander Puerto Rico's senior and subordinate debt ratings to Baa1.

Subsequent to year end, on January 19, 2018, Fitch upgraded Spain's Long-term Foreign Currency and Local Currency rating to A- from BBB+ and upgraded Spain's Short-term Foreign Currency and Local Currency rating to F1 from F2.BSPR in October 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

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

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

As of December 31, 2017, SHUSA did not have material direct credit exposure to the Commonwealth of Puerto Rico, and its exposure to Puerto Rico municipalities in total was approximately $220 million. As of December 31, 2017, municipalities had not been designated “covered” territorial instrumentalities subject to the requirements of PROMESA, and the municipalities were current on their debt obligations to SHUSA. Under PROMESA, the FOB has sole discretion to designate territorial instrumentalities such as municipalities as covered entities subject to PROMESA’s requirements. If the FOB determines to designate municipalities as covered entities under PROMESA, the FOB could initiate debt restructuring of municipalities that have debt obligations to SHUSA, if deemed necessary.

Impact from Hurricanes

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions and increased its allowance for loan losses by approximately $110 million recorded during the full year of 2017. However, for credit exposures in Puerto Rico, given the current state in the region, the Company has had limited information with which to estimate probable credit losses. As of December 31, 2017, the Company has approximately $3.5 billion of loan exposures in Puerto Rico consisting of $1.6 billion in consumer loans, $1.9 billion in commercial loans, and $220 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses, and may establish additional reserves for losses in future periods.


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.
parent. 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")FRB of Boston, and the Consumer Financial Protection Bureau (the "CFPB").CFPB. The Company's banking and bank holding company subsidiaries are further supervised by the Federal Deposit Insurance Corporation (the "FDIC")FDIC and the Office of the Comptroller of the Currency (the “OCC”).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.

During the year ended December 31, 2017, the Company paid cash dividends on common stock of $10.0 million to its sole shareholder, Santander.
39

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



Foreign Banking Organizations ("FBOs")Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



FBOs

In February 2014, the Federal Reserve issued the final rule implementing certain enhanced prudential standards (“EPS”)EPS mandated by section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA") (“FBO Final Rule”).DFA. 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. In addition, the FBO Final Rule required U.S. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the Final Rule. As a result of this rule, Santander has transferred substantially all of its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. A phased-in

Economic Growth Act

In May 2018, 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 is being used for the standards and requirements at both the FBO and the IHC. As a U.S. BHC with more than $50 billion in total consolidated assets, the Company became subject to the EPS on January 1, 2015. Other standardsmandated by Section 165 of the FBO Final Rule will be phased in through January 1, 2019.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

In July 2013, the Federal Reserve, the FDIC and the OCC released final U.S. Basel III regulatory capital rules implementing the global regulatory capital reforms of Basel III that are applicable to both SHUSA and the Bank. The final rules establishedBank 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. Subject to various transition periods, this rule became effective for SHUSA on January 1, 2015.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



TheThese 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")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 is beingwas phased in over three years starting in 2016, beginning at 0.625% and increasing by that amount on each subsequent January 1, until the buffer reaches 2.5% oneffective 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.

TheThese 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"),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 proposed finalized changes to the capital rules that became effective on January 1, 2018.  These changes extended the current treatment and will deferdeferred the final transition provision phase-in at non-advanced approach institutions for certain capital elements, and suspendsuspended the risk-weightingrisk-weight to 100 percent for certain deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent.  In addition,During 2019, the regulatory agencies issuedapproved a secondary proposal in 2017final rule which includes simplifications for non-advanced approaches to further revise the generally applicable capital rule by introducing newrules, specifically with regard to the treatment of high volatility acquisition, development and construction loans, and byminority interest, as well as modifying the calculationrisk-weight to 250 percent for minority interest includible within capital, for which the regulators havecertain deferred taxes and mortgage servicing assets not released adisallowed from capital.  This final decision.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.


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Item 7.    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 ImprovementImprovements Act (the “FDIA”) and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution.

At December 31, 2017,2019, the Bank met the criteria to be classified as “well-capitalized.”

On April 10, 2018, the Federal Reserve issued a 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 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 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, if finalized as proposed, to have a material impact on its current or future planned capital actions. This rule was finalized on March 4, 2020, and its impact is being evaluated.

Stress Testing and Capital Planning

The DFA also requires certain banks and BHCs, including the Company, is subject to the Federal Reserve'sperform a stress test and submit a capital plan rule, which requires the Company and the Bank to perform stress tests and submit the results 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 OCCCompany 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 requiredsubject to submitsupervisory stress testing on a mid-year stress testtwo-year cycle. The Company continues to the Federal Reserve. In addition, together with theevaluate planned capital actions in its annual stress test submission, the Company is required to submit a proposed capital plan to the Federal Reserve. As a consolidated subsidiary of the Company, SC is included in the Company's stress tests and capital plans.on an ongoing basis.

Under the capital plan rule, the Company is considered a large and non-complex BHC. The Federal Reserve may object to the Company’s capital plan if the Federal Reserve determines that the Company has not demonstrated an ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the planning horizon. Large and non-complex BHCs such as the Company are no longer subject to the qualitative objection criteria of the capital plan rule which are applied to larger banks that fall outside the large and non-complex BHC definition.

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Liquidity Rules

In September 2014, theThe Federal Reserve, the FDIC, and the OCC finalizedhave established a rule to implement the Basel III liquidity coverage ratio (the “LCR”)LCR for certain internationally active banks and nonbank financial companies, and a modified version of the LCR for certain depository institution holding companies that are not internationally active. The LCR is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets ("HQLA") equal to its expected net cash outflow for a 30-day time horizon. This rule implements a phased implementation approach under which the most globally important covered companies (more than $700 billion in assets) and large regional financial institutions ($250 billion to $700 billion in assets) were required to begin phasing-in the LCR requirements in January 2015. Smaller covered companies (more than $50 billion in assets), such as the Company were required to calculate the LCR monthly beginning January 2016. In November 2015, the Federal Reserve published a revised final LCR rule. Under this revision, the Company was required to calculate the modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016. There is no requirement to submit the calculation to the Federal Reserve. The Company will be required to publicly disclose its US LCR results beginning October 1, 2018.

In October 2014,2019, the Basel CommitteeFederal Reserve finalized rules that tailor the liquidity requirements based on Banking Supervision issueda company’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. In light of the final standard forfact that the net stableCompany is under $250 billion in assets and has less than $50 billion in short-term wholesale funding, ratio (the “NSFR”). the Company is no longer required to disclose the US LCR.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 thisthe 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. 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 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.

TLAC

The Federal Reserve adopted a final rule in December 2016 thatTLAC 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”).LTD. The TLAC Rule applies to U.S. global systemically important banks ("G-SIB")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 tomust hold the higher of 18% of its risk-weighted assets ("RWAs")RWAs or 9% of its total consolidated assets in the form of TLAC.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. In addition theThe 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 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.


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Item 7.    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 SHUSAsponsors of ABS to hold LTD ofretain at least 6%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 RWAsmarket 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 3.5%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 as a result, both the Company and SBNA began holding the market risk component within RWA of the risk-based capital ratios, and submitted the FFIEC 102 - Market Risk Regulatory Report beginning for the period ended December 31, 2019. The incorporation of market risk within regulatory capital has resulted in a decrease in the risk-based capital ratios.

Capital Simplification Rule

The federal banking agencies are adopting a final rule that simplifies for non-advanced approaches banking organizations the generally applicable capital rules and makes a number of technical corrections. Specifically, it reverses the previous transition provision freeze on MSRs and deferred tax assets by modifying the risk-weight from 100% to 250%. The rule will also replace the existing methodology for calculating includible minority interest with a flat 10% limit at each capital level. The increased risk weighting presents an unfavorable decline to the Company's risk-based ratios, but it is estimated that the Tier 1 and total capital ratios will improve overall due to the additional minority interest includible under the simplified rule. The capital simplification rule becomes effective April 1, 2020; however, regulators have granted the option for institutions to adopt early on January 1, 2020. The Company plans to adopt this new rule on April 1, 2020.

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 TLAC Rule is effective January 1, 2019.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 activitiestransactions of the Company and its banking subsidiaries with affiliated companies and individuals. Section 23A imposes limits on certain specified “covered transactions,” which include loans, lines, and letters of credit to affiliated companies or individuals, and investments in affiliated companies, as well as certain other transactions with affiliated companies and individuals. The aggregate of all covered transactions is limited to 10% of a bank’s capital and surplus for any one affiliate and 20% for all affiliates. Certain covered transactions also must meet collateral requirements that range from 100% to 130% depending on the type of transaction.

Section 23B of the Federal Reserve Act prohibits a depository institution from engaging in certain transactions with affiliates unless the transactions are considered arms'-length. To meet the definition of arms-length,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.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Regulation AB II

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

Community Reinvestment Act ("CRA")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.”“Outstanding” and SBNA’s most recent publiccurrent CRA report of examination rated the Bank as “Needs to Improve” for the January 1, 2011 through December 31, 2013 evaluation period. The Bank’s rating based solely on the applicable CRA lending, service and investment tests would have been “satisfactory.” However, the overall rating was lowered to “Needs to Improve” due to previously disclosed instances of non-compliance by the Bank that are being remediated.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.

On December 12, 2019, the OCC and the FDIC jointly issued the CRA NPR to modernize the regulatory framework implementing the CRA.   The CRA NPR generally focuses on clarifying and expanding the activities that qualify for CRA consideration, providing benchmarks to determine what levels of activity are necessary to obtain a particular CRA rating, establishing additional assessment areas based on the location of a bank’s deposits, and increasing clarity and consistency in reporting.  The CRA NPR contemplates that regulators will provide a publicly available, non-exhaustive list of activities that would automatically receive CRA consideration.   In addition, there may be some negative impacts on aspects of the Bank’s business as a result ofCRA NPR allows banks to receive consideration for certain qualifying activities conducted outside their assessment areas. It currently is unclear when and in what manner the downgrade. For example, certain categories of depositors are restricted from making deposits in banks with a “Needs to Improve” rating.OCC and FDIC will finalize the CRA NPR.

Other Regulatory Matters

On April 1, 2014, the Bank received a civil investigative demand from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for automated teller machine ("ATM") and onetime debit card transactions through a third-party vendor. On July 14, 2016, the Bank entered into a consent order with the CFPB regarding these practices. Pursuant to the terms of the consent order, the Bank paid a civil money penalty (a “CMP”) of $10.0 million and agreed to validate the elections made by customers who opted in to overdraft coverage for ATM and onetime debit card transactions in connection with telemarketing by the third-party vendor. The Bank is also required to make certain changes to its third-party vendor oversight policy and its customer complaint policy.  The Bank is currently executing a remediation plan and working to meet the other consent order requirements. It is possible that additional litigation could be filed as a result of these issues.

On February 25, 2015, SC entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, which resolvesresolved 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”).SCRA. The consent order requiresrequired SC to pay a civil fine in the amount of $55,000, as well as at least $9.4 million to affected servicemembers,service members, consisting of $10,000 per servicememberservice member plus compensation for any lost equity (with interest) for each repossession by SC and $5,000 per servicememberservice member for each instance where SC sought to collect repossession-related fees on accounts wherefor which a repossession was conducted by a prior account holder.account-holder. The consent order requires usrequired SC to undertake additional remedial measures. The consent order also subjectssubjected SC to monitoring by the DOJ for compliance with the SCRA for a period of five years. The consent order terminated as of February 26, 2019.

On March 26, 2015, the Bank entered into a cease21, 2017, SC and desist order (the "SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP, an identity theft protection product from the Bank’s third-party vendor. Pursuant to the SIP Consent Order, the Bank paid a CMP of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of the SIP. Prior to entering into the SIP Consent Order, the Bank made $37.3 million in remediation payments to customers, representing the total amount paid for product enrollment.

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

On July 2, 2015, the Company entered into a written agreement with the FRB of Boston. Under the terms of that written agreement, SC is required to enhance its compliance risk management program, board oversight of risk management and senior management oversight of risk management, and the Company is required to make enhancements with respectenhance its oversight of SC's management and operations.

As of December 31, 2019, SSLLC had received 751 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico CEFs 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 matters, Board oversightthings, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There were 439 arbitration cases pending as of December 31, 2019. The Company has experienced a decrease in the volume of claims since September 30, 2019; however, it is reasonably possible that 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 consolidated organization, risk management, capital planningdebt and liquidity risk management.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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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


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

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

The following activities are disclosed in response to Section 13(r) with respect to affiliates of SHUSA within the Santander Group. During the period covered by this annual report:

(a)    Santander UK holds accounts for two customers, with the first customer holding one savings accountsaccount and one current account for twoand the second customer holding one savings account. Both of the customers, who are resident in the UK, who are currently designated by the U.S. under the Specially Designated Global Terrorist ("SDGT")SDGT sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 20172019 were negligible relative to the overall profits of Santander.

(b)    During the period covered by this annual report, Santander UK held one savings account with a balance of £1.24, and one current account with a balance of £1,884.53, for another customer resident in the UK who is currently designated by the U.S. under the SDGT sanctions program. The customer relationship pre-dates the designations of the customer under these sanctions. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. Santander UK determined to put a block on these accounts, and the accounts were subsequently closed on 14 January 2019. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 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 2017.the year ended December 31, 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 this accountthese accounts in the year ended December 31, 2017.2019.

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.

During the period covered by this annual report, Santander Brasil held one current account with a balance of R$100.00 for a customer resident in Brazil who is currently designated by the U.S. under the SDGT sanctions program. The customer relationship pre-dates the designation of the customer under these sanctions. Santander Brasil determined to terminate the account even prior to the customer being formally designated under the SDGT sanctions program on September 10, 2019, and the account was subsequently closed on October 9, 2019. Revenues and profits generated by Santander Brasil on this account in the year ended December 31, 2019 were negligible relative to the overall profits of Santander.

In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2017,2019 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- takingdeposit-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.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



CRITICAL ACCOUNTING ESTIMATES

This MD&A is based on the Consolidated Financial Statements and accompanying notes that have been prepared in accordance with GAAP. The significant accounting policies of the Company are described in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, accordingly, have a greater possibility of producing results that could be materially different than originally reported. However, the Company is not currently aware of any likely events or circumstances that would result in materially different results. Management identified accounting for ALLL and the reserve for unfunded lending commitments, estimates of expected residual values of leased vehicles subject to operating leases, accretion of discounts and subvention on RICs, goodwill, fair value measurements and income taxes as the Company's most critical accounting estimates, in that they are important to the portrayal of the Company's financial condition and results and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.

ALLL for Loan Losses and Reserve for Unfunded Lending Commitments

The ALLL and reserve for unfunded lending commitments represent management's best estimate of probable losses inherent in the loan portfolio. The adequacy of SHUSA's ALLL and reserve for unfunded lending commitments is regularly evaluated. This evaluation process is subject to several estimates and applications of judgment. Management's evaluation of the adequacy of the allowance to absorb loan and lease losses takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans that have loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. Management also considers loan quality, changes in the size and character of the loan portfolio, the amount of NPLs, and industry trends. Changes in these estimates could have a direct material impact on the provision for credit losses recorded in the Consolidated Statements of Operations and/or could result in a change in the recorded allowance and reserve for unfunded lending commitments. The loan portfolio represents the largest asset on the Consolidated Balance Sheets. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the ALLL and reserve for unfunded lending commitments in the Consolidated Balance Sheets. A discussion of the factors driving changes in the amount of the ALLL and reserve for unfunded lending commitments for the periods presented is included in the Credit Risk Management section of this MD&A. 

The ALLL includes: (i) an allocated allowance, which is comprised of allowances established on loans specifically evaluated for impairment and loans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends general economic conditions and other risk factors, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Generally, the Company’s loans held for investment are carried at amortized cost, net of the ALLL. The ALLL includes the estimate of credit losses to be realized during the loss emergence period based on the recorded investment in the loan, including 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. Reserve levels are collectively reviewed for adequacy and approved quarterly.

The Company's allocated reserves are principally based on various models subject to the Company's Model Risk Management Framework. New models are approved by the Company's Model Risk Management Committee. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.

The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions include loss factors 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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Valuation of Automotive Lease Assets and Residuals

The Company has significant investments in vehicles in SC's operating lease portfolio. In accounting for operating leases, management must make a determination at the beginning of the lease contract of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. At contract inception, the Company determines the projected residual value based on an internal evaluation of the expected future value. This evaluation is based on a proprietary model using internally-generated data that is compared against third-party, independent data for reasonableness. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a finance charge. However, since the customer is not obligated to purchase the vehicle at the end of the contract, the Company is exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of leased assets.

To account for residual risk, the Company depreciates automobile operating lease assets to estimated realizable value on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Periodically, the Company revises the projected value of the leased vehicle at termination based on current market conditions and other relevant data points, and adjusts depreciation expense appropriately over the remaining term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances, such as a systemic and material decline in used vehicle values occurs. These circumstances could include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices (which may have a pronounced impact on certain models of vehicles) or pervasive manufacturer defects (which may systemically affect the value of a particular brand or model). Impairment is determined to exist if the fair value of the leased asset is less than its carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by DCF. No such impairment was recognized in 2019, 2018, or 2017.

The Company's depreciation methodology for operating lease assets considers management's expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used vehicle values. The critical assumptions underlying the estimated carrying value of automobile lease assets include: (1) estimated market value information obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) our remarketing abilities, and (4) automobile manufacturer vehicle and marketing programs. Changes in these assumptions could have a significant impact on the value of the lease residuals. Expected residual values include estimates of payments from automobile manufacturers
related to residual support and risk-sharing agreements, if any. To the extent an automotive manufacturer is not able to fully honor its obligation relative to these agreements, the Company's depreciation expense would be negatively impacted.

Accretion of Discounts and Subvention on RICs

LHFI include the RIC portfolio which consists largely of nonprime automobile loans, and which are primarily acquired individually from dealers at a nonrefundable discount from the contractual principal amount. The Company also pays dealer participation on certain receivables. The amortization of discounts, subvention payments from manufacturers, and other origination costs are recognized as adjustments to the yield of the related contracts. The Company applies significant assumptions, including prepayment speeds, in estimating the accretion rates used to approximate effective yield.

The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Goodwill

The acquisition method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets acquired and liabilities assumed. The excess of the purchase price of an acquired business over the fair value of the identifiable assets and liabilities represents goodwill. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing.

As more fully described in Note 23 to the Consolidated Financial Statements, a reporting unit is an operating segment or one level below. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis on October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. As of December 31, 2019, the reporting units with assigned goodwill were Consumer and Business Banking, C&I, CRE & VF, CIB, and SC.

An entity's quantitative goodwill impairment analysis must be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, and that no impairment exists. An entity has an unconditional option to bypass the preceding qualitative assessment for any reporting unit in any period and proceed directly to the quantitative analysis of the goodwill impairment test.

The quantitative analysis requires a comparison of the fair value of each reporting unit to its carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, impairment is measured as the excess of the carrying amount over the fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit, and cannot subsequently be reversed even if the fair value of the reporting unit recovers. The Company utilizes the market capitalization approach to determine the fair value of its SC reporting unit, as it is a publicly traded company that has a single reporting unit. Determining the fair value of the remaining reporting units requires significant valuation inputs, assumptions, and estimates.

The Company determines the carrying value of each reporting unit using a risk-based capital approach. Certain of the Company's assets are assigned to a Corporate/Other category. These assets are related to the Company's corporate-only programs, such as BOLI, and are not employed in or related to the operations of a reporting unit or considered in determining the fair value of a reporting unit.

Goodwill impairment testing involves management's judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value. This is performed using widely-accepted valuation techniques, such as the guideline public company market approach (earnings and price-to-tangible book value multiples of comparable public companies), the market capitalization approach (share price of the reporting unit and control premium of comparable public companies), and the income approach (the DCF method). The Company uses a combination of these accepted methodologies to determine the fair valuation of reporting units. Several factors are taken into account, including actual operating results, future business plans, economic projections, and market data.

The guideline public company market approach ("market approach") includes earnings and price-to-tangible book value multiples of comparable public companies which were applied to the earnings and equity for all of the Company's reporting units. The market capitalization plus control premium approach was applied to the Company's SC reporting unit, as the SC reporting unit is a publicly traded subsidiary whose securities are traded in an active market.

In connection with the market capitalization plus control premium approach applied to the Company's SC reporting unit, the Company used SC's stock price as of the date of the annual impairment analysis. The Company also considered historical auto loan industry transactions and control premiums over the last three years in determining the control premium.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The DCF method of the income approach incorporates the reporting units' forecasted cash flows, including a terminal value to estimate the fair value of cash flows beyond the final year of the forecasts. The discount rates utilized to obtain the net present value of the reporting units' cash flows were estimated using a capital asset pricing model. Significant inputs to this model include a risk-free rate of return, beta (which is a measure of the level of non-diversifiable risk associated with comparable companies for each specific reporting unit), market equity risk premium, and, in certain cases, additional premium for size and/or unsystematic company-specific risk factors. The Company utilized discount rates that it believes adequately reflect the risk and uncertainty in the financial markets. The Company estimated expected rates of equity returns based on historical market returns and risk/return rates for similar industries of the reporting unit. The Company uses its internal forecasts to estimate future cash flows, so actual results may differ from forecasted results.

All of the preceding fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions in the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impacts the estimated fair value of the aforementioned reporting units include such items as:

a prolonged downturn in the business environment in which the reporting units operate;
an economic recovery that significantly differs from our assumptions in timing or degree;
volatility in equity and debt markets resulting in higher discount rates and unexpected regulatory changes;
Specific to the SC reporting unit, a decrease in SC's share price would impact the fair value of the reporting segment.

Refer to the Financial Condition, Goodwill section of this MD&A for further details on the Company's goodwill, including the results of management's goodwill impairment analyses.

Fair Value Measurements

The Company uses fair value measurements to estimate the fair value of certain assets and liabilities for both measurement and disclosure purposes. Refer to Note 16 to the Consolidated Financial Statements for a description of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized. The Company follows the fair value hierarchy set forth in Note 16 to the Consolidated Financial Statements to prioritize the inputs utilized to measure fair value. The Company reviews and modifies, as necessary, the fair value hierarchy classifications on a quarterly basis. Accordingly, there may be reclassifications between hierarchy levels due to changes in inputs to the valuation techniques used to measure fair value.

The Company has numerous internal controls in place to ensure the appropriateness of fair value measurements, including controls over the inputs into and the outputs from the fair value measurements. Certain valuations are benchmarked to market indices when appropriate and available.

Considerable judgment is used in forming conclusions from observable market data used to estimate the Company's Level 2 fair value measurements and in estimating inputs to the Company's internal valuation models used to estimate Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, recovery rates and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, the Company's estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Income Taxes

The Company accounts for income taxes under the asset and liability method, which includes considerable judgment. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, including investments in subsidiaries. Deferred tax assets and liabilities are measured using enacted tax rates that apply or will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets. The critical assumptions used in the Company's deferred tax asset valuation allowance analysis are as follows: (a) the expectation of future earnings; (b) estimates of the Company's long-term annual growth rate, based on the Company's long-term economic outlook in the U.S.; (c) estimates of the dividend income payout ratio from the Company's consolidated subsidiary, SC, based on current policies and practices of SC; (d) estimates of book income to tax income differences, based on the analysis of historical differences and the historical timing of the reversal of temporary differences; (e) the ability to carry back losses to recoup taxes previously paid; (f) estimates of tax credits to be earned on current investments, based on the Company's evaluation of the credits applicable to each investment; (g) experience with operating loss and tax credit carryforwards not expiring unused; (h) estimates of applicable state tax rates based on current/most recent enacted tax rates and state apportionment calculations; (i) tax planning strategies; and (j) current tax laws. Significant judgment is required to assess future earnings trends and the timing of reversals of temporary differences. The Company makes certain assertions in regards to its investment in subsidiaries, which impact whether a deferred tax liability is recorded for the book over tax basis difference in the investment in these subsidiaries. This requires the Company to make judgments with respect to its ability to permanently reinvest its earnings in foreign subsidiaries and its ability to recover its investment in domestic subsidiaries in a tax free manner.

The Company bases its expectations of future earnings, which are used to assess the realizability of its deferred tax assets, on financial performance forecasts of its operating subsidiaries and unconsolidated investees. The budgets and estimates used in these forecasts are approved by the Company's management, and the assumptions underlying the forecasts are reviewed at least annually and adjusted as necessary based on current developments or when new information becomes available. The updates made and the variances between the Company's forecasts and its actual performance have not been significant enough to alter the Company's conclusions with regard to the realizability of its deferred tax asset. The Company continues to forecast sufficient taxable income to fully realize its current deferred tax assets. Forecasted taxable income is subject to changes in overall market and global economic conditions.

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws in the U.S., its states and municipalities, and abroad. Actual income taxes paid may vary from estimates depending on 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. Interest and penalties on income tax payments are included within income tax expense in the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority assuming full knowledge of the position and all relevant facts. See Note 15 of the Consolidated Financial Statements for details on the Company's income taxes.


50





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



RESULTS OF OPERATIONS



On July 1, 2016, ownershipThe following MD&A compares and discusses operating results for the years ended December 31, 2019 and 2018. For a discussion of several Santander subsidiaries, including Santander BanCorp, BSI, SISour results of operations for 2018 versus 2017, See Part II, Item 7: Management's Discussion and SSLLC, were transferred toAnalysis of Financial Condition and Results of Operation" included in our 2018 Form 10-K, filed with the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. On July 1, 2017, an additional Santander subsidiary, Santander Financial Services ("SFS"), a finance company located in Puerto Rico, was transferred to the Company and accounted for prospectively. Refer to Note 1 for additional information.SEC on March 15, 2019.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 20172019 AND 20162018

 Year Ended December 31, YTD ChangeYear Ended December 31, Year To Date Change
(dollars in thousands) 2017 2016 Dollar Percentage2019 2018 Dollar increase/(decrease) Percentage
Net interest income $6,334,005
 $6,564,692
 $(230,687) (3.5)%$6,442,768
 $6,344,850
 $97,918
 1.5 %
Provision for credit losses (2,650,494) (2,979,725) 329,231
 11.0 %(2,292,017) (2,339,898) (47,881) (2.0)%
Total non-interest income 2,929,576
 2,766,759
 162,817
 5.9 %3,729,117
 3,244,308
 484,809
 14.9 %
General and administrative expenses (5,570,159) (5,122,211) (447,948) (8.7)%
Other expenses (222,488) (275,037) 52,549
 19.1 %
General, administrative and other expenses(6,365,852) (5,832,325) 533,527
 9.1 %
Income before income taxes 820,440

954,478
 (134,038) (14.0)%1,514,016

1,416,935
 97,081
 6.9 %
Income tax provision (benefit) (152,334) 313,715
 (466,049) 148.6 %
Income tax provision472,199
 425,900
 46,299
 10.9 %
Net income 972,774
 640,763
 332,011
 51.8 %$1,041,817
 $991,035
 $50,782
 5.1 %
Net income attributable to NCI 411,707
 277,879
 133,828
 48.2 %
Net income attributable to non-controlling interest288,648
 283,631
 5,017
 1.8 %
Net income attributable to SHUSA $561,067
 $362,884
 $198,183
 54.6 %$753,169
 $707,404
 $45,765
 6.5 %

The Company reported pre-tax income of $820.4 million$1.5 billion for the year ended December 31, 2017,2019, compared to pre-tax income of $954.5 million$1.4 billion for the year ended December 31, 2016.corresponding period in 2018. Factors contributing to this decline were as follows:

Net interest income decreased $230.7 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a decrease in interest income earned on loans due to declining yields on consumer loans and an increase in interest expense on Other borrowings due to the rates paid on new debt issuances.
The provision for credit losses decreased $329.2 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a decline in loan balances, improved credit performance and stable recovery rates for the auto loan portfolio and a decreasechange have been discussed further in the Corporate Banking and Middle Market Commercial Real Estate ("CRE") portfolio provisions.
Total non-interest income increased $162.8 million for the year ended December 31, 2017 compared to 2016. This increase was primarily due to lease income associated with the continued growth of the lease portfolio, an increase in gain on sale of assets coming off of lease, and an increase on the gain on sale of bank branches. These were offset by a decrease in consumer and commercial loan fees due to a reduction in loans serviced by the Company for the year ended December 31, 2017.
Total general and administrative expenses increased $447.9 million for the year ended December 31, 2017 compared to 2016. This increase was primarily due to an increase in lease depreciation expense due to the growth of the Company's leased vehicle portfolio and an increase in compensation expense. These increases were offset by a decrease in outside service costs for consulting and processing services and a decrease in loan servicing expense.
Other expenses decreased $52.5 million for the year ended December 31, 2017 compared to 2016. This was primarily due to a decrease in expenses associated with loss on debt repurchases.
The income tax provision decreased $466.0 million for the year ended December 31, 2017, compared to 2016. This decrease was primarily due to the enactment of H.R.1, known as the Tax Cuts and Jobs Act (the “TCJA”). Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. As a result of the TCJA's enactment, GAAP requires that companies remeasure their deferred tax balances as of the enactment of the legislation. During the fourth quarter of 2017, we reduced our income tax provision by $427.3 million as a result of remeasuring our net deferred tax liabilities due to the federal rate reduction.sections below.

4951





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



                
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
 YEAR ENDED DECEMBER 31, 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)VolumeRate
EARNING ASSETS               
INVESTMENTS AND INTEREST EARNING DEPOSITS$22,175,778
 $551,713
 2.49% $21,342,992
 $522,677
 2.45% $29,036
$20,470
$8,566
LOANS(3):
            


Commercial loans33,452,626
 1,430,831
 4.28% 31,416,207
 1,325,001
 4.22% 105,830
86,791
19,039
Multifamily8,398,303
 346,766
 4.13% 8,191,487
 328,147
 4.01% 18,619
8,520
10,099
Total commercial loans41,850,929
 1,777,597
 4.25% 39,607,694
 1,653,148
 4.17% 124,449
95,311
29,138
Consumer loans:               
Residential mortgages9,959,837
 400,943
 4.03% 9,716,021
 392,660
 4.04% 8,283
9,189
(906)
Home equity loans and lines of credit5,081,252
 256,030
 5.04% 5,602,240
 261,745
 4.67% (5,715)(38,604)32,889
Total consumer loans secured by real estate15,041,089
 656,973
 4.37% 15,318,261
 654,405
 4.27% 2,568
(29,415)31,983
RICs and auto loans32,594,822
 4,972,829
 15.26% 27,559,139
 4,570,641
 16.58% 402,188
712,717
(310,529)
Personal unsecured2,449,744
 664,069
 27.11% 2,362,910
 630,394
 26.68% 33,675
23,407
10,268
Other consumer(4)
374,712
 27,014
 7.21% 526,170
 37,788
 7.18% (10,774)(10,932)158
Total consumer50,460,367
 6,320,885
 12.53% 45,766,480
 5,893,228
 12.88% 427,657
695,777
(268,120)
Total loans92,311,296
 8,098,482
 8.77% 85,374,174
 7,546,376
 8.84% 552,106
791,088
(238,982)
Intercompany investments
 
 % 3,572
 142
 3.98% (142)(142)
TOTAL EARNING ASSETS114,487,074
 8,650,195
 7.56% 106,720,738
 8,069,195
 7.56% 581,000
811,416
(230,416)
Allowance for loan losses(5)
(3,802,702)     (3,835,182)        
Other assets(6)
31,624,211
     28,346,465
        
TOTAL ASSETS$142,308,583
     $131,232,021
        
INTEREST-BEARING FUNDING LIABILITIES               
Deposits and other customer related accounts:               
Interest-bearing demand deposits$10,724,077
 $83,794
 0.78% $9,116,631
 $40,355
 0.44% $43,439
$8,071
$35,368
Savings5,794,992
 13,132
 0.23% 5,887,341
 12,325
 0.21% 807
(159)966
Money market24,962,744
 317,300
 1.27% 25,308,245
 248,683
 0.98% 68,617
(3,321)71,938
CDs8,291,400
 160,245
 1.93% 5,989,993
 87,765
 1.47% 72,480
39,944
32,536
TOTAL INTEREST-BEARING DEPOSITS49,773,213
 574,471
 1.15% 46,302,210
 389,128
 0.84% 185,343
44,535
140,808
BORROWED FUNDS:               
FHLB advances, federal funds, and repurchase agreements5,471,080
 143,804
 2.63% 2,066,575
 53,674
 2.60% 90,130
89,499
631
Other borrowings41,710,311
 1,489,152
 3.57% 38,152,038
 1,281,401
 3.36% 207,751
124,401
83,350
TOTAL BORROWED FUNDS (7)
47,181,391
 1,632,956
 3.46% 40,218,613
 1,335,075
 3.32% 297,881
213,900
83,981
TOTAL INTEREST-BEARING FUNDING LIABILITIES96,954,604
 2,207,427
 2.28% 86,520,823
 1,724,203
 1.99% 483,224
258,435
224,789
Noninterest bearing demand deposits14,572,605
     15,117,229
        
Other liabilities(8)
6,141,813
     5,490,385
        
TOTAL LIABILITIES117,669,022
     107,128,437
        
STOCKHOLDER’S EQUITY24,639,561
     24,103,584
        
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$142,308,583
     $131,232,021
        
                
NET INTEREST SPREAD (9)
    5.28%     5.57%    
NET INTEREST MARGIN (10)
    5.63%     5.95%    
NET INTEREST INCOME (11)
  $6,442,768
     $6,344,850
      
(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 LHFS.
(4)Other consumer primarily includes RV and marine loans.
(5)Refer to Note 4 to the 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 9 to the Consolidated Financial Statements for further discussion.
(7)Refer to Note 11 to the 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.



52





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



NET INTEREST INCOME
 Year Ended December 31, YTD Change
(dollars in thousands)2019 2018 Dollar increase/(decrease) Percentage
INTEREST INCOME:       
Interest-earning deposits$174,189
 $137,753
 $36,436
 26.5 %
Investments AFS280,927
 297,557
 (16,630) (5.6)%
Investments HTM70,815
 68,525
 2,290
 3.3 %
Other investments25,782
 18,842
 6,940
 36.8 %
Total interest income on investment securities and interest-earning deposits551,713
 522,677
 29,036
 5.6 %
Interest on loans8,098,482
 7,546,376
 552,106
 7.3 %
Total interest income8,650,195
 8,069,053
 581,142
 7.2 %
INTEREST EXPENSE:    
 
Deposits and customer accounts574,471
 389,128
 185,343
 47.6 %
Borrowings and other debt obligations1,632,956
 1,335,075
 297,881
 22.3 %
Total interest expense2,207,427
 1,724,203
 483,224
 28.0 %
NET INTEREST INCOME$6,442,768
 $6,344,850
 $97,918
 1.5 %

Net interest income increased $97.9 million for the year ended December 31, 2019 compared to 2018.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $29.0 million for the year ended December 31, 2019 compared to 2018. The average balances of investment securities and interest-earning deposits for the year ended December 31, 2019 was $22.2 billion with an average yield of 2.49%, compared to an average balance of $21.3 billion with an average yield of 2.45% for the corresponding period in 2018. The increase in interest income on investment securities and interest-earning deposits for the year ended December 31, 2019 was primarily due to an increase in the average yield on interest-earning deposits resulting from 2018 increases to the federal funds rate. During 2019, the federal funds rate was lowered three times; this has had an effect of partially offsetting increases in interest income on deposits and investments.

Interest Income on Loans

Interest income on loans increased $552.1 million for the year ended December 31, 2019, compared to 2018. This increase was primarily due to the growth of total loans. The average balance of total loans increased $6.9 billion for the year ended December 31, 2019 compared to 2018. This overall increase in loans was primarily driven by the continued growth of the commercial portfolio, auto loans and RICs; however, the average rate has decreased on the RIC portfolio due to more prime loan originations as a result of the SBNA origination program.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts increased $185.3 million for the year ended December 31, 2019 compared to 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 balance of total interest-bearing deposits was $49.8 billion with an average cost of 1.15% for the year ended December 31, 2019, compared to an average balance of $46.3 billion with an average cost of 0.84% for the year ended December 31, 2018.


53





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $297.9 million for the year ended December 31, 2019 compared to 2018. This increase was due to higher interest rates being paid and increased balances during the year ended December 31, 2019. The average balance of total borrowings was $47.2 billion with an average cost of 3.46% for the year ended December 31, 2019, compared to an average balance of $40.2 billion with an average cost of 3.32% for 2018. The average balance of borrowed funds increased for the year ended December 31, 2019 compared to the year ended December 31, 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 was primarily comprised of the provision for loan and lease losses for the years ended December 31, 2019 and December 31, 2018 of $2.3 billion and $2.4 billion, respectively.
  Year Ended December 31, YTD Change
(in thousands) 2019 2018 DollarPercentage
ALLL, beginning of period $3,897,130
 $3,994,887
 $(97,757)(2.4)%
Charge-offs:       
Commercial (185,035) (108,750) (76,285)70.1 %
Consumer (5,364,673) (4,974,547) (390,126)7.8 %
Unallocated (275) 
 (275)100.0 %
Total charge-offs (5,549,983) (5,083,297) (466,686)9.2 %
Recoveries:       
Commercial 53,819
 60,140
 (6,321)(10.5)%
Consumer 2,954,391
 2,572,607
 381,784
14.8 %
Total recoveries 3,008,210
 2,632,747
 375,463
14.3 %
Charge-offs, net of recoveries (2,541,773) (2,450,550) (91,223)3.7 %
Provision for loan and lease losses (1)
 2,290,832
 2,352,793
 (61,961)(2.6)%
ALLL, end of period $3,646,189
 $3,897,130
 $(250,941)(6.4)%
Reserve for unfunded lending commitments, beginning of period $95,500
 $109,111
 $(13,611)(12.5)%
Release of reserves for unfunded lending commitments (1)
 1,185
 (12,895) 14,080
(109.2)%
Loss on unfunded lending commitments (4,859) (716) (4,143)578.6 %
Reserve for unfunded lending commitments, end of period 91,826
 95,500
 (3,674)(3.8)%
Total ACL, end of period $3,738,015
 $3,992,630
 $(254,615)(6.4)%
(1)The provision for credit losses in the 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 $91.2 million for the year ended December 31, 2019 compared to 2018.

Consumer charge-offs increased $390.1 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of a $391.2 million increase in RIC and consumer auto loan charge-offs.

Consumer recoveries increased $381.8 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of a $345.6 million increase in RIC and consumer auto loan recoveries, and a $21.1 million increase in indirect purchased loan recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 4.8% for the year ended December 31, 2019 compared to 5.2% in 2018.

54





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Commercial charge-offs increased $76.3 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of an $89.1 million increase in Corporate Banking charge-offs.

Commercial recoveries decreased $6.3 million for the year ended December 31, 2019 compared to 2018.

NON-INTEREST INCOME
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Consumer fees $391,495
 $413,934
 $(22,439) (5.4)%
Commercial fees 157,351
 154,213
 3,138
 2.0 %
Lease income 2,872,857
 2,375,596
 497,261
 20.9 %
Miscellaneous income, net 301,598
 307,282
 (5,684) (1.8)%
Net gains/(losses) recognized in earnings 5,816
 (6,717) 12,533
 186.6 %
Total non-interest income $3,729,117
 $3,244,308
 $484,809
 14.9 %

Total non-interest income increased $484.8 million for the year ended December 31, 2019 compared to 2018. This increase was primarily due to an increase in lease income. The increase was partially offset by decreases in consumer fees due to the reduction of loans serviced by the Company.

Consumer fees

Consumer fees decreased $22.4 million for the year ended December 31, 2019 compared to 2018. This decrease was primarily related to a decrease in loan fees income, which was attributable to a reduction in loans serviced by the Company.

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 year ended December 31, 2019 compared to 2018.

Lease income

Lease income increased $497.3 million for the year ended December 31, 2019 compared to 2018. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $15.3 billion for the year ended December 31, 2019, compared to $12.3 billion for 2018.

Miscellaneous income/(loss)
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Mortgage banking income, net $44,315
 $34,612
 $9,703
 28.0 %
BOLI 62,782
 58,939
 3,843
 6.5 %
Capital market revenue 197,042
 165,392
 31,650
 19.1 %
Net gain on sale of operating leases 135,948
 202,793
 (66,845) (33.0)%
Asset and wealth management fees 175,611
 165,765
 9,846
 5.9 %
Loss on sale of non-mortgage loans (397,965) (351,751) (46,214) (13.1)%
Other miscellaneous income, net 83,865
 31,532
 52,333
 166.0 %
     Total miscellaneous income/(loss) $301,598
 $307,282
 $(5,684) (1.8)%

Miscellaneous income decreased $5.7 million for the year ended December 31, 2019 compared to 2018. This decrease was primarily due to a decrease in net gain on sale of operating leases and an increase in loss on sale of non-mortgage loans, partially offset by an increase in capital market revenue and an increase in Other miscellaneous income due to lower losses on securitization transactions.

55





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar Percentage
Compensation and benefits $1,945,047
 $1,799,369
 $145,678
 8.1 %
Occupancy and equipment expenses 603,716
 659,789
 (56,073) (8.5)%
Technology, outside services, and marketing expense 656,681
 590,249
 66,432
 11.3 %
Loan expense 405,367
 384,899
 20,468
 5.3 %
Lease expense 2,067,611
 1,789,030
 278,581
 15.6 %
Other expenses 687,430
 608,989
 78,441
 12.9 %
Total general, administrative and other expenses $6,365,852
 $5,832,325
 $533,527
 9.1 %

Total general, administrative and other expenses increased $533.5 million for the year ended December 31, 2019 compared to 2018. The most significant factors contributing to these increases were as follows:

Technology, outside services, and marketing expense increased $66.4 million for the year ended December 31, 2019, compared to 2018. The increase was primarily due to increases in outside service expenses.
Lease expense increased $278.6 million for the year ended December 31, 2019 compared to 2018. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio.
Other expenses increased $78.4 million for the year ended December 31, 2019, compared to the corresponding period in 2018. This increase was primarily attributable to an increase in legal expenses and investments in qualified housing, offset by a decrease in operational risk. FDIC insurance premiums for the year ended December 31, 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 17 to the Consolidated Financial Statements.

INCOME TAX PROVISION

An income tax provision of $472.2 million was recorded for the year ended December 31, 2019, compared to an income tax provision of $425.9 million for 2018. This resulted in an ETR of 31.2% for the year ended December 31, 2019, compared to 30.1% for 2018.

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 15 to the Consolidated Financial Statements for the year-to-year comparison of the ETR.

LINE OF BUSINESS RESULTS

General

The Company's segments at December 31, 2019 consisted of Consumer and Business Banking, C&I, 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 23 to the Consolidated Financial Statements.


56





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Results Summary

Consumer and Business Banking
 Year Ended December 31, YTD Change
(dollars in thousands)2019 2018 Dollar increase/(decrease) Percentage
Net interest income$1,504,887
 $1,298,571
 $206,316
 15.9 %
Total non-interest income359,849
 310,839
 49,010
 15.8 %
Provision for credit losses156,936
 100,523
 56,413
 56.1 %
Total expenses1,655,923
 1,575,407
 80,516
 5.1 %
Income/(loss) before income taxes51,877
 (66,520) 118,397
 178.0 %
Intersegment revenue2,093
 2,507
 (414) (16.5)%
Total assets23,934,172
 21,024,740
 2,909,432
 13.8 %

Consumer and Business Banking reported income before income taxes of $51.9 million for the year ended December 31, 2019, compared to losses before income taxes of $66.5 million for the year ended December 31, 2018. Factors contributing to this change were:

Net interest income increased $206.3 million for the year ended December 31, 2019compared to 2018. This increase was primarily driven by deposit product margin due to a higher interest rate environment combined with increased auto loan volumes.
Non-interest income increased by $49.0 million for the year ended December 31, 2019compared to 2018. This increase was the result of gains on the sale of 14 branches and gains on the sale of conforming mortgage loan portfolios.
The provision for credit losses increased $56.4 million for the year ended December 31, 2019 compared to 2018. This increase was due to reserve builds for the large growth of the auto portfolio in 2019.
Total assets increased $2.9 billion for the year ended December 31, 2019 compared to 2018. This increase was primarily driven by an increase in auto loans.

C&I Banking
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $231,270
 $228,491
 $2,779
 1.2 %
Total non-interest income 71,323
 82,435
 (11,112) (13.5)%
(Release of) /provision for credit losses 31,796
 (35,069) 66,865
 190.7 %
Total expenses 238,681
 225,495
 13,186
 5.8 %
Income before income taxes 32,116
 120,500
 (88,384) (73.3)%
Intersegment revenue 6,377
 4,691
 1,686
 35.9 %
Total assets 7,031,238
 6,823,633
 207,605
 3.0 %

C&I reported income before income taxes of $32.1 million for the year ended December 31, 2019, compared to income before income taxes of $120.5 million for 2018. Contributing to these changes were:

The provision for credit losses increased $66.9 million for the year ended December 31, 2019 compared to 2018. This increase was 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.


57





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



CRE & VF
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $417,418
 $413,541
 $3,877
 0.9 %
Total non-interest income 11,270
 6,643
 4,627
 69.7 %
(Release of) /provision for credit losses 13,147
 15,664
 (2,517) (16.1)%
Total expenses 135,319
 116,392
 18,927
 16.3 %
Income before income taxes 280,222
 288,128
 (7,906) (2.7)%
Intersegment revenue 5,950
 4,729
 1,221
 25.8 %
Total assets 19,019,242
 18,888,676
 130,566
 0.7 %

CRE & VF reported income before income taxes of $280.2 million for the year ended December 31, 2019 compared to income before income taxes of $288.1 million for 2018. The results of this reportable segment were relatively consistent period-over-period.

CIB
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $152,083
 $136,582
 $15,501
 11.3 %
Total non-interest income 208,955
 195,023
 13,932
 7.1 %
(Release of)/Provision for credit losses 6,045
 9,335
 (3,290) (35.2)%
Total expenses 270,226
 234,949
 35,277
 15.0 %
Income before income taxes 84,767
 87,321
 (2,554) (2.9)%
Intersegment expense (14,420) (12,362) (2,058) (16.6)%
Total assets 9,943,547
 8,521,004
 1,422,543
 16.7 %

CIB reported income before income taxes of $84.8 million for the year ended December 31, 2019, compared to income before income taxes of $87.3 million for 2018. Factors contributing to this change were:

Total expenses increased $35.3 million for the year ended December 31, 2019 compared to 2018, due to higher compensation related to higher headcount.
Total assets increased $1.4 billion for the year ended December 31, 2019 compared to 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
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $72,535
 $240,110
 $(167,575) (69.8)%
Total non-interest income 415,473
 402,006
 13,467
 3.3 %
(Release of)/Provision for credit losses (7,322) 24,254
 (31,576) (130.2)%
Total expenses 770,254
 786,543
 (16,289) (2.1)%
Loss before income taxes (274,924) (168,681) (106,243) (63.0)%
Intersegment (expense)/revenue 
 435
 (435) (100.0)%
Total assets 40,648,746
 36,416,377
 4,232,369
 11.6 %

58





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The Other category reported losses before income taxes of $274.9 million for the year ended December 31, 2019 compared to losses before income taxes of $168.7 million for 2018. Factors contributing to this change were:

Net interest income decreased $167.6 million for the year ended December 31, 2019 compared to 2018, due to higher interest rates.
The provision for credit losses decreased $31.6 million for the year ended December 31, 2019 compared to 2018, due to the release of reserves related to the sale of loan portfolios at BSPR, and loan portfolios that were in run-off.

SC

The 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.

  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $3,971,826
 $3,958,280
 $13,546
 0.3 %
Total non-interest income 2,760,370
 2,297,517
 462,853
 20.1 %
Provision for credit losses 2,093,749
 2,205,585
 (111,836) (5.1)%
Total expenses 3,284,179
 2,857,944
 426,235
 14.9 %
Income before income taxes 1,354,268
 1,192,268
 162,000
 13.6 %
Intersegment revenue 
 
 
 0.0%
Total assets 48,922,532
 43,959,855
 4,962,677
 11.3 %

SC reported income before income taxes of $1.4 billion for the year ended December 31, 2019, compared to income before income taxes of $1.2 billion for 2018. Contributing to this change were:

Total non-interest income increased $462.9 million for the year ended December 31, 2019 compared to 2018, due to increasing operating lease income from the continued growth in the operating lease vehicle portfolio.
The provision of credit losses decreased $111.8 million for the year ended December 31, 2019 compared to 2018, due to lower TDR balances and better recovery rates.
Total expenses increased $426.2 million for the year ended December 31, 2019 compared to 2018, due to increasing lease expense from the continued growth in the operating lease vehicle portfolio.
Total assets increased $5.0 billion for the year ended December 31, 2019 compared to 2018, due to continued growth in RICs and operating lease receivables. This growth was driven by increased originations.

59





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's LHFI portfolioconsisted of the following at the dates indicated:
  December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015
(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial LHFI:                    
CRE $8,468,023
 9.1% $8,704,481
 10.0% $9,279,225
 11.5% $10,112,043
 11.8% $9,846,236
 11.3%
C&I 16,534,694
 17.8% 15,738,158
 18.1% 14,438,311
 17.9% 18,812,002
 21.9% 20,908,107
 24.0%
Multifamily 8,641,204
 9.3% 8,309,115
 9.5% 8,274,435
 10.1% 8,683,680
 10.1% 9,438,463
 10.8%
Other commercial 7,390,795
 8.2% 7,630,004
 8.8% 7,174,739
 8.9% 6,832,403
 8.0% 6,257,072
 7.2%
Total commercial loans (1)
 41,034,716
 44.4% 40,381,758
 46.4% 39,166,710
 48.4% 44,440,128
 51.8% 46,449,878
 53.3%
                     
Consumer loans secured by real estate:                    
Residential mortgages 8,835,702
 9.5% 9,884,462
 11.4% 8,846,765
 11.0% 7,775,272
 9.1% 7,566,301
 8.7%
Home equity loans and lines of credit 4,770,344
 5.1% 5,465,670
 6.3% 5,907,733
 7.3% 6,001,192
 7.1% 6,151,232
 7.1%
Total consumer loans secured by real estate 13,606,046
 14.6% 15,350,132
 17.7% 14,754,498
 18.3% 13,776,464
 16.2% 13,717,533
 15.8%
                     
Consumer loans not secured by real estate:                    
RICs and auto loans 36,456,747
 39.3% 29,335,220
 33.7% 24,966,121
 30.9% 25,573,721
 29.8% 24,647,798
 28.3%
Personal unsecured loans 1,291,547
 1.4% 1,531,708
 1.8% 1,285,677
 1.6% 1,234,094
 1.4% 1,177,998
 1.4%
Other consumer 316,384
 0.3% 447,050
 0.4% 617,675
 0.8% 795,378
 0.8% 1,032,579
 1.2%
                     
Total consumer loans 51,670,724
 55.6% 46,664,110
 53.6% 41,623,971
 51.6% 41,379,657
 48.2% 40,575,908
 46.7%
Total LHFI $92,705,440
 100.0% $87,045,868
 100.0% $80,790,681
 100.0% $85,819,785
 100.0% $87,025,786
 100.0%
                     
Total LHFI with:                    
Fixed $61,775,942
 66.6% $56,696,491
 65.1% $50,703,619
 62.8% $51,752,761
 60.3% $52,283,715
 60.1%
Variable 30,929,498
 33.4% 30,349,377
 34.9% 30,087,062
 37.2% 34,067,024
 39.7% 34,742,071
 39.9%
Total LHFI $92,705,440
 100.0% $87,045,868
 100.0% $80,790,681
 100.0% $85,819,785
 100.0% $87,025,786
 100.0%
(1) As of December 31, 2019, the Company had $395.8 million of commercial loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans increased approximately $653.0 million, or 1.6%, from December 31, 2018 to December 31, 2019. This increase was comprised of increases in C&I loans of $796.5 million and multifamily loans of $332.1 million, offset by decreases in other commercial loans of $239.2 million, and CRE loans of $236.5 million. The increase is reflective of continued investment of resources to grow the commercial business.

  At December 31, 2019, Maturing
(in thousands) 
In One Year
Or Less
 
One to Five
Years
 
After Five
Years
 
Total (1)
CRE loans $1,748,087
 $5,245,277

$1,474,659
 $8,468,023
C&I and other commercial 10,683,269
 11,367,553

1,990,960
 24,041,782
Multifamily loans 734,815
 5,447,661

2,458,728
 8,641,204
Total $13,166,171

$22,060,491

$5,924,347
 $41,151,009
Loans with:        
Fixed rates $4,815,879
 $8,569,337

$3,455,594
 $16,840,810
Variable rates 8,350,292
 13,491,154

2,468,753
 24,310,199
Total $13,166,171

$22,060,491

$5,924,347
 $41,151,009
(1) Includes LHFS.

60





Item 7.    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 $1.7 billion, or 11.4%, from December 31, 2018 to December 31, 2019. This decrease was comprised of a decrease in the residential mortgage portfolio of $1.0 billion, primarily due to the sale of residential mortgage loans to the FNMA in 2019, and a decrease in the home equity loans and lines of credit portfolio of $695.3 million.

Consumer Loans Not Secured By Real Estate

RICs and auto loans

RICs and auto loans increased $7.1 billion, or 24.3%, from December 31, 2018 to December 31, 2019. The increase in the RIC and auto loan portfolio was primarily due to an increase of purchased financial receivables from third-party lenders and originations, net of securitizations. 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 are pledged against warehouse lines or securitization bonds. Refer to further discussion of these in Note 11 to the Consolidated Financial Statements.

As of December 31, 2019, 66.2% (includes loans with no FICO score equivalent to 8.7% of the total portfolio) of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a FICO score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. While underwriting guidelines are 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 decreased 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, DTI ratios, 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 December 31, 2019, a typical RIC was originated with an average annual percentage rate of 16.3% and was purchased from the dealer at a premium of 0.5%. 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 December 31, 2019 by $370.8 million.

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 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 December 31, 2019, SC's personal unsecured portfolio was held-for-sale and thus does not have a related allowance.

61





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 Committees 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, 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, credit scores, and adherence to underwriting policies that emphasize conservative LTV ratios of generally no more than 80%. Residential mortgage loans originated or purchased in excess of an 80% LTV ratio are generally insured by private mortgage insurance, unless otherwise guaranteed or insured by the Federal, state, or local government. SHUSA also utilizes underwriting standards which comply with those of the FHLMC or 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.

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.


62





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 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) December 31, 2019 December 31, 2018 Dollar Percentage
Non-accrual loans:        
Commercial:        
CRE $83,117
 $88,500
 $(5,383) (6.1)%
C&I 153,428
 189,827
 (36,399) (19.2)%
Multifamily 5,112
 13,530
 (8,418) (62.2)%
Other commercial 31,987
 72,841
 (40,854) (56.1)%
Total commercial loans 273,644
 364,698
 (91,054) (25.0)%
         
Consumer loans secured by real estate:  
  
    
Residential mortgages 134,957
 216,815
 (81,858) (37.8)%
Home equity loans and lines of credit 107,289
 115,813
 (8,524) (7.4)%
Consumer loans not secured by real estate:     

 

RICs and auto loans 1,643,459
 1,545,322
 98,137
 6.4 %
Personal unsecured loans 2,212
 3,602
 (1,390) (38.6)%
Other consumer 11,491
 9,187
 2,304
 25.1 %
Total consumer loans 1,899,408
 1,890,739
 8,669
 0.5 %
Total non-accrual loans 2,173,052
 2,255,437
 (82,385) (3.7)%
         
Other real estate owned 66,828
 107,868
 (41,040) (38.0)%
Repossessed vehicles 212,966
 224,046
 (11,080) (4.9)%
Other repossessed assets 4,218
 1,844
 2,374
 128.7 %
Total OREO and other repossessed assets 284,012
 333,758
 (49,746) (14.9)%
Total non-performing assets $2,457,064
 $2,589,195
 $(132,131) (5.1)%
         
Past due 90 days or more as to interest or principal and accruing interest $93,102
 $98,979
 $(5,877) (5.9)%
Annualized net loan charge-offs to average loans (1)
 2.8% 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 2.3% 2.6%    n/a    n/a
ALLL as a percentage of total NPLs 167.8% 172.8%    n/a    n/a
(1) Annualized net loan charge-offs are based on year-to-date charge-offs.

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 $179.9 million and $98.8 million at December 31, 2019 and December 31, 2018, respectively. This increase was primarily due to loans to one large borrower within the CRE portfolio.

Potential problem consumer loans amounted to $4.7 billion at December 31, 2019 and December 31, 2018. Management has included these loans in its evaluation of the Company's ACL and reserved for them during the respective periods.

Non-performing assets decreased to $2.5 billion, or 1.6% of total assets, at December 31, 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.


63





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Commercial

Commercial NPLs decreased $91.1 million from December 31, 2018 to December 31, 2019. Commercial NPLs accounted for 0.7% and 0.9% of commercial LHFI at December 31, 2019 and December 31, 2018, respectively. The decrease in commercial NPLs was comprised of decreases of $36.4 million in C&I and $40.9 million in the Other commercial 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 increased by $98.1 million from December 31, 2018 to December 31, 2019. Non-performing RICs and auto loans accounted for 4.5% and 5.3% of total RICs and auto loans at December 31, 2019 and December 31, 2018, respectively.

Consumer Loans Secured by Real Estate

The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of December 31, 2019 and December 31, 2018, respectively:
  December 31, 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 $134,957
 $107,289
 $216,815
 $115,813
Total LHFI 8,835,702
 4,770,344
 9,884,462
 5,465,670
NPLs as a percentage of total LHFI 1.5% 2.2% 2.2% 2.1%
NPLs in foreclosure status 15.5% 84.2% 43.3% 56.7%

The NPL ratio is usually 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. As of December 31, 2019, the consumer loans secured by real estate portfolio has a higher NPL ratio compared to the residential mortgage portfolio, primarily due to the NPL loan sale in 2019.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 December 31, 2019 and December 31, 2018, the Company's delinquencies consisted of the following:
  December 31, 2019 December 31, 2018
(dollars in thousands) Consumer Loans Secured by Real EstateRICs and auto loansPersonal Unsecured and Other Consumer LoansCommercial LoansTotal Consumer Loans Secured by Real EstateRICs and auto loansPersonal Unsecured and Other Consumer LoansCommercial LoansTotal
Total delinquencies $404,945$4,768,833$206,703$339,844$5,720,325 $495,854$4,760,361$226,181$232,264$5,714,660
Total loans(1)
 $13,902,871$36,456,747$2,615,036$41,151,009$94,125,663 $15,564,653$29,335,220$3,047,515$40,381,758$88,329,146
Delinquencies as a % of loans 2.9%13.1%7.9%0.8%6.1% 3.2%16.2%7.4%0.6%6.5%
(1)Includes LHFS.

Overall, total delinquencies increased by $5.7 million, or 0.1%, from December 31, 2018 to December 31, 2019, primarily driven by commercial loans, which increased $107.6 million, offset by consumer loans secured by real estate, which decreased $90.9 million. The increase in the commercial portfolio was due to loans to two customers that became delinquent in the fourth quarter of 2019, partially offset by the mortgage decrease due to the NPL and FNMA sales.

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 a sustained period of repayment performance, as long as the Company believes the principal and interest of the restructured loan will be paid in full. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.

The following table summarizes TDRs at the dates indicated:
  As of December 31, 2019
(in thousands) Commercial% Consumer Loans Secured by Real Estate% RICs and Auto Loans% Other Consumer% Total TDRs
Performing $64,538
49.5% $182,105
67.8% $3,332,246
86.6% $67,465
91.7% $3,646,354
Non-performing 65,741
50.5% 86,335
32.2% 515,573
13.4% 6,128
8.3% 673,777
Total $130,279
100.0% $268,440
100.0% $3,847,819
100.0% $73,593
100.0% $4,320,131
               
% of loan portfolio 0.3%n/a
 2.0%n/a
 10.6%n/a
 4.6%n/a
 4.7%
(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% $141,605
79.6% $5,069,879
Non-performing 107,024
57.6% 100,543
27.7% 664,688
12.7% 36,235
20.4% 908,490
Total $185,768
100.0% $362,992
100.0% $5,251,769
100.0% $177,840
100.0% $5,978,369
               
% of loan portfolio 0.5%n/a
 2.3%n/a
 17.9%n/a
 9.0%n/a
 6.9%
(1) Excludes LHFS.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table provides a summary of TDR activity:
  Year Ended December 31, 2019 Year Ended December 31, 2018
(in thousands) RICs and Auto Loans 
All Other Loans(1)
 RICs and Auto Loans 
All Other Loans(1)(2)
TDRs, beginning of period $5,251,769
 $726,600
 $6,037,695
 $805,292
New TDRs(1)
 1,153,160
 145,135
 1,877,058
 192,733
Charged-Off TDRs (1,389,044) (13,706) (1,706,788) (14,554)
Sold TDRs (1,139) (83,204) (2,884) (7,148)
Payments on TDRs (1,166,927) (302,513) (953,312) (249,723)
TDRs, end of period $3,847,819
 $472,312
 $5,251,769
 $726,600
(1)New TDRs includes drawdowns on lines of credit that have previously been classified as TDRs.
(2) Rollforward adjusted through the New TDRs line item to include RV/Marine TDRs in the amount of $56.0 million that were not identified at December 31, 2018.

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.

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.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table presents the allocation of the ALLL and the percentage of each loan type to total LHFI at the dates indicated:
  December 31, 2019 December 31, 2018
(dollars in thousands) Amount 
% of Loans
to Total LHFI
 Amount % of Loans
to Total LHFI
Allocated allowance:        
Commercial loans $399,829
 44.4% $441,083
 46.4%
Consumer loans 3,199,612
 55.6% 3,409,024
 53.6%
Unallocated allowance 46,748
 n/a
 47,023
 n/a
Total ALLL 3,646,189
 100.0% 3,897,130
 100.0%
Reserve for unfunded lending commitments 91,826
   95,500
  
Total ACL $3,738,015
   $3,992,630
  

General

The ACL decreased by $254.6 million from December 31, 2018 to December 31, 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.

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

Commercial

For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3 million), the Company has specialized credit officers, a monitoring unit, and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and/or additional analysis is needed. For the commercial loan portfolios, risk ratings are assigned to each loan to differentiate risk within the portfolio, reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrower’s current risk profile and the related collateral position.

The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower’s risk rating on at least an annual basis, and more frequently if warranted. This reassessment process is managed by credit officers and is overseen by the credit monitoring group to ensure consistency and accuracy in risk ratings, as well as the appropriate frequency of risk rating reviews by the Company’s credit officers. The Company’s Credit Risk Review Committee assesses whether the Company’s Credit Risk Review Framework and risk management guidelines established by the Company’s Board and applicable laws and regulations are being followed, and reports key findings and relevant information to the Board. The Company’s Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded below a certain level, the Company’s Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management’s strategies for the customer relationship going forward.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. If a loan is identified as impaired and is collateral-dependent, an initial appraisal is obtained to provide a baseline to determine the property’s fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of the asset, obsolescence, etc.), an appraisal is obtained more frequently. At a minimum, updated appraisals for impaired loans are obtained within a 12-month period if the loan remains outstanding for that period of time.

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

The portion of the ALLL related to the commercial portfolio was $399.8 million at December 31, 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.

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

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

The Company considers the delinquency status of its senior liens in cases in which the Company services the lien. The Company currently services the senior lien on 23.5% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.1% 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.

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.

The allowance for consumer loans was $3.2 billion and $3.4 billion at December 31, 2019 and December 31, 2018, respectively. The allowance as a percentage of HFI consumer loans was 6.2% at December 31, 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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 December 31, 2019 and December 31, 2018, respectively.

Reserve for Unfunded Lending Commitments

The reserve for unfunded lending commitments decreased $3.7 million from $95.5 million at December 31, 2018 to $91.8 million at December 31, 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 FHLB and FRB stock. MBS consist of pass-through, CMOs and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s at the date of issuance. The Company’s AFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.

Total investment securities AFS increased $2.7 billion to $14.3 billion at December 31, 2019, compared to $11.6 billion at December 31, 2018. During the year ended December 31, 2019, the composition of the Company's investment portfolio changed due to an increase in U.S. Treasury securities and MBS, partially offset by a decrease in ABS. U.S. Treasuries increased by $2.3 billionprimarily due to investment purchases of $3.8 billion as offset by $1.5 billion of sales. MBS increased by $739.4 million primarily due to investment purchases and a decrease in unrealized losses, partially offset by sales, maturities and principal paydowns. For additional information with respect to the Company’s investment securities, see Note 3 to the 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 $3.9 billion at December 31, 2019. The Company had 99 investment securities classified as HTM as of December 31, 2019.

Total gross unrealized losses on investment securities AFS decreased by $258.2 million during the year ended December 31, 2019. This decrease was primarily related to a decrease in unrealized losses of $246.1 million on MBS, primarily due to a decrease in interest rates.

The average life of the AFS investment portfolio (excluding certain ABS) at December 31, 2019 was approximately 3.86 years. The average effective duration of the investment portfolio (excluding certain ABS) at December 31, 2019 was approximately 2.85 years. The actual maturities of MBS AFS will differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties.


70





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table presents the fair value of investment securities by obligor at the dates indicated:
(in thousands) December 31, 2019 December 31, 2018
Investment securities AFS:    
U.S. Treasury securities and government agencies $9,735,337
 $5,485,392
FNMA and FHLMC securities 4,326,299
 5,550,628
State and municipal securities 9
 16
Other securities (1)
 278,113
 596,951
Total investment securities AFS 14,339,758
 11,632,987
Investment securities HTM:    
U.S. government agencies 3,938,797
 2,750,680
Total investment securities HTM(2)
 3,938,797
 2,750,680
Other investments 995,680
 805,357
Total investment portfolio $19,274,235
 $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 December 31, 2019:
  December 31, 2019
(in thousands) Amortized Cost Fair Value
FNMA $2,467,867
 $2,463,166
GNMA (1)
 9,581,198
 9,601,626
Government - Treasuries 4,086,733
 4,090,938
Total $16,135,798
 $16,155,730
(1)Includes U.S. government agency MBS.

GOODWILL

The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At December 31, 2019, goodwill totaled $4.4 billion and represented 3.0% of total assets and 18.2% of total stockholder's equity. The following table shows goodwill by reporting units at December 31, 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 December 31, 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 23 to the Consolidated Financial Statements for additional details on the change in reportable segments.

The Company conducted its annual goodwill impairment tests as of October 1, 2019 using generally accepted valuation methods. The Company completes a quarterly review for impairment indicators over each of its reporting units, which includes consideration of economic and organizational factors that could impact the fair value of the Company's reporting units. At the completion of the 2019 fourth 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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



For the Consumer and Business Banking reporting unit's fair valuation analysis, an equal weighting of the market approach ("market approach") and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.4x was selected based on publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 9.1%, which was most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Consumer and Business Banking reporting unit by 10.3%, indicating the reporting unit was not considered to be impaired.

For the C&I reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the marketplace that were determined to be comparable. The projected TBV of 1.4x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 12.7%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 18.0%, indicating the C&I reporting unit was not considered to be impaired.

For the CRE&VF reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the marketplace that were determined to be comparable. The projected TBV of 1.5x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 9.4%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 20.5%, indicating the CRE&VF reporting unit was not considered to be impaired or at risk for impairment.

For the CIB reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.3x was selected based on the selected publicly traded peers of the reporting unit and was equally considered with the projected earnings multiples of 8.0x and 7.5x and 7.0x, which were
applied to the reporting unit's 2019, 2020, and 2021 projected earnings, respectively, due to the nature of the business, which operates outside of the traditional savings and loan bank model. For the income approach, the Company selected a discount rate of 10.3%, which is most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the CIB reporting unit by 25.2%, indicating that the CIB reporting unit was not considered to be impaired or at risk for impairment.

For the SC reporting unit's fair valuation analysis, the Company used only the market capitalization approach. For the market capitalization approach, SC's stock price from October 1, 2019 of $25.53 was used and a 25.0% control premium was used based on the Company's review of transactions observable in the market-place that were determined to be comparable. The results of the fair value analyses exceeded the carrying value of the SC reporting unit by 67.9%, indicating that the SC reporting unit was not considered to be impaired. Management continues to monitor SC's stock price, along with changes in the financial position and results of operations that would impact the reporting unit's carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2019.

Management continues to monitor changes in financial position and results of operations that would impact each of the reporting units estimated fair value or carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2019.

DEFERRED TAXES AND OTHER TAX ACTIVITY

The Company had a net deferred tax liability balance of $1.0 billion at December 31, 2019 (consisting of a deferred tax asset balance of $503.7 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 $429.9 million increase in net deferred liabilities for the year ended December 31, 2019 was primarily due to an increase in deferred tax liabilities related to accelerated depreciation from leasing transactions and changes in depreciation on company owned assets.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 7 and Note 20 to the 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 IRS, please refer to Note 15 to the 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 December 31, 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 December 31, 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.

Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the years ended December 31, 2019 and 2018, the Company paid cash dividends of $400.0 million, and $410.0 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 December 31, 2019:
  SHUSA
       
  December 31, 2019 
Well-capitalized Requirement(1)
 
Minimum Requirement(1)
CET1 capital ratio 14.63% 6.50% 4.50%
Tier 1 capital ratio 15.80% 8.00% 6.00%
Total capital ratio 17.23% 10.00% 8.00%
Leverage ratio 13.13% 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
       
  December 31, 2019 
Well-capitalized Requirement(2)
 
Minimum Requirement(2)
CET1 capital ratio 15.80% 6.50% 4.50%
Tier 1 capital ratio 15.80% 8.00% 6.00%
Total capital ratio 16.77% 10.00% 8.00%
Leverage ratio 12.77% 5.00% 4.00%
(2)As defined by OCC regulations. The Bank's ratios are presented on a Basel III phasing-in basis.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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.

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

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.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



During the year ended December 31, 2019, SC completed on-balance sheet funding transactions totaling approximately $18.2 billion, including:

securitizations on its SDART platform for approximately $3.2 billion;
securitizations on its DRIVE, deeper subprime platform, for approximately $4.5 billion;
lease securitizations on its SRT platform for approximately $3.7 billion;
lease securitization on its PSRT platform for approximately $1.2 billion;
private amortizing lease facilities for approximately $4.6 billion;
securitization on its SREV platform for approximately $0.9 billion;
issuance of retained bonds on its SDART platform for approximately $129.8 million; and
issuance of a retained bond on its SRT platform for approximately $60.4 million.

For information regarding SC's debt, see Note 11 to the 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 subordinated loan described above. At December 31, 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. 

Available Liquidity

As of December 31, 2019, the Bank had approximately $20.3 billion in committed liquidity from the FHLB and the FRB. Of this amount, $12.4 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At December 31, 2019 and December 31, 2018, liquid assets (cash and cash equivalents and LHFS) and securities AFS exclusive of securities pledged as collateral) totaled approximately $15.0 billion and $15.9 billion, respectively. These amounts represented 24.3% and 25.8% of total deposits at December 31, 2019 and December 31, 2018, respectively. As of December 31, 2019, the Bank, BSI and BSPR had $1.1 billion, $1.3 billion, and $838.4 million, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.

BSPR has $647.6 million in committed liquidity from the FHLB, all of which was unused as of December 31, 2019, as well as $2.2 billion in liquid assets aside from cash unused as of December 31, 2019.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Cash, cash equivalents, and restricted cash

As of January 1, 2018, the classification of restricted cash within the Company's SCF changed. Refer to Note 1 to the Consolidated Financial Statements for additional details.
  Year Ended December 31,
(in thousands) 2019 2018 2017
Net cash flows from operating activities $6,849,157
 $7,015,061
 $4,964,060
Net cash flows from investing activities (17,242,333) (12,460,839) 3,281,179
Net cash flows from financing activities 11,197,124
 5,829,308
 (10,959,272)

Cash flows from operating activities

Net cash flow from operating activities was $6.8 billion for the year ended December 31, 2019, which was primarily comprised of net income of $1.0 billion, $1.6 billion in proceeds from sales of LHFS, $2.4 billion in depreciation, amortization and accretion, and $2.3 billion of provisions for credit losses, partially offset by $1.5 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $7.0 billion for the year ended December 31, 2018, which was primarily comprised of net income of $991.0 million, $4.3 billion in proceeds from sales of LHFS, $1.9 billion in depreciation, amortization and accretion, and $2.3 billion of provision for credit losses, partially offset by $3.0 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $5.0 billion for the year ended December 31, 2017, which was primarily comprised of net income of $958.0 million, $4.6 billion in proceeds from sales of LHFS, $1.6 billion in depreciation, amortization and accretion, and $2.8 billion of provision for credit losses, partially offset by $4.9 billion of originations of LHFS, net of repayments.

Cash flows from investing activities

For the year ended December 31, 2019, net cash flow from investing activities was $(17.2) billion, primarily due to $10.2 billion in normal loan activity, $10.5 billion of purchases of investment securities AFS, $8.6 billion in operating lease purchases and originations, and $1.6 billion of purchases of HTM investment securities, partially offset by $8.1 billion of AFS investment securities sales, maturities and prepayments, $2.6 billion in proceeds from sales of LHFI, and $3.5 billion in proceeds from sales and terminations of operating leases.

For the year ended December 31, 2018, net cash flow from investing activities was $(12.5) billion, primarily due to $8.5 billion in normal loan activity, $2.4 billion of purchases of investment securities AFS, and $9.9 billion in operating lease purchases and originations, partially offset by $3.9 billion of AFS investment securities sales, maturities and prepayments, $1.0 billion in proceeds from sales of LHFI, and $3.6 billion in proceeds from sales and terminations of operating leases.

For the year ended December 31, 2017, net cash flow from investing activities was $3.3 billion, primarily due to $8.4 billion of AFS investment securities sales, maturities and prepayments, $2.7 billion in normal loan activity, $3.1 billion in proceeds from sales and terminations of operating leases, and $1.2 billion in proceeds from sales of LHFI, partially offset by $6.2 billion of purchases of investment securities AFS and $6.0 billion in operating lease purchases and originations.

Cash flows from financing activities

For the year ended December 31, 2019, net cash flow from financing activities was $11.2 billion, which was primarily due to an increase in net borrowing activity of $5.6 billion and a $6.3 billion increase in deposits, partially offset by $400.0 million in dividends paid on common stock and $338.0 million in stock repurchases attributable to NCI.

Net cash flow from financing activities for the year ended December 31, 2018 was $5.8 billion, which was primarily due to an increase in net borrowing activity of $5.9 billion, partially offset by $410.0 million in dividends paid on common stock and $200.0 million in redemption of preferred stock.

Net cash flow from financing activities for the year ended December 31, 2017 was $(11.0) billion, which was primarily due to a decrease in net borrowing activity of $4.7 billion and a $6.2 billion decrease in deposits.

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


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Item 7.    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 eight banks providing an aggregate commitment of $5.0 billion for the exclusive use of providing short-term liquidity needs to support Chrysler Finance lease financing. As of December 31, 2019, there was an outstanding balance of approximately $1.1 billion on this facility in the 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 eleven banks providing an aggregate commitment of $6.5 billion for the exclusive use of providing short-term liquidity needs to support core and Chrysler Capital loan financing. As of December 31, 2019, there was an outstanding balance of approximately $3.9 billion on these facilities in the 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 December 31, 2019 and December 31, 2018, there were outstanding balances of $422.3 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 $5.7 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, and privately issues amortizing notes. SC has on-balance sheet securitizations outstanding in the market with a cumulative ABS balance of approximately $28.0 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 7.    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 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 December 31, 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 December 31, 2019, the Company had 530,391,043 shares of common stock outstanding. During the year ended December 31, 2019, the Company paid dividends of $400.0 million to its sole shareholder, Santander. During the first quarter of 2020, the Company declared a cash dividend of $125.0 million on its common stock, which was paid on March 2, 2020.

During the year ended December 31, 2019, Santander made cash contributions of $88.9 million 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 and November 2019. Further, SC declared a cash dividend of $0.22 per share, which was paid on February 20, 2020, to shareholders of record as of the close of business on February 10, 2020. SC has paid a total of $291.5 million in dividends through December 31, 2019, of which $85.2 million has been paid to NCI and $206.3 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 year ended December 31, 2019 ($ in thousands, except per share amounts):
$200 Million Share Repurchase Program - January 2019 (1)
  
Total cost (including commissions paid) of shares repurchased $17,780
Average price per share $18.40
Number of shares repurchased 965,430
   
$400 Million Share Repurchase Program - May 2019 through June 2019  
Total cost (including commissions paid) of shares repurchased $86,864
Average price per share $23.16
Number of shares repurchased 3,749,692
   
$1.1 Billion Share Repurchase Program - July 2019 through June 2020  
Total cost (including commissions paid) of shares repurchased $233,350
Average price per share $25.47
Number of shares repurchased 9,155,288
(1) During the year ended December 31, 2018, SC purchased 9.5 million shares of SC Common Stock under its share repurchase program at a cost of approximately $182 million.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



In June 2018, the SC Board of Directors announced purchases of up to $200 million, excluding commissions, of outstanding SC Common Stock through June 2019.

In May 2019, the Company announced an amendment to its 2018 capital plan, which authorized SC to repurchase up to $400 million of outstanding SC 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 outstanding SC Common Stock through the end of the second quarter of 2020.

During the year ended December 31, 2019, SC purchased 13.9 million shares of SC Common Stock under its share repurchase program at a cost of approximately $338 million, excluding commissions.

On January 30, 2020, SC commenced a tender offer to purchase for cash up to $1 billion of shares of SC Common Stock, at a range of between $23 and $26 per share. The tender offer expired on February 27, 2020 and was closed on March 4, 2020. In connection with the completion of the tender offer, SC acquired approximately 17.5 million shares of SC Common Stock for approximately $455.4 million. After the completion of the tender offer, SHUSA's ownership in SC increased to approximately 76.3%.

During the year ended December 31, 2019, SHUSA's subsidiaries had the following capital activity which eliminated in consolidation:
The Bank declared and paid $250.0 million in dividends to SHUSA.
BSI declared and paid $25.0 million in dividends to SHUSA.
Santander BanCorp declared and paid $1.25 million in dividends to SHUSA.
SHUSA contributed $110.0 million to SSLLC.
SHUSA contributed $105.0 million to SFS.

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)
 $7,136,454
 $5,830,669
 $1,305,785
 $
 $
Notes payable - revolving facilities 5,399,931
 1,864,182
 3,535,749
 
 
Notes payable - secured structured financings 28,206,898
 203,114
 10,381,235
 11,461,822
 6,160,727
Other debt obligations (1) (2)
 14,569,222
 2,728,846
 3,607,386
 4,580,226
 3,652,764
CDs (1)
 9,493,234
 7,037,872
 2,354,465
 94,654
 6,243
Non-qualified pension and post-retirement benefits 124,840
 13,376
 26,860
 26,996
 57,608
Operating leases(3)
 794,537
 139,597
 250,416
 197,677
 206,847
Total contractual cash obligations $65,725,116
 $17,817,656
 $21,461,896
 $16,361,375
 $10,084,189
Other commitments:          
Commitments to extend credit $30,685,478
 $5,623,071
 $5,044,127
 $7,282,066
 $12,736,214
Letters of credit 1,592,726
 1,090,622
 238,958
 227,671
 35,475
Total Contractual Obligations and Other Commitments $98,003,320
 $24,531,349
 $26,744,981
 $23,871,112
 $22,855,878
(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 December 31, 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 or interest of $82.9 million.

Excluded from the above table are deposits of $58.0 billion that are due on demand by customers.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 14 and Note 20 to the 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.

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month LIBOR. Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income and balance sheet valuation simulations, shocks to those simulations, and scenario and market value analyses, and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.

Net Interest Income Simulation Analysis

The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense, to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.

The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes at December 31, 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 December 31, 2019 December 31, 2018
Down 100 basis points (1.12)% (3.07)%
Up 100 basis points 1.31 % 2.87 %
Up 200 basis points 2.56 % 5.58 %

MVE Analysis

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at December 31, 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 December 31, 2019 December 31, 2018
Down 100 basis points (3.01)% (1.55)%
Up 100 basis points (0.49)% (1.25)%
Up 200 basis points (3.17)% (3.49)%

As of December 31, 2019, the Company’s profile reflected a decrease of MVE of 3.01% for downward parallel interest rate shocks of 100 basis points and an increase of 0.49% 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 NMDs).

In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates 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 16 to the Consolidated Financial Statements.


81





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 14 to the Consolidated Financial Statements.

BORROWINGS AND OTHER DEBT OBLIGATIONS

The Company has term loans and lines of credit with Santander and other lenders. The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. In addition, SC has warehouse lines of credit and securitizes some of its RICs and operating leases, which are structured secured financings. Total borrowings and other debt obligations at December 31, 2019 were $50.7 billion, compared to $45.0 billion at December 31, 2018. Total borrowings increased $5.7 billion, primarily due to new debt issuances of $3.8 billion, an increase in FHLB advances at the Bank of $2.2 billion and an overall increase of $2.2 billion in SC debt, partially offset by $2.3 billion of debt maturities and calls. See further detail on borrowings activity in Note 11 to the Consolidated Financial Statements.

  Year Ended December 31,
(Dollars in thousands) 2019 2018
Parent Company & other subsidiary borrowings and other debt obligations    
Parent Company senior notes:    
Balance $9,949,214 $8,351,685
Weighted average interest rate at year-end 3.68% 3.79%
Maximum amount outstanding at any month-end during the year $9,949,214 $8,351,685
Average amount outstanding during the year $8,961,588 $7,626,199
Weighted average interest rate during the year 3.81% 3.66%
Junior subordinated debentures to capital trusts:(1)
    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $154,640
Average amount outstanding during the year $0 $118,650
Weighted average interest rate during the year % 3.92%
Subsidiary subordinated notes:    
Balance $602 $40,703
Weighted average interest rate at year-end 2.00% 2.00%
Maximum amount outstanding at any month-end during the year $41,026 $40,934
Average amount outstanding during the year $30,791 $40,784
Weighted average interest rate during the year 2.12% 2.03%
Subsidiary short-term and overnight borrowings:    
Balance $1,831 $59,900
Weighted average interest rate at year-end 0.38% 1.86%
Maximum amount outstanding at any month-end during the year $34,323 $132,827
Average amount outstanding during the year $19,162 $71,432
Weighted average interest rate during the year 3.42% 2.19%
(1) Includes related common securities.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Year Ended December 31,
(Dollars in thousands) 2019 2018
Bank borrowings and other debt obligations    
REIT preferred:    
Balance $125,943 $145,590
Weighted average interest rate at year-end 13.17% 13.22%
Maximum amount outstanding at any month-end during the year $146,066 $145,590
Average amount outstanding during the year $133,068 $144,827
Weighted average interest rate during the year 13.04% 13.22%
Bank subordinated notes:    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $192,125
Average amount outstanding during the year $0 $78,408
Weighted average interest rate during the year % 9.04%
Term loans:    
Balance $0 $126,172
Weighted average interest rate at year-end % 8.57%
Maximum amount outstanding at any month-end during the year $126,257 $139,888
Average amount outstanding during the year $21,023 $130,722
Weighted average interest rate during the year 5.86% 5.70%
Securities sold under repurchase agreements:    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $150,000
Average amount outstanding during the year $0 $41,096
Weighted average interest rate during the year % 1.90%
FHLB advances:    
Balance $7,035,000 $4,850,000
Weighted average interest rate at year-end 2.30% 2.74%
Maximum amount outstanding at any month-end during the year $7,035,000 $4,850,000
Average amount outstanding during the year $5,465,329 $2,025,479
Weighted average interest rate during the year 2.63% 2.61%

83





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Year Ended December 31,
(Dollars in thousands) 2019 2018
SC borrowings and other debt obligations    
Revolving credit facilities:    
Balance $5,399,931 $4,478,214
Weighted average interest rate at year-end 3.44% 3.92%
Maximum amount outstanding at any month-end during the year $6,753,790 $5,632,053
Average amount outstanding during the year $5,532,273 $5,043,462
Weighted average interest rate during the year 6.58% 5.60%
Public securitizations:    
Balance $18,807,773 $19,225,169
Weighted average interest rate range at year-end  1.35% - 3.42%
  1.16% - 3.53%
Maximum amount outstanding at any month-end during the year $19,656,531 $19,647,748
Average amount outstanding during the year $19,000,303 $18,353,127
Weighted average interest rate during the year 2.54% 2.52%
Privately issued amortizing notes:    
Balance $9,334,112 $7,676,351
Weighted average interest rate range at year-end  1.05% - 3.90%
  0.88% - 3.17%
Maximum amount outstanding at any month-end during the year $9,334,112 $7,676,351
Average amount outstanding during the year $7,983,672 $6,379,987
Weighted average interest rate during the year 3.48% 3.54%

NON-GAAP FINANCIAL MEASURES

The Company's non-generally accepted accounting principle ("non-GAAP")non-GAAP information has limitations as an analytical tool and, therefore, should not be considered in isolation or as a substitute for analysis of our results or any performance measures under generally accepted accounting principles ("GAAP")GAAP as set forth in the Company's financial statements. These limitations should be compensated for by relying primarily on the Company's GAAP results and using this non-GAAP information only as a supplement to evaluate the Company's performance.

The Company considers various measures when evaluating capital utilization and adequacy. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because GAAP does not include capital ratio measures, the Company believes that there are no comparable GAAP financial measures to these ratios. These ratios are not formally defined by GAAP and are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess the Company's capital adequacy using these ratios, the Company believes they are useful to provide investors the ability to assess its capital adequacy on the same basis. The Company believes these non-GAAP measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures may allow readers to compare certain aspects of the Company's capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Company's calculations may not be directly comparable with those of other organizations, and the usefulness of these measures to investors may be limited. As a result, the Company encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

The following table includes the related GAAP measures included in our non-GAAP financial measures.
 Year Ended December 31,  
(Dollars in thousands)2017 2016 2015 2014 2013  
Return on Average Assets:           
Net income/(loss)$972,774
 $640,763
 $(3,055,436) $3,034,095
 $783,204
  
Average assets134,534,278
 141,921,781
 140,461,913
 123,410,743
 96,183,449
  
Return on average assets0.72% 0.45% (2.18)% 2.46% 0.81%  
            
Return on Average Equity:           
Net income/(loss)$972,774
 $640,763
 $(3,055,436) $3,034,095
 $783,204
  
Average equity23,395,479
 22,232,729
 25,495,652
 23,434,691
 15,353,336
  
Return on average equity4.16% 2.88% (11.98)% 12.95% 5.10%  
            
Average Equity to Average Assets:           
Average equity$23,395,479
 $22,232,729
 $25,495,652
 $23,434,691
 $15,353,336
  
Average assets134,534,278
 141,921,781
 140,461,913
 123,410,743
 96,183,449
  
Average equity to average assets17.39% 15.67% 18.15% 18.99% 15.96%  
            
Efficiency Ratio:           
General and administrative expenses$5,570,159
 $5,122,211
 $4,724,400
 $3,777,173
 $2,215,411
  
Other expenses222,488
 275,037
 4,657,492
 358,173
 170,475
  
Total expenses (numerator)5,792,647
 5,397,248
 9,381,892
 4,135,346
 2,385,886
  
            
Net interest income$6,334,005
 $6,564,692
 $6,901,406
 $6,243,100
 $1,869,551
  
Non-interest income2,929,576
 2,766,759
 2,905,035
 5,059,462
 1,552,830
  
   Total net interest income and non-interest income (denominator)9,263,581
 9,331,451
 9,806,441
 11,302,562
 3,422,381
  
            
Efficiency ratio62.53% 57.84% 95.67% 36.59% 69.71%  
            
            

5084





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table includes the related GAAP measures included in our non-GAAP financial measures.
Year Ended December 31,  
(Dollars in thousands)2019 2018 2017 2016 
2015(1)
  
Return on Average Assets:           
Net income/(loss)$1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)  
Average assets142,308,583
 131,232,021
 134,522,957
 141,921,781
 140,461,913
  
Return on average assets0.73% 0.76% 0.71% 0.45% (2.18)%  
           
Return on Average Equity:           
Net income/(loss)$1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)  
Average equity24,639,561
 24,103,584
 23,388,410
 22,232,729
 25,495,652
  
Return on average equity4.23% 4.11% 4.10% 2.88% (11.98)%  
           
Average Equity to Average Assets:           
Average equity$24,639,561
 $24,103,584
 $23,388,410
 $22,232,729
 $25,495,652
  
Average assets142,308,583
 131,232,021
 134,522,957
 141,921,781
 140,461,913
  
Average equity to average assets17.31% 18.37% 17.39% 15.67% 18.15%  
           
Efficiency Ratio:           
General, administrative, and other expenses
(numerator)
$6,365,852
 $5,832,325
 $5,764,324
 $5,386,194
 $9,381,892
  
           
Net interest income$6,442,768
 $6,344,850
 $6,423,950
 $6,564,692
 $6,901,406
  
Non-interest income3,729,117
 3,244,308
 2,901,253
 2,755,705
 2,905,035
  
Total net interest income and non-interest income (denominator)10,171,885
 9,589,158
 9,325,203
 9,320,397
 9,806,441
  
           
Efficiency ratio62.58% 60.82% 61.81% 57.79% 95.67%  
(1) General, administrative, and other expenses includes $4.5 billion goodwill impairment charge on SC.(1) General, administrative, and other expenses includes $4.5 billion goodwill impairment charge on SC.  
           
           
           Transitional 
Fully Phased In(4)
Transitional 
Fully Phased In(5)
SBNA SHUSA SBNA SHUSA
SBNA 
SHUSA(4)
 SBNA SHUSADecember 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2019
December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2017
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1
(1)
 
Common Equity
Tier 1
(1)
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1
(1)
 
Common Equity
Tier 1
(1)
           
           
Total stockholder's equity (U.S. GAAP)$13,522,396
 $13,418,228
 $21,182,698
 $19,621,883
 $13,522,396
 $21,182,698
Less: Preferred stock
 
 (195,445) (195,445) 
 (195,445)
Total stockholder's equity (GAAP)$13,680,941
 $13,407,676
 $22,021,460
 $21,321,057
 $13,680,941
 $22,021,460
Goodwill(3,402,637) (3,402,637) (4,444,389) (4,454,925) (3,402,637) (4,444,389)(3,402,637) (3,402,637) (4,444,389) (4,444,389) (3,402,637) (4,444,389)
Intangible assets(2,751) (3,679) (535,753) (597,244) (2,751) (535,753)(1,802) (2,176) (416,204) (475,193) (1,802) (416,204)
Deferred taxes on goodwill and intangible assets220,218
 343,807
 372,036
 586,992
 220,336
 372,154
242,333
 238,747
 397,485
 392,563
 242,333
 397,485
Other adjustments to Common equity tier 1 ("CET1")(3)
(157,707) (153,818) 188,273
 437,177
 (197,669) 20,267
Other adjustments to CET1(3)
(238,923) (230,942) (39,362) (39,275) (238,923) (39,362)
Disallowed deferred tax assets(391,449) (406,341) (423,554) (455,396) (391,449) (529,442)(129,885) (167,701) (215,330) (317,667) (129,885) (215,330)
Accumulated other comprehensive loss226,704
 210,141
 198,431
 193,208
 226,704
 198,431
69,792
 336,332
 88,207
 321,652
 69,792
 88,207
CET1 capital (numerator)$10,014,774
 $10,005,701
 $16,342,297
 $15,136,250
 $9,974,930
 $16,068,521
$10,219,819
 $10,179,299
 $17,391,867
 $16,758,748
 $10,219,819
 $17,391,867
Risk weighted assets ("RWAs")(denominator)(2)
55,110,740
 61,885,512
 99,756,459
 104,333,528
 55,801,497
 100,464,033
RWAs (denominator)(2)
64,677,883
 59,394,280
 118,898,213
 107,915,606
 66,140,440
 119,981,713
Ratio18.17% 16.17% 16.38% 14.51% 17.88% 15.99%15.80% 17.14% 14.63% 15.53% 15.45% 14.50%
                      
(1)CET1 is calculated under Basel III regulations required as of January 1, 2015.
(2)Under the banking agencies' risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together with the measure for market risk, resulting in the Company's and the Bank's total RWAs.
(3)Represents the impact of NCI, transitional and other intangible adjustments for regulatory capital.
(4)Capital ratios as of December 31, 2015 have not been re-cast for the consolidation of IHC entities as regulatory filings are only impacted prospectively.
(5)Represents non-GAAP measures


5185





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA

The following table presented selected quarterly consolidated financial data (unaudited):
  THREE MONTHS ENDED
(in thousands) December 31, 2019 September 30,
2019
 June 30,
2019
 March 31,
2019
 December 31, 2018 September 30,
2018
 June 30,
2018
 March 31,
2018
Total interest income $2,147,955
 $2,185,107
 $2,176,090
 $2,141,043
 $2,094,575
 $2,042,938
 $2,001,073
 $1,930,467
Total interest expense 548,907
 565,997
 554,365
 538,158
 490,925
 444,177
 408,987
 380,114
Net interest income 1,599,048
 1,619,110
 1,621,725
 1,602,885
 1,603,650
 1,598,761
 1,592,086
 1,550,353
Provision for credit losses 607,539
 603,635
 480,632
 600,211
 731,202
 621,014
 433,802
 553,880
Net interest income after provision for credit loss 991,509
 1,015,475
 1,141,093
 1,002,674
 872,448
 977,747
 1,158,284
 996,473
Total fees and other income 866,385
 998,865
 960,605
 897,446
 806,664
 823,744
 818,754
 801,863
Gain/(loss) on investment securities, net 3,170
 2,267
 2,379
 (2,000) (4,785) (1,688) 419
 (663)
General, administrative and other expenses 1,647,808
 1,633,244
 1,542,386
 1,542,414
 1,490,829
 1,450,387
 1,449,749
 1,441,360
Income before income taxes 213,256
 383,363
 561,691
 355,706
 183,498
 349,416
 527,708
 356,313
Income tax provision 87,732
 112,927
 155,326
 116,214
 51,738
 109,949
 168,151
 96,062
Net income before NCI 125,524
 270,436
 406,365
 239,492
 131,760
 239,467
 359,557
 260,251
Less: Net income attributable to NCI 38,562
 66,831
 110,743
 72,512
 31,861
 72,491
 104,141
 75,138
Net income attributable to SHUSA $86,962
 $203,605
 $295,622
 $166,980
 $99,899
 $166,976
 $255,416
 $185,113

2019 FOURTH QUARTER RESULTS

SHUSA reported net income for the fourth quarter of 2019 of $125.5 million compared to net income of $270.4 million for the third quarter of 2019. The most significant period-over-period variances were:
an increase in total fees and other income of $132.5 million, primarily comprised of the mark to market on the personal unsecured portfolio HFS included in miscellaneous income, net.
a decrease in the income tax provision of $25.2 million primarily due to lower income before taxes.

SHUSA reported net income for the fourth quarter of 2019 of $125.5 million, compared to net income of $131.8 million for the fourth quarter of 2018. The most significant period over period variances were:
an increase in interest expense of $58.0 million, due to higher deposit volume and rates.
a decrease in the provision for credit losses of $123.6 million as a result of lower TDR balances and better recovery rates
an increase in general and administrative and other expenses of $157.0 million, including an increase in lease expense of $78.0 million, resulting from the increasing leased vehicle portfolio, and an increase in compensation and benefits expense of $45.7 million as a result of increased headcount.
an increase in income tax provision of $36.0 million as a result of higher income before taxes.



86




ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated by reference from Part II, Item 7, MD&A — "Asset and Liability Management" above.


ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements and Supplementary DataPage


87



Table of Contents


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Tothe Board of Directors and Stockholder of
Santander Holdings USA, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Santander Holdings USA, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income (loss), of stockholder's equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 11, 2020

We have served as the Company’s auditor since 2016.



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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
 December 31, 2019 December 31, 2018
ASSETS   
Cash and cash equivalents$7,644,372
 $7,790,593
Investment securities:   
AFS at fair value14,339,758
 11,632,987
HTM (fair value of $3,957,227 and $2,676,049 as of December 31, 2019 and December 31, 2018, respectively)3,938,797
 2,750,680
Other investments (includes trading securities of $1,097 and $10 as of December 31, 2019 and December 31, 2018, respectively)995,680
 805,357
LHFI(1) (5)
92,705,440
 87,045,868
ALLL (5)
(3,646,189) (3,897,130)
Net LHFI89,059,251
 83,148,738
LHFS (2)
1,420,223
 1,283,278
Premises and equipment, net (3)
798,122
 805,940
Operating lease assets, net (5)(6)
16,495,739
 14,078,793
Goodwill4,444,389
 4,444,389
Intangible assets, net416,204
 475,193
BOLI1,860,846
 1,833,290
Restricted cash (5)
3,881,880
 2,931,711
Other assets (4) (5)
4,204,216
 3,653,336
TOTAL ASSETS$149,499,477
 $135,634,285
LIABILITIES   
Accrued expenses and payables$4,476,072
 $3,035,848
Deposits and other customer accounts67,326,706
 61,511,380
Borrowings and other debt obligations (5)
50,654,406
 44,953,784
Advance payments by borrowers for taxes and insurance153,420
 160,728
Deferred tax liabilities, net1,521,034
 1,212,538
Other liabilities (5)
969,009
 912,775
TOTAL LIABILITIES125,100,647
 111,787,053
Commitments and contingencies (Note 20)
 
STOCKHOLDER'S EQUITY   
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both December 31, 2019 and December 31, 2018)17,954,441
 17,859,304
Accumulated other comprehensive loss(88,207) (321,652)
Retained earnings4,155,226
 3,783,405
TOTAL SHUSA STOCKHOLDER'S EQUITY22,021,460
 21,321,057
NCI2,377,370
 2,526,175
TOTAL STOCKHOLDER'S EQUITY24,398,830
 23,847,232
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY$149,499,477
 $135,634,285
(1) LHFI includes $102.0 million and $126.3 million of loans recorded at fair value at December 31, 2019 and December 31, 2018, respectively.
(2) Includes $289.0 million and $209.5 million of loans recorded at the FVO at December 31, 2019 and December 31, 2018, respectively.
(3) Net of accumulated depreciation of $1.5 billion and $1.4 billion at December 31, 2019 and December 31, 2018, respectively.
(4) Includes MSRs of $130.9 million and $149.7 million at December 31, 2019 and December 31, 2018, respectively, for which the Company has elected the FVO. See Note 16 to these Consolidated Financial Statements for additional information.
(5) The Company has interests in certain Trusts that are considered VIEs for accounting purposes. At December 31, 2019 and December 31, 2018, LHFI included $26.5 billion and $24.1 billion, Operating leases assets, net included $16.5 billion and $14.0 billion, restricted cash included $1.6 billion and $1.6 billion, other assets included $625.4 million and $685.4 million, Borrowings and other debt obligations included $34.2 billion and $31.9 billion, and Other liabilities included $188.1 million and $122.0 million of assets or liabilities that were included within VIEs, respectively. See Note 7 to these Consolidated Financial Statements for additional information.
(6) Net of accumulated depreciation of $4.2 billion and $3.5 billion at December 31, 2019 and December 31, 2018, respectively.
See accompanying unaudited notes to Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
 Year Ended December 31,
 2019 2018 2017
INTEREST INCOME:     
Loans$8,098,482
 $7,546,376
 $7,377,345
Interest-earning deposits174,189
 137,753
 86,205
Investment securities:     
AFS280,927
 297,557
 352,601
HTM70,815
 68,525
 38,609
Other investments25,782
 18,842
 21,319
TOTAL INTEREST INCOME8,650,195
 8,069,053
 7,876,079
INTEREST EXPENSE:     
Deposits and other customer accounts574,471
 389,128
 241,044
Borrowings and other debt obligations1,632,956
 1,335,075
 1,211,085
TOTAL INTEREST EXPENSE2,207,427
 1,724,203
 1,452,129
NET INTEREST INCOME6,442,768
 6,344,850
 6,423,950
Provision for credit losses2,292,017
 2,339,898
 2,759,944
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES4,150,751
 4,004,952
 3,664,006
NON-INTEREST INCOME:     
Consumer and commercial fees548,846
 568,147
 616,438
Lease income2,872,857
 2,375,596
 2,017,775
Miscellaneous income, net(1) (2)
301,598
 307,282
 269,484
TOTAL FEES AND OTHER INCOME3,723,301
 3,251,025
 2,903,697
Net gain/(loss) on sale of investment securities5,816
 (6,717) (2,444)
TOTAL NON-INTEREST INCOME3,729,117
 3,244,308
 2,901,253
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES:     
Compensation and benefits1,945,047
 1,799,369
 1,895,326
Occupancy and equipment expenses603,716
 659,789
 669,113
Technology, outside service, and marketing expense656,681
 590,249
 581,164
Loan expense405,367
 384,899
 386,468
Lease expense2,067,611
 1,789,030
 1,553,096
Other expenses687,430
 608,989
 679,157
TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES6,365,852
 5,832,325
 5,764,324
INCOME BEFORE INCOME TAX PROVISION/(BENEFIT)1,514,016
 1,416,935
 800,935
Income tax provision/(benefit)472,199
 425,900
 (157,040)
NET INCOME INCLUDING NCI1,041,817
 991,035
 957,975
LESS: NET INCOME ATTRIBUTABLE TO NCI288,648
 283,631
 405,625
NET INCOME ATTRIBUTABLE TO SHUSA$753,169
 $707,404
 $552,350
(1) Netted down by impact of$404.6 million, $382.3 million, and $386.4 million for the years ended December 31, 2019, 2018 and 2017 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 Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)

 Year Ended December 31,
 2019 2018 2017
NET INCOME INCLUDING NCI$1,041,817
 $991,035
 $957,975
OCI, NET OF TAX     
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments, net of tax (1) (2)
(301) (3,796) 337
Net unrealized gains/(losses) on AFS and HTM investment securities, net of tax (2)
222,887
 (80,891) (9,744)
Pension and post-retirement actuarial gains, net of tax (2)
10,859
 560
 4,184
TOTAL OTHER COMPREHENSIVE GAIN / (LOSS), NET OF TAX233,445
 (84,127) (5,223)
COMPREHENSIVE INCOME1,275,262
 906,908
 952,752
NET INCOME ATTRIBUTABLE TO NCI288,648
 283,631
 405,625
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA$986,614
 $623,277
 $547,127

(1) Excludes $(18.3) million, $(3.1) million, and $6.0 million of OCI attributable to NCI for the years ended December 31, 2019, 2018 and 2017, respectively.
(2) Excludes $39.1 million impact of OCI reclassified to Retained earnings as a result of the adoption of ASU 2018-02 for the year ended December 31, 2018.

See accompanying unaudited notes to Consolidated Financial Statements.


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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(In thousands)
              
  
                
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
 YEARS ENDED DECEMBER 31, 2017 AND 2016
 
2017 (1)
 
2016 (1)
  Change due to
(dollars in thousands)
Average
Balance
 Interest 
Yield/
Rate
(2)
 
Average
Balance
 Interest 
Yield/
Rate
(2)
 Increase/(Decrease)VolumeRate
EARNING ASSETS               
INVESTMENTS AND INTEREST EARNING DEPOSITS$26,251,822
 $498,734
 1.90% $29,287,122
 $378,404
 1.29% $120,330
$(33,777)$154,107
LOANS(3):
            


Commercial loans32,897,457
 1,216,958
 3.70% 37,313,431
 1,219,667
 3.27% (2,709)(20,182)17,473
Multifamily8,334,329
 311,068
 3.73% 9,126,075
 331,344
 3.63% (20,276)(29,710)9,434
Total commercial loans41,231,786
 1,528,026
 3.71% 46,439,506
 1,551,011
 3.34% (22,985)(49,892)26,907
Consumer loans:               
Residential mortgages8,471,891
 334,463
 3.95% 7,887,893
 316,015
 4.01% 18,448
23,121
(4,673)
Home equity loans and lines of credit5,902,819
 233,477
 3.96% 6,076,177
 219,691
 3.62% 13,786
(6,015)19,801
Total consumer loans secured by real estate14,374,710
 567,940
 3.95% 13,964,070
 535,706
 3.84% 32,234
17,106
15,128
RICs and auto loans26,874,580
 4,513,616
 16.80% 26,636,271
 4,831,270
 18.14% (317,654)43,773
(361,427)
Personal unsecured2,500,670
 619,053
 24.76% 2,310,996
 610,998
 26.44% 8,055
35,669
(27,614)
Other consumer(4)
698,654
 58,765
 8.41% 910,686
 82,362
 9.04% (23,597)(18,160)(5,437)
Total consumer44,448,614
 5,759,374
 12.96% 43,822,023
 6,060,336
 13.83% (300,962)78,388
(379,350)
Total loans85,680,400
 7,287,400
 8.51% 90,261,529
 7,611,347
 8.43% (323,947)28,496
(352,443)
Intercompany investments10,832
 626
 5.78% 14,640
 904
 6.17% (278)(224)(54)
TOTAL EARNING ASSETS111,943,054
 7,786,760
 6.96% 119,563,291
 7,990,655
 6.68% (203,895)(5,505)(198,390)
Allowance for loan losses(5)
(3,931,822)     (3,664,095)        
Other assets(6)
26,523,046
     26,022,585
        
TOTAL ASSETS$134,534,278
     $141,921,781
        
INTEREST BEARING FUNDING LIABILITIES               
Deposits and other customer related accounts:               
Interest-bearing demand deposits$10,138,818
 $23,560
 0.23% $11,682,723
 $42,013
 0.36% $(18,453)$(4,944)$(13,509)
Savings5,888,011
 11,004
 0.19% 5,956,770
 12,723
 0.21% (1,719)(186)(1,533)
Money market25,403,882
 132,993
 0.52% 25,029,571
 126,417
 0.51% 6,576
2,845
3,731
Certificates of deposit ("CDs")6,592,535
 73,487
 1.11% 9,738,344
 95,869
 0.98% (22,382)(37,978)15,596
TOTAL INTEREST-BEARING DEPOSITS48,023,246
 241,044
 0.50% 52,407,408
 277,022
 0.53% (35,978)(40,263)4,285
BORROWED FUNDS:               
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements4,258,450
 65,294
 1.53% 9,466,243
 126,799
 1.34% (61,505)(82,860)21,355
Other borrowings37,983,865
 1,145,791
 3.02% 38,042,187
 1,021,238
 2.68% 124,553
(1,520)126,073
TOTAL BORROWED FUNDS (7)
42,242,315
 1,211,085
 2.87% 47,508,430
 1,148,037
 2.42% 63,048
(84,380)147,428
TOTAL INTEREST-BEARING FUNDING LIABILITIES90,265,561
 1,452,129
 1.61% 99,915,838
 1,425,059
 1.43% 27,070
(124,643)151,713
Noninterest bearing demand deposits15,629,718
     14,410,397
        
Other liabilities(8)
5,243,520
     5,362,817
        
TOTAL LIABILITIES111,138,799
     119,689,052
        
STOCKHOLDER’S EQUITY23,395,479
     22,232,729
        
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$134,534,278
     $141,921,781
        
                
NET INTEREST SPREAD (9)
    5.35%     5.25%    
NET INTEREST MARGIN (10)
    5.66%     5.49%    
NET INTEREST INCOME  $6,334,005
     $6,564,692
      
Ratio of interest-earning assets to interest-bearing liabilities    1.24x
     1.20x
    
 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, 2017530,391
 $195,445
 $16,599,497
 $(193,208) $3,020,149
 $2,756,875
 $22,378,758
Cumulative effect adjustment upon adoption of ASU 2016-09
 
 (26,457) 
 14,763
 37,401
 25,707
Comprehensive (loss)/income Attributable to SHUSA
 
 
 (5,223) 552,350
 
 547,127
Other comprehensive income attributable to NCI
 
 
 
 
 6,048
 6,048
Net income attributable to NCI
 
 
 
 
 405,625
 405,625
Impact of SC Stock Option Activity
 
 
 
 
 22,116
 22,116
Contribution of SFS from Shareholder (Note 1)  
 430,783
 
 (108,705) 
 322,078
Capital contribution from shareholder (Note 13)
 
 11,747
 
 
 
 11,747
Contribution of incremental SC shares from shareholder
 
 707,589
 
 
 (707,589) 
Dividends paid to NCI
 
 
 
 
 (4,475) (4,475)
Stock issued in connection with employee benefit and incentive compensation plans
 
 (149) 
 
 850
 701
Dividends declared and paid on common stock
 
 
 
 (10,000) 
 (10,000)
Dividends declared and paid on preferred stock
 
 
 
 (14,600) 
 (14,600)
Balance, December 31, 2017530,391
 $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) 47,549
 
 8,455
Comprehensive (loss)/income attributable to SHUSA
 
 
 (84,127) 707,404
 
 623,277
Other comprehensive loss attributable to NCI
 
 
 
 
 (3,130) (3,130)
Net income attributable to NCI
 
 
 
 
 283,631
 283,631
Impact of SC stock option activity
 
 
 
 
 12,411
 12,411
Contribution from shareholder and related tax impact (Note 13)
 
 88,468
 
 
 
 88,468
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
 
 
 
 (410,000) 
 (410,000)
Dividends paid to NCI
 
 
 
 
 (57,511) (57,511)
Stock repurchase attributable to NCI
 
 43,430
 
 
 (226,077) (182,647)
Dividends paid on preferred stock
 
 
 
 (10,950) 
 (10,950)
Balance, December 31, 2018530,391
 $
 $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
 
 
 233,445
 753,169
 
 986,614
Other comprehensive loss attributable to NCI
 
 
 
 
 (18,265) (18,265)
Net income attributable to NCI
 
 
 
 
 288,648
 288,648
Impact of SC stock option activity
 
 
 
 
 10,176
 10,176
Contribution from shareholder (Note 13)
 
 88,927
 
 
 
 88,927
Dividends declared and paid on common stock
 
 
 
 (400,000) 
 (400,000)
Dividends paid to NCI
 
 
 
 
 (85,160) (85,160)
Stock repurchase attributable to NCI
 
 6,210
 
 
 (344,204) (337,994)
Balance, December 31, 2019530,391
 $
 $17,954,441
 $(88,207) $4,155,226
 $2,377,370
 $24,398,830
(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 Consolidated Financial Statements for further discussion.
(6)Other assets primarily includes goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, bank-owned life insurance ("BOLI"), accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and mortgage servicing rights ("MSRs"). Refer to Note 9 to the Consolidated Financial Statements for further discussion.
(7)Refer to Note 11 to the 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.


See accompanying unaudited notes to Consolidated Financial Statements.

5293





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of OperationsCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)



NET INTEREST INCOME
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
INTEREST INCOME:        
Interest-earning deposits $86,205
 $57,361
 $28,844
 50.3 %
Investments available-for-sale 352,601
 284,796
 67,805
 23.8 %
Investments held-to-maturity 38,609
 3,526
 35,083
 995.0 %
Other investments 21,319
 32,721
 (11,402) (34.8)%
Total interest income on investment securities and interest-earning deposits 498,734
 378,404
 120,330
 31.8 %
Interest on loans 7,287,400
 7,611,347
 (323,947) (4.3)%
Total Interest Income 7,786,134
 7,989,751
 (203,617) (2.5)%
INTEREST EXPENSE:     
 
Deposits and customer accounts 241,044
 277,022
 (35,978) (13.0)%
Borrowings and other debt obligations 1,211,085
 1,148,037
 63,048
 5.5 %
Total Interest Expense 1,452,129
 1,425,059
 27,070
 1.9 %
 NET INTEREST INCOME $6,334,005
 $6,564,692
 $(230,687) (3.5)%

Net interest income decreased $230.7 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a decrease in yield on interest income earned on loans and an increase in interest expense on borrowings due to higher borrowing rate.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $120.3 million for the year ended December 31, 2017 compared to 2016. The average balance of investment securities and interest-earning deposits for the year ended December 31, 2017 was $26.3 billion with an average yield of 1.90%, compared to an average balance of $29.3 billion with an average yield of 1.29% for 2016. The increase in interest income on investment securities and interest-earning deposits for the year ended December 31, 2017 was primarily attributable to an increase of $35.1 million in interest income on investments held-to-maturity due to increased volume, and an increase of $67.8 million in interest income on investments AFS.

Interest Income on Loans

Interest income on loans decreased $323.9 million for the year ended December 31, 2017 compared to 2016, primarily due to declines in RIC rates, which comprised $317.7 million of the decrease. The average balance of total loans was $85.7 billion with an average yield of 8.51% for the year ended December 31, 2017, compared to $90.3 billion with an average yield of 8.43% for 2016. The decrease in the average balance of total loans of $4.6 billion was primarily due to a decline in the balance of the commercial loan portfolio. The average balance of commercial loans was $41.2 billion with an average yield of 3.71% for the year ended December 31, 2017, compared to $46.4 billion with an average yield of 3.34% for 2016.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts decreased $36.0 million for the year ended December 31, 2017 compared to 2016, primarily due to a decrease in average interest-bearing deposits and interest rates. The average balance of total interest-bearing deposits was $48.0 billion with an average cost of 0.50% for the year ended December 31, 2017 compared to an average balance of $52.4 billion with an average cost of 0.53% for 2016.


53





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $63.0 million for the year ended December 31, 2017 compared to 2016. The increase in interest expense on borrowed funds was due to interest paid at higher rate during the year ended December 31, 2017. The average balance of total borrowings was $42.2 billion with an average cost of 2.87% for the year ended December 31, 2017, compared to an average balance of $47.5 billion with an average cost of 2.42% for 2016. The average balance of borrowed funds decreased from December 31, 2016 to December 31, 2017, primarily due to the decrease in FHLB advances as a result of maturities and terminations. The increase in interest expense on borrowed funds is due to the Company issuing $5.5 billion of long-term debt at higher fixed rates in 2017 to increase liquidity and meet the FRB's TLAC requirement.


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 year ended December 31, 2017 was $2.7 billion, compared to $3.0 billion for 2016. The decrease for the year ended December 31, 2017 was primarily due to decreases in the overall loan portfolio resulting in a decreased ALLL and a decline in originations, stabilizing credit performance for non-TDR loans, and recovery rates for the RIC and auto loan portfolio.
  Year Ended December 31, YTD Change
(in thousands) 2017 2016 DollarPercentage
ALLL, beginning of period $3,814,464
 $3,246,145
 $568,319
17.5 %
Charge-offs:       
Commercial (144,002) (245,399) 101,397
(41.3)%
Consumer (4,865,244) (4,720,135) (145,109)3.1 %
Total charge-offs (5,009,246) (4,965,534) (43,712)0.9 %
Recoveries:       
Commercial 37,999
 86,312
 (48,313)(56.0)%
Consumer 2,401,613
 2,442,921
 (41,308)(1.7)%
Total recoveries 2,439,612
 2,529,233
 (89,621)(3.5)%
Charge-offs, net of recoveries (2,569,634) (2,436,301) (133,333)5.5 %
Provision for loan and lease losses (1)
 2,661,106
 3,004,620
 (343,514)(11.4)%
Other(2):
       
Commercial 356
 
 356
100.0%
Consumer 5,283
 
 5,283
100.0%
ALLL, end of period $3,911,575
 $3,814,464
 $97,111
2.5 %
Reserve for unfunded lending commitments, beginning of period $122,418
 $149,021
 $(26,603)(17.9)%
Release of reserves for unfunded lending commitments (1)
 (10,612) (24,895) 14,283
(57.4)%
Loss on unfunded lending commitments (2,695) (1,708) (987)57.8 %
Reserve for unfunded lending commitments, end of period 109,111
 122,418
 (13,307)(10.9)%
Total allowance for credit losses ("ACL"), end of period $4,020,686
 $3,936,882
 $83,804
2.1 %
(1)The provision for credit losses in the Consolidated Statement of Operations is the sum of the total provision for loan and lease losses and the provision for unfunded lending commitments.
(2)Includes transfers in for the period ending December 31, 2017 related to the contribution of SFS to SHUSA.

The Company's net charge-offs increased $133.3 million for the year ended December 31, 2017 compared to 2016.

Consumer charge-offs increased $145.1 million for the year ended December 31, 2017 compared to 2016. The increase was due to a $153.7 million increase in consumer auto loan charge-offs, offset by an $8.5 million decrease in home mortgage charge-offs.

Consumer recoveries decreased $41.3 million for the year ended December 31, 2017 compared to 2016. This decrease was comprised of a $38.4 million decrease in consumer auto loan recoveries, and a $1.6 million decrease in other consumer loan recoveries.

54





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Consumer net charge-offs as a percentage of average consumer loans were 5.5% for the year ended December 31, 2017, compared to 5.2% for 2016.

Commercial charge-offs decreased $101.4 million for the year ended December 31, 2017 compared to 2016. This decrease was comprised of a $77.2 million decrease in Commercial Banking charge-offs, a $28.5 million decrease in commercial fleet charge-offs, and a $6.7 million decrease in Middle Market CRE charge-offs, offset by an $8.3 million increase in charge-offs for commercial loans in Puerto Rico.

Commercial recoveries decreased $48.3 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a $12.7 million decrease in recoveries for continuing care retirement communities, a $10.9 million decrease in Corporate Banking recoveries, an $18.8 million decrease in commercial fleet recoveries, and a $4.6 million decrease in Middle Market CRE recoveries.

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, was 0.26% for the year ended December 31, 2017, compared to 0.34% for the year ended December 31, 2016.


NON-INTEREST INCOME
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Consumer fees $442,483
 $499,591
 $(57,108) (11.4)%
Commercial fees 173,955
190
190,248
 (16,293) (8.6)%
Mortgage banking income, net 56,659
 63,790
 (7,131) (11.2)%
BOLI 66,784
 57,796
 8,988
 15.6 %
Capital markets revenue 195,906
 190,647
 5,259
 2.8 %
Lease income 2,017,775
 1,839,307
 178,468
 9.7 %
Miscellaneous loss (21,542) (132,123) 110,581
 (83.7)%
Net (losses)/gains recognized in earnings (2,444) 57,503
 (59,947) (104.3)%
Total non-interest income $2,929,576
 $2,766,759
 $162,817
 5.9 %

Total non-interest income increased $162.8 million for the year ended December 31, 2017 compared to 2016. The increase for the year ended December 31, 2017 was primarily due to the increase in lease income associated with the continued growth of the lease portfolio and increases in miscellaneous income. These increases were offset by decreases in consumer loan fees due to the reduction of loans serviced by the Company as well as a decrease in net gains recognized in earnings for the year ended December 31, 2017.

Consumer Fees

Consumer fees decreased $57.1 million for the year ended December 31, 2017, respectively, compared to 2016. This decrease was primarily due to a $76.3 million decrease in loan fee income, which was attributable to a reduction in loans serviced by the Company due to loan sales and payoffs and lower reserve recourse releases in 2017. This was partially offset by an increase of $19.6 million in consumer deposit fees for the year ended December 31, 2017.

Commercial Fees

Commercial fees consists of deposit overdraft fees, deposit automated teller machine ("ATM") fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $16.3 million for the year ended December 31, 2017compared to 2016, primarily due to lower capital markets income.


55





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Mortgage Banking Revenue
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Mortgage and multifamily servicing fees $41,344
 $42,996
 $(1,652) (3.8)%
Net gains on sales of residential mortgage loans and related securities 28,535
 35,720
 (7,185) (20.1)%
Net gains on sales of multifamily mortgage loans 2,500
 6,368
 (3,868) (60.7)%
Net gains/(losses) on hedging activities 1,678
 (723) 2,401
 (332.1)%
Net gains/(losses) from changes in MSR fair value 1,967
 3,887
 (1,920) (49.4)%
MSR principal reductions (19,365) (24,458) 5,093
 (20.8)%
     Total mortgage banking income, net
$56,659

$63,790
 $(7,131) (11.2)%

Mortgage banking income consisted of fees associated with servicing loans not held by the Company, as well as originations, amortization, and changes in the fair value of MSRs and recourse reserves. Mortgage banking income also included gains or losses on the sale of mortgage loans, home equity loans, home equity lines of credit, and mortgage-backed securities ("MBS"). Gains or losses on mortgage banking derivative and hedging transactions are also included in Mortgage banking income.

Mortgage banking revenue decreased $7.1 million for the year ended December 31, 2017 compared to 2016. This decrease for December 31, 2017 was primarily attributable to $7.2 million in lower net gains on sales of residential mortgage loans and related securities, $3.9 million in lower net gains on sales of multifamily loans and $1.9 million in lower net gains from changes in MSR fair value. These decreases were offset by $5.1 million in lower MSR principal paydowns and $2.4 million of higher net gains on hedging activities.

Since 2015, mortgage interest rates have remained stable, resulting in relative stability in mortgage banking fees from rate changes.

The following table details interest rates on certain residential mortgage loans for the Bank as of the dates indicated:
 30-Year Fixed 15-Year Fixed
December 31, 20154.13% 3.38%
March 31, 20163.63% 2.88%
June 30, 20163.50% 2.75%
September 30, 20163.50% 2.88%
December 31, 20164.38% 3.63%
March 31, 20174.25% 3.50%
June 30, 20174.13% 3.38%
September 30, 20173.99% 3.25%
December 31, 20174.13% 3.63%

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

Mortgage and multifamily loan servicing fees decreased $1.7 million for the year ended December 31, 2017, compared to 2016. At December 31, 2017 and 2016, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $241.3 million and $621.1 million, respectively. The decrease in loans serviced for others was primarily due to pay-downs received during 2017.

Net gains on sales of residential mortgage loans and related securities decreased $7.2 million for the year ended December 31, 2017 compared to 2016. For the year ended December 31, 2017, the Company sold $1.7 billion of mortgage loans for gains of $28.5 million, compared to $2.2 billion of loans sold for gains of $35.7 million for 2016.


56





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

The net gains on sales of multifamily mortgage loans decreased $3.9 million for the year ended December 31, 2017 compared to 2016. This decrease was due to a reduction in loan sales during 2017 compared to 2016 and the release of FNMA recourse reserves of $2.5 million for the year ended 2017, compared to $3.0 million for the year ended 2016.

The Company previously sold multifamily loans in the secondary market to FNMA while retaining servicing. In September 2009, the Bank elected to stop selling multifamily loans to FNMA and, since that time, has retained all production for the multifamily loan portfolio. Under the terms of the multifamily sales program with FNMA, the Company retained a portion of the credit risk associated with those loans. As a result of that agreement, the Company retains a 100% first loss position on each multifamily loan sold to FNMA under the program until the earlier to occur of (i) the aggregate approved losses on the multifamily loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole or (ii) all of the loans sold to FNMA under the program are fully paid off.

At December 31, 2017, the Company serviced loans with a principal balance of $136.0 million for FNMA, compared to $341.7 million at December 31, 2016. These loans had a credit loss exposure of $12.2 million as of December 31, 2017, compared to $34.4 million as of December 31, 2016. Losses, if any, resulting from representation and warranty defaults would be in addition to the Company's credit loss exposure. The servicing asset for these loans is fully amortized.

The Company has established a liability related to the fair value of the retained credit exposure for multifamily loans sold to FNMA. This liability represents the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses the portfolio is projected to incur based upon specific internal information and an industry-based default curve with a range of estimated losses. As of December 31, 2017 and December 31, 2016, the Company had a liability of $1.3 million and $3.8 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA under this program.

Net gains on hedging activities increased $2.4 million for the year ended December 31, 2017 compared to 2016. This variance for December 31, 2017 was primarily due to the Company's hedging strategy in the current mortgage rate environment and net gains on its MSR hedging strategies.

Net gains/losses from changes in MSR fair value were a net gain of $2.0 million for the year ended December 31, 2017 as compared to a net gain of $3.9 million for the corresponding period in 2016. The value of the related MSRs carried at fair value at December 31, 2017 and December 31, 2016 was $146.0 million and $146.6 million, respectively. The MSR asset fair value change for the year ended December 31, 2017 was the result of fluctuations in interest rates and a smaller servicing portfolio.

The Company recognized $19.4 million of principal reductions for the year ended December 31, 2017, compared to $24.5 million for 2016. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing.

BOLI

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI increased $9.0 million for the year ended December 31, 2017 compared to 2016 as a result of an increase in death benefits received.

Lease income

Lease income increased $178.5 million for the year ended December 31, 2017 compared to 2016. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $10.1 billion for the year ended December 31, 2017, compared to $9.1 billion at December 31, 2016.


57





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Miscellaneous Income/(loss)

  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Net gain on sale of operating leases $127,156
 $66,909
 $60,247
 90.0 %
Trust and wealth management 147,749
 148,514
 (765) (0.5)%
Loss on sale of non-mortgage loans (396,220) (436,419) 40,199
 (9.2)%
Net gain/(loss) on sale of fixed assets 29,371
 (864) 30,235
 (3,499.4)%
Re-valuation adjustments for FVO assets and liabilities 13,612
 54,676
 (41,064) (75.1)%
Other miscellaneous income 56,790
 35,061
 21,729
 62.0 %
     Total miscellaneous income/(loss) $(21,542) $(132,123) $110,581
 (83.7)%

Miscellaneous income increased $110.6 million for the year ended December 31, 2017 compared to 2016. Factors contributing to this change were as follows:

An increase in the net gain on sale of operating leases of $60.2 million.
A decrease in the loss on the sale of non-mortgage loans of $40.2 million. This line item is primarily driven by lower of cost or market adjustments on the Company's Bluestem personal loan portfolio, which was held for sale at December 31, 2017 and 2016.
Net gain/(loss) on sale of fixed assets increased by $30.2 million in 2017, primarily due to the Company selling and leasing back ten properties in 2017. For further discussion, see Note 6 to the Consolidated Financial Statements.
A decrease of $41.1 million in re-valuation adjustments relating primarily to the change in the fair value of the loan portfolio compared to 2016. For further discussion, see Note 18 to the Consolidated Financial Statements.

Net (losses)/gains recognized in earnings

The Company recognized $2.4 million in net losses for the year ended December 31, 2017 on the sale of AFS investment securities compared to net gains of $57.5 million for the year ended December 31, 2016. The net gain realized for the year ended December 31, 2016 was primarily comprised of the sale of state and municipal securities with a book value of $748.0 million for a gain of $19.9 million, the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, the sale of corporate debt securities with a book value of $1.4 billion for a gain of $5.9 million, and the sale of MBS, including FHLMC residential debt securities and CMOs, with a book value of $1.3 billion for a gain of $24.7 million.


GENERAL AND ADMINISTRATIVE EXPENSES
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar Percentage
Compensation and benefits $1,895,326
 $1,719,645
 $175,681
 10.2 %
Occupancy and equipment expenses 669,113
 618,597
 50,516
 8.2 %
Technology expense 581,164
 644,079
 (62,915) (9.8)%
Loan expense 386,468
 415,267
 (28,799) (6.9)%
Lease expense 1,553,096
 1,305,712
 247,384
 18.9 %
Other administrative expenses 484,992
 418,911
 66,081
 15.8 %
Total general and administrative expenses $5,570,159
 $5,122,211
 $447,948
 8.7 %

Total general and administrative expenses increased $447.9 million for the year ended December 31, 2017 compared to 2016. Factors contributing to this increase were as follows:

Compensation and benefits expense increased $175.7 million for the year ended December 31, 2017 compared to 2016. This increase was primarily the result of a Company's other compensation and benefits expense increase of $104.5 million, salary expense increase of $47.6 million and commission expense increase of $17.1 million for the year ended December 31, 2017 compared to 2016. These increases were offset by decreases in benefits expense of $6.9 million and bonus expense of $3.3 million for the year ended December 31, 2017 compared to 2016.

58





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Occupancy and equipment expenses increased $50.5 million for the year ended December 31, 2017 compared to 2016. This was primarily due to an increase in depreciation expense of $17.9 million for the year ended December 31, 2017 compared to 2016. This increase was primarily due to more assets being placed in service and an increase in depreciation for assets that were moved to held for sale and sold during the periods. Also, there were increases of $15.4 million in maintenance and repair expense and $6.8 million in impairment loss on building expense for the year ended December 31, 2017 compared to 2016.
Technology, outside services, and marketing expenses decreased $62.9 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a decrease in consulting services of $73.7 million related to regulatory initiatives, including preparation for meeting the requirements of the IHC during 2016. This was offset by an increase of $6.0 million for outside processing services and an increase of $6.8 million in marketing expenses related to direct mail, advertising and outside processing services.
Loan expense decreased $28.8 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to decreases of $21.6 million in loan collection expenses and $11.7 million in loan servicing expense. These decreases were offset by an increase in origination expense of $5.9 million for the year ended December 31, 2017 compared to 2016.
Lease expense increased $247.4 million for the year ended December 31, 2017 compared to 2016. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio and depreciation associated with that portfolio.
Other administrative expenses increased $66.1 million for the year ended December 31, 2017 compared to 2016. This increase was primarily attributable to an increase in legal reserve expense of $79.7 million for the year ended December 31, 2017 compared to 2016. During 2017, the Company increased its legal reserves for certain matters discussed in Note 19 to the Consolidated Financial Statements. This increase was offset by lower operational risk expenses and other non-income tax expenses for year ended December 31, 2017.


OTHER EXPENSES
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar (decrease)/increase Percentage
Amortization of intangibles $61,491
 $70,034
 $(8,543) (12.2)%
Deposit insurance premiums and other expenses 70,661
 77,976
 (7,315) (9.4)%
Loss on debt extinguishment 30,349
 114,232
 (83,883) (73.4)%
Impairment of goodwill 10,536
 
 10,536
 100.0%
Impairment on long lived assets 15,540
 
 15,540
 100.0%
Other miscellaneous expenses 33,911
 12,795
 21,116
 165.0 %
Total other expenses $222,488
 $275,037
 $(52,549) (19.1)%

Total other expenses decreased $52.5 million for the year ended December 31, 2017 compared to 2016. The primary factors contributing to this decrease were:

Amortization of intangibles decreased $8.5 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a portion of the Company's core deposit intangibles becoming fully amortized in the second quarter of 2016, thereby reducing intangibles in 2017.
Deposit insurance premiums and other expenses decreased $7.3 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily attributable to decreases in FDIC insurance premiums and assessments.
Losses on debt extinguishment decreased $83.9 million for the year ended December 31, 2017 compared to 2016. This decrease in expense was due to the Company incurring early termination fees for FHLB advances in 2016 that did not recur in 2017. The reduction in FHLB termination fees was offset by a $4.0 million charge on the buyback of real estate investment trust (“REIT”) preferred stock and a $26.4 million charge for repurchase of Bank debt.
Impairment of goodwill increased $10.5 million for the year ended December 31, 2017 compared to 2016. There was no impairment recorded in 2016. This increase was related to the full impairment of Santander BanCorp's goodwill in 2017 which was primarily due to the unfavorable economic environment in Puerto Rico and the adverse effect of Hurricane Maria.
Impairment on long-lived assets increased $15.5 million for the year ended December 31, 2017 compared to 2016. This increase was primarily related to impairment on capitalized software assets.

59





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Other miscellaneous expenses increased $21.1 million for the year ended December 31, 2017 compared to 2016. This increase was primarily due to a $17.3 million increase in equity method net income/expense due to a $27.1 million impairment charge on certain tax credit investments directly related to the Tax Cuts and Jobs Act.


INCOME TAX PROVISION

An income tax benefit of $152.3 million was recorded for the year ended December 31, 2017, compared to an income tax provision of $313.7 million for 2016. This resulted in an effective tax rate ("ETR") of (18.6)% for the year ended December 31, 2017, compared to 32.9% for 2016.

On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act (the “TCJA”), was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. As a result of the TCJA's enactment, GAAP requires that companies re-measure their deferred tax balances as of the enactment of the legislation. During the fourth quarter of 2017, we reduced our income tax provision by $427.3 million as a result of re-measuring our deferred tax liabilities due to the federal rate reduction. The rate reduction is expected to have a positive impact to future earnings.

The Company's ETR in future periods will be affected by the results of operations allocated to the various tax jurisdictions in which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company's interpretations by tax authorities that examine tax returns filed by the Company or any of its subsidiaries.


LINE OF BUSINESS RESULTS

General

The Company's segments at December 31, 2017 consisted of Consumer and Business Banking, Commercial Banking, CRE, Global Corporate Banking ("GCB"), and SC. For additional information with respect to the Company's reporting segments, see Note 23 to the Consolidated Financial Statements.

Results Summary

Consumer and Business Banking
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Net interest income $1,266,073
 $1,099,097
 $166,976
 15.2 %
Total non-interest income 366,827
 384,177
 (17,350) (4.5)%
Provision for credit losses 85,115
 56,440
 28,675
 50.8 %
Total expenses 1,570,954
 1,565,151
 5,803
 0.4 %
Loss before income taxes (23,169) (138,317) 115,148
 83.2 %
Intersegment revenue 12,213
 2,523
 9,690
 384.1 %
Total assets 19,889,065
 19,828,173
 60,892
 0.3 %

Consumer and Business Banking reported a loss before income taxes of $23.2 million for the year ended December 31, 2017 compared to a loss before income taxes of $138.3 million for the year ended December 31, 2016. Factors contributing to this change were as follows:
Net interest income increased $167.0 million for the year ended December 31, 2017 compared to 2016. This increase was primarily driven by deposit product margin where despite rising interest rates, costs have been managed down.
Total non-interest income decreased $17.4 million for the year ended December 31, 2017 compared to 2016 driven by a change in the shared services agreement between the Bank and SSLLC made effective in the middle of 2017.
The provision for credit losses increased by $28.7 million for the year ended December 31, 2017 compared to 2016, driven by the absence of reserve releases in 2017 for home equity and increased delinquency in the credit cards and personal loan portfolios.

60





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Commercial Banking
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Net interest income $346,766
 $349,834
 $(3,068) (0.9)%
Total non-interest income 62,515
 62,882
 (367) (0.6)%
Provision for credit losses 37,915
 79,891
 (41,976) (52.5)%
Total expenses 219,158
 210,984
 8,174
 3.9 %
Income before income taxes 152,208
 121,841
 30,367
 24.9 %
Intersegment revenue 6,081
 4,127
 1,954
 47.3 %
Total assets 11,626,318
 11,962,637
 (336,319) (2.8)%

Commercial Banking reported income before income taxes of $152.2 million for the year ended December 31, 2017, compared to income before income taxes of $121.8 million for the year ended December 31, 2016. Factors contributing to this change were as follows:

Net interest income decreased $3.1 million for the year ended December 31, 2017 compared to 2016. Total average gross loans were $11.6 billion for the year ended December 31, 2017 compared to $11.9 billion for 2016. The decline in average gross loans is primarily related to decreases in the Middle Market, Energy Lending, and Mortgage Warehouse portfolios.
The provision for credit losses decreased $42.0 million for the year ended December 31, 2017 compared to 2016. The decrease in provision for the year ended December 31, 2017 was due to increased provisions required for the Energy Finance portfolio in the prior year that did not recur in 2017 and one large, previously unreserved charge-off that occurred in 2016 in the Middle Market portfolio.

CRE
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Net interest income $292,945
 $287,387
 $5,558
 1.9 %
Total non-interest income 10,475
 24,264
 (13,789) (56.8)%
Provision for credit losses (8,329) 6,025
 (14,354) (238.2)%
Total expenses 79,431
 87,941
 (8,510) (9.7)%
Income before income taxes 232,318
 217,685
 14,633
 6.7 %
Intersegment revenue 2,827
 2,273
 554
 24.4 %
Total assets 13,691,750
 14,630,450
 (938,700) (6.4)%

CRE reported income before income taxes of $232.3 million for the year ended December 31, 2017, compared to income before income taxes of $217.7 million for the year ended December 31, 2016. Factors contributing to this change were as follows:

Net interest income increased $5.6 million for the year ended December 31, 2017 compared to 2016. The increasing rate environment led to an increase in the deposit margin and capital credit year-over-year. The average balance of this segment's gross loans decreased to $14.2 billion for the year ended December 31, 2017, compared to $15.2 billion for 2016. The balance decline was driven by higher runoff in the lower-priced Multi-Family portfolio outpacing originations. The average balance of deposits was $868.0 million for the year ended December 31, 2017, compared to $843.3 million for 2016.
Total non-interest income decreased $13.8 million for the year ended December 31, 2017 compared to 2016 driven in part by a one-time gain on sale recognized in 2016.
The provision for credit losses decreased $14.4 million for the year ended December 31, 2017 compared to 2016. The decrease in provisions was primarily related to a provision release in the real estate construction portfolio.
Total expenses decreased $8.5 million for the year ended December 31, 2017 compared to 2016, driven by a reduction in indirect expenses. Total assets were $13.7 billion as of December 31, 2017, compared to $14.6 billion as of December 31, 2016.


61





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



GCB
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Net interest income $155,826
 $237,635
 $(81,809) (34.4)%
Total non-interest income 37,135
 82,765
 (45,630) (55.1)%
Provision for credit losses 33,275
 7,952
 25,323
 318.4 %
Total expenses 102,164
 118,804
 (16,640) (14.0)%
Income before income taxes 57,522
 193,644
 (136,122) (70.3)%
Intersegment expense (7,212) (9,052) 1,840
 20.3 %
Total assets 5,544,182
 9,389,271
 (3,845,089) (41.0)%

GCB reported income before income taxes of $57.5 million for the year ended December 31, 2017 compared to income before income taxes of $193.6 million for the year ended December 31, 2016. Factors contributing to this change were as follows:

Net interest income decreased $81.8 million for the year ended December 31, 2017 compared to 2016. The average balance of this segment's gross loans was $6.0 billion for the year ended December 31, 2017 compared to $9.3 billion for 2016. The average balance of deposits was $2.2 billion for the year ended December 31, 2017 compared to $2.2 billion for 2016. The decrease in loan balances is attributed to the strategic goal of building a less capital-intensive U.S. franchise, which was attained by exiting less profitable relationships across all sectors, and by pro-actively reducing exposures related to the commodities and oil and gas sectors.
Total non-interest income decreased $45.6 million for the year ended December 31, 2017 compared to 2016.
The provision for credit losses increased $25.3 million for the year ended December 31, 2017 compared to 2016. The provision increased for the year ended December 31, 2017 due to higher reserves required for oil and gas clients and higher reserves on a renewable energy investment that was substantially damaged by Hurricane Maria in 2017.
Total expenses decreased $16.6 million for the year ended December 31, 2017 compared to 2016, driven by lower support and personnel expenses.

Other
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Net interest income $92,502
 $(63,191) $155,693
 246.4 %
Total non-interest income 713,933
 792,457
 (78,524) (9.9)%
Provision for credit losses 93,166
 52,490
 40,676
 77.5 %
Total expenses 1,055,804
 1,152,027
 (96,223) (8.4)%
Loss before income taxes (342,535) (475,251) 132,716
 27.9 %
Intersegment revenue/(expense) (13,909) 129
 (14,038) 
NM1

Total assets 38,120,411
 44,010,655
 (5,890,244) (13.4)%
1 - not meaningful

The Other category reported losses before income taxes of $342.5 million for the year ended December 31, 2017, compared to losses before income taxes of $475.3 million for the year ended December 31, 2016. Factors contributing to this change were as follows:

Net interest income increased $155.7 million for the year ended December 31, 2017 compared to 2016.
Total non-interest income decreased $78.5 million for the year ended December 31, 2017 compared to 2016.
The provision for credit losses increased $40.7 million for the year ended December 31, 2017 compared to 2016.
Total expenses decreased $96.2 million for the year ended December 31, 2017 compared to 2016.


62





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



SC
  Year Ended December 31, YTD Change
(dollars in thousands) 2017 2016 Dollar increase/(decrease) Percentage
Net interest income $4,024,508
 $4,448,535
 $(424,027) (9.5)%
Total non-interest income 1,793,556
 1,432,634
 360,922
 25.2 %
Provision for credit losses 2,254,361
 2,468,199
 (213,838) (8.7)%
Total expenses 2,740,190
 2,252,259
 487,931
 21.7 %
Income before income taxes 823,513
 1,160,711
 (337,198) (29.1)%
Intersegment revenue 
 
 
 0.0%
Total assets 39,422,304
 38,539,104
 883,200
 2.3 %

SC reported income before income taxes of $823.5 million for the year ended December 31, 2017, compared to income before income taxes of $1.2 billion for the year ended December 31, 2016. Factors contributing to this change were as follows:

Net interest income decreased $424.0 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily related to an increase in interest expense during the period. SC's cost of funds increased during 2017 due to higher market rates and increased spreads.
Total non-interest income increased $360.9 million for the year ended December 31, 2017 compared to 2016, due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.
The provision for credit losses decreased $213.8 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a lower build of the ACL as a result of the decline in originations during the year ended December 31, 2017 compared to 2016.
Total expenses increased $487.9 million for the year ended December 31, 2017 compared to 2016, primarily due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

63





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. Consistent with the Company's December 31, 2016 Form 10-K, the following discussion has been updated to reflect the effects of the recast, except that ratios as of December 31, 2015 have not been recast for the consolidation of IHC entities as regulatory filings are only impacted prospectively.

  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar Percentage
Net interest income $6,564,692
 $6,901,406
 $(336,714) (4.9)%
Provision for credit losses (2,979,725) (4,079,743) 1,100,018
 (27.0)%
Total non-interest income 2,766,759
 2,905,035
 (138,276) (4.8)%
General and administrative expenses (5,122,211) (4,724,400) (397,811) 8.4 %
Other expenses (275,037) (4,657,492) 4,382,455
 (94.1)%
(Loss)/income before income taxes 954,478
 (3,655,194) 4,609,672
 (126.1)%
Income tax provision/(benefit) 313,715
 (599,758) 913,473
 (152.3)%
Net income/(loss) (1)
 $640,763
 $(3,055,436) $3,696,199
 (121.0)%
(1)Includes NCI.

The Company reported a pre-tax income of $954.5 million for the year ended December 31, 2016, compared to pre-tax loss of $3.7 billion for the year ended December 31, 2015. Factors contributing to this increase were as follows:

Net interest income decreased $336.7 for the year ended December 31, 2016 compared to 2015. This decrease was primarily due to yield decreases on loans and an increase in interest expense due to higher borrowing levels and associated interest rates in 2016 compared to 2015.
Provisions for credit losses decreased $1.1 billion for the year ended December 31, 2016, compared to 2015. This decrease was primarily related to the buildup of the allowance for loan and lease losses (“ALLL”) coverage ratio throughout 2015, mainly on the RIC and auto loan portfolio. The provision continues to reflect the growth of the RIC and auto loan portfolio.
Total non-interest income decreased $138.3 million for the year ended December 31, 2016 compared to 2015. This decrease was primarily in miscellaneous income attributable to reduced sales of operating leases and mark-downs of the fair value associated with personal unsecured LHFS in 2016 compared to 2015, offset by an increase in lease income.
Total general and administrative expenses increased $397.8 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to an increase in lease expenses and compensation and benefits.
Other expenses decreased $4.4 billion for the year ended December 31, 2016 compared to 2015. This decrease was primarily due to an impairment of goodwill in the amount of $4.5 billion recorded in 2015, with no impairment recorded in 2016. There was also an increase in losses on debt extinguishment associated with repositioning the balance sheet.
The income tax provision increased $913.5 million for the year ended December 31, 2016 compared to 2015. This increase was due to discrete tax provisions recognized in 2016 compared to discrete tax benefits in the prior year, which resulted in a higher effective tax rate for 2016.



64





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



                
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
 YEARS ENDED DECEMBER 31, 2016 AND 2015
 
2016 (1)
 
2015 (1)
 InterestChange due to
(dollars in thousands)
Average
Balance
 

Interest
 
Yield/
Rate
(2)
 
Average
Balance
 

Interest
 
Yield/
Rate
(2)
 Increase/ DecreaseVolumeRate
EARNING ASSETS               
INVESTMENTS AND INTEREST EARNING DEPOSITS$29,287,122
 $378,404
 1.29% $27,457,675
 $405,594
 1.48% $(27,190)$30,869
$(58,059)
LOANS(3):
               
Commercial loans37,313,431
 1,219,667
 3.27% 35,765,796
 1,141,115
 3.19% 78,552
50,150
28,402
Multifamily9,126,075
 331,344
 3.63% 8,927,502
 361,858
 4.05% (30,514)8,276
(38,790)
Total commercial loans46,439,506
 1,551,011
 3.34% 44,693,298
 1,502,973
 3.36% 48,038
58,426
(10,388)
Consumer loans:               
Residential mortgages7,887,893
 316,015
 4.01% 8,165,625
 339,541
 4.16% (23,526)(11,345)(12,181)
Home equity loans and lines of credit6,076,177
 219,691
 3.62% 6,165,718
 218,018
 3.54% 1,673
(3,037)4,710
Total consumer loans secured by real estate13,964,070
 535,706
 3.84% 14,331,343
 557,559
 3.89% (21,853)(14,382)(7,471)
RICs and auto loans26,636,271
 4,831,270
 18.14% 24,637,592
 4,843,916
 19.66% (12,646)(279,353)266,707
Personal unsecured2,310,996
 610,998
 26.44% 3,340,235
 721,318
 21.59% (110,320)(405,526)295,206
Other consumer(4)
910,686
 82,362
 9.04% 1,156,606
 106,256
 9.19% (23,894)(22,265)(1,629)
Total consumer43,822,023
 6,060,336
 13.83% 43,465,776
 6,229,049
 14.33% (168,713)(721,526)552,813
Total loans90,261,529
 7,611,347
 8.43% 88,159,074
 7,732,022
 8.77% (120,675)(663,100)542,425
Intercompany investments14,640
 904
 6.17% 14,591
 886
 6.07% 18
3
15
TOTAL EARNING ASSETS119,563,291
 7,990,655
 6.68% 115,631,340
 8,138,502
 7.04% (147,847)(632,228)484,381
Allowance for loan losses(5)
(3,664,095)     (2,631,602)        
Other assets(6)
26,022,585
     27,462,175
        
TOTAL ASSETS$141,921,781
     $140,461,913
        
INTEREST BEARING FUNDING LIABILITIES               
Deposits and other customer related accounts:               
Interest bearing demand deposits$11,682,723
 $42,013
 0.36% $12,953,809
 $56,327
 0.43% $(14,314)$(5,181)$(9,133)
Savings5,956,770
 12,723
 0.21% 6,488,645
 14,389
 0.22% (1,666)(1,149)(517)
Money market25,029,571
 126,417
 0.51% 23,135,793
 127,576
 0.55% (1,159)43,042
(44,201)
CDs9,738,344
 95,869
 0.98% 9,589,966
 90,853
 0.95% 5,016
1,421
3,595
TOTAL INTEREST BEARING DEPOSITS52,407,408
 277,022
 0.53% 52,168,213
 289,145
 0.55% (12,123)38,133
(50,256)
BORROWED FUNDS:               
FHLB advances, federal funds, and repurchase agreements9,466,243
 126,799
 1.34% 10,219,740
 181,414
 1.78% (54,615)(12,617)(41,998)
Other borrowings38,042,187
 1,021,238
 2.68% 35,108,308
 765,651
 2.18% 255,587
67,909
187,678
TOTAL BORROWED FUNDS (7)
47,508,430
 1,148,037
 2.42% 45,328,048
 947,065
 2.09% 200,972
55,292
145,680
TOTAL INTEREST BEARING FUNDING LIABILITIES99,915,838
 1,425,059
 1.43% 97,496,261
 1,236,210
 1.27% 188,849
93,425
95,424
Noninterest bearing demand deposits14,410,397
     12,710,485
        
Other liabilities(8)
5,362,817
     4,759,515
        
TOTAL LIABILITIES119,689,052
     114,966,261
        
STOCKHOLDER’S EQUITY22,232,729
     25,495,652
        
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$141,921,781
     $140,461,913
        
                
NET INTEREST SPREAD (9)
    5.25%     5.77%    
NET INTEREST MARGIN (10)
    5.49%     5.97%    
NET INTEREST INCOME  $6,564,692
     $6,901,406
      
Ratio of interest-earning assets to interest-bearing liabilities    1.20x
     1.19x
    

Year Ended December 31,
 2019
2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:     
Net income including NCI$1,041,817
 $991,035
 $957,975
Adjustments to reconcile net income to net cash provided by operating activities:     
Impairment of goodwill
 
 10,536
Provision for credit losses2,292,017
 2,339,898
 2,759,944
Deferred tax expense/(benefit)339,152
 416,875
 (196,614)
Depreciation, amortization and accretion2,402,611
 1,913,225
 1,606,862
Net loss on sale of loans397,037
 379,181
 373,532
Net (gain)/loss on sale of investment securities(5,816) 6,717
 2,444
Loss on debt extinguishment2,735
 3,470
 30,349
Net (gain)/loss on real estate owned, premises and equipment, and other assets(19,637) 10,610
 (9,567)
Stock-based compensation317
 913
 4,674
Equity (income)/loss on equity method investments(1,584) (4,324) 28,323
Originations of LHFS, net of repayments(1,462,963) (2,982,366) (4,920,570)
Purchases of LHFS(387) (1,381) (4,280)
Proceeds from sales of LHFS1,563,206
 4,264,959
 4,601,777
Net change in:     
Revolving personal loans(360,922) (371,716) (329,168)
Other assets, BOLI and trading securities(152,520) (200,380) (99,306)
Other liabilities814,094
 248,345
 147,149
NET CASH PROVIDED BY OPERATING ACTIVITIES6,849,157
 7,015,061
 4,964,060
      
CASH FLOWS FROM INVESTING ACTIVITIES:     
Proceeds from sales of AFS investment securities1,423,579
 1,262,409
 3,216,595
Proceeds from prepayments and maturities of AFS investment securities6,688,603
 2,616,417
 5,231,910
Purchases of AFS investment securities(10,534,918) (2,421,286) (6,248,059)
Proceeds from prepayments and maturities of HTM investment securities392,971
 338,932
 200,085
Purchases of HTM investment securities(1,595,777) (135,898) (352,786)
Proceeds from sales of other investments264,364
 153,294
 327,029
Proceeds from maturities of other investments13,673
 45
 560
Purchases of other investments(369,361) (214,427) (217,007)
Proceeds from sales of LHFI2,583,563
 1,016,652
 1,227,052
Proceeds from the sales of equity method investments
 
 25,145
Distributions from equity method investments4,539
 9,889
 10,522
Contributions to equity method and other investments(228,275) (122,816) (87,267)
Proceeds from settlements of BOLI policies34,941
 20,931
 37,028
Purchases of LHFI(897,907) (1,243,574) (723,793)
Net change in loans other than purchases and sales(10,184,035) (8,462,103) 2,724,489
Purchases and originations of operating leases(8,597,560) (9,859,861) (6,036,193)
Proceeds from the sale and termination of operating leases3,502,677
 3,588,820
 3,119,264
Manufacturer incentives794,237
 1,098,055
 878,219
Proceeds from sales of real estate owned and premises and equipment68,491
 53,569
 112,497
Purchases of premises and equipment(216,810) (159,887) (164,111)
Net cash paid for branch disposition(329,328) 
 
Upfront fee paid to FCA(60,000) 
 
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES(17,242,333) (12,460,839) 3,281,179
      
CASH FLOWS FROM FINANCING ACTIVITIES:     
Net change in deposits and other customer accounts6,286,153
 680,277
 (6,218,010)
Net change in short-term borrowings191,931
 (168,769) (50,331)
Net proceeds from long-term borrowings48,043,664
 46,461,404
 43,325,311
Repayments of long-term borrowings(44,522,618) (43,277,142) (44,005,642)
Proceeds from FHLB advances (with terms greater than 3 months)4,435,000
 4,900,000
 1,000,000
Repayments of FHLB advances (with terms greater than 3 months)(2,500,000) (2,000,000) (5,000,000)
Net change in advance payments by borrowers for taxes and insurance(7,308) 1,407
 (4,177)
Cash dividends paid to preferred stockholders
 (10,950) (14,600)
Dividends paid on common stock(400,000) (410,000) (10,000)
Dividends paid to NCI(85,160) (57,511) (4,475)
Stock repurchase attributable to NCI(337,994) (182,647) 
Proceeds from the issuance of common stock4,529
 8,204
 13,652
Capital contribution from shareholder88,927
 85,035
 9,000
Redemption of preferred stock
 (200,000) 
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES11,197,124
 5,829,308
 (10,959,272)
      
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH803,948
 383,530
 (2,714,033)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD10,722,304
 10,338,774
 13,052,807
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (1)
$11,526,252
 $10,722,304
 $10,338,774
      
SUPPLEMENTAL DISCLOSURES     
Income taxes paid, net$35,355
 $26,261
 $3,954
Interest paid2,210,838
 1,694,850
 1,442,484
      
NON-CASH TRANSACTIONS     
Loans transferred to/(from) other real estate owned(1,423) 86,467
 44,650
Loans transferred from/(to) HFI (from)/to HFS, net2,727,067
 731,944
 202,760
Unsettled sales of investment securities
 
 39,783
Contribution of SFS from shareholder (2)

 
 322,078
Contribution of incremental SC shares from shareholder
 
 707,589
Contribution of SAM from shareholder (2)

 4,396
 
AFS investment securities transferred to HTM investment securities
 1,167,189
 
Adoption of lease accounting standard:     
ROU assets664,057
 
 
Accrued expenses and payables705,650
 
 
(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 LHFS.
(4)Other consumer primarily includes RV and marine loans.
(5)Refer to Note 4 to the Consolidated Financial Statements for further discussion.
(6)Other assets primarily includes 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 9 to the Consolidated Financial Statements for further discussion.
(7)Refer to Note 11 to the 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.

(1) The years ended December 31, 2019, 2018, and 2017 include cash and cash equivalents balances of $7.6 billion, $7.8 billion, and $6.5 billion, respectively, and restricted cash balances of $3.9 billion, $2.9 billion, and $3.8 billion, respectively.
(2) The contributions of SFS and SAM were accounted for as non-cash transactions. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

See accompanying unaudited notes to Consolidated Financial Statements.

6594





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES


Introduction

NET INTEREST INCOME
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar Percentage
INTEREST INCOME:     
  
Interest-earning deposits $57,361
 $21,745
 $35,616
 163.8 %
Investments available-for-sale 284,796
 331,379
 (46,583) (14.1)%
Investments held-to-maturity 3,526
 
 3,526
 100.0 %
Other investments 32,721
 52,470
 (19,749) (37.6)%
Total interest income on investment securities and interest-earning deposits 378,404
 405,594
 (27,190) (6.7)%
Interest on loans 7,611,347
 7,732,022
 (120,675) (1.6)%
Total interest income 7,989,751
 8,137,616
 (147,865) (1.8)%
INTEREST EXPENSE:     
 
Deposits and customer accounts 277,022
 289,145
 (12,123) (4.2)%
Borrowings and other debt obligations 1,148,037
 947,065
 200,972
 21.2 %
Total Interest Expense 1,425,059
 1,236,210
 188,849
 15.3 %
 NET INTEREST INCOME: $6,564,692
 $6,901,406
 $(336,714) (4.9)%

Net interestSHUSA is the Parent Company of SBNA, a national banking association; SC, a consumer finance company; Santander BanCorp, a financial holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, BSPR; SSLLC, a broker-dealer headquartered in Boston, Massachusetts; BSI, a financial services company headquartered in Miami, Florida that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; and SIS, a registered broker-dealer headquartered 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 decreased $336.7 million forsecurities; as well as several other subsidiaries. SSLLC, SIS, and another SHUSA subsidiary, SAM, are registered investment advisers with the year ended December 31, 2016 compared to 2015. This overall decrease was primarily due to yield decreases on loansSEC. SHUSA is headquartered in Boston and an increasethe Bank's home office is in interest expense due to higher borrowing levelsWilmington, Delaware. SHUSA is a wholly-owned subsidiary of Santander. The Parent Company's two largest subsidiaries by asset size and associated interest rates in 2016 compared to 2015.

Net Interest Income on Investment Securitiesrevenue are the Bank and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits decreased $27.2 million for the year ended December 31, 2016 compared to 2015. The average balance of investment securities and interest-earning deposits for the year ended December 31, 2016 was $29.3 billion with an average yield of 1.29%, compared to an average balance of $27.5 billion with an average yield of 1.48% for 2015. The decrease in interest income on investment securities and interest-earning deposits for the year ended December 31, 2016 was primarily attributable to a decrease of $66.3 million in interest income on AFS investment securities and other investments, offset by a $35.6 million increase in interest income on short-term deposits compared to 2015.

Interest Income on Loans

Interest income on loans decreased $120.7 million for the year ended December 31, 2016 compared to 2015. The average balance of total loans was $90.3 billion with an average yield of 8.43% for the year ended December 31, 2016, compared to $88.2 billion with an average yield of 8.77% for the year ended December 31, 2015. The increase in the average balance of total loans of $2.1 billion was primarily due to the growth of the RIC and auto loan portfolio. The average balance of RICs and auto loans, which comprised a majority of the increase, was $26.6 billion with an average yield of 18.14% for the year ended December 31, 2016, compared to $24.6 billion with an average yield of 19.66% for 2015.SC.

The decreaseBank’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. SC's primary business is the indirect origination and servicing of RICs and leases, principally, through manufacturer-franchised dealers in interest income onconnection 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.

SAF is SC’s primary vehicle brand, and is available as a finance option for automotive dealers across the United States. Since May 2013, under its agreement with FCA, SC has operated as FCA's preferred provider for consumer loans, leases, and dealer loans and provides 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 20 for additional details. On June 28, 2019, SC entered into an amendment to its agreement with FCA, which modified that agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions.

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. However, in 2015, SC announced its exit from personal lending and, accordingly, all of its personal lending assets are classified as HFS at December 31, 2019.

As of December 31, 2019, SC was primarily due to activity in the unsecured loan portfolios, as the Company sold the LendingClub loans in February 2016. Interest incomeowned approximately 72.4% by SHUSA and 27.6% by other shareholders. SC Common Stock is listed on the personal unsecured loan portfolio decreased $110.3 million forNYSE under the year ended December 31, 2016. The average balance of the portfolio decreased from $3.3 billion in 2015 to $2.3 billion in 2016.trading symbol "SC."

Interest Expense on DepositsDuring 2019, SBNA completed the sale of 14 bank branches and Related Customer Accounts

Interest expense onfour ATMs located in central Pennsylvania, together with approximately $471 million of deposits and related customer accounts decreased $12.1$102 million of retail and business loans, to First Commonwealth Bank for the year ended December 31, 2016 compared to 2015. The average balancea gain of total interest-bearing deposits was $52.4 billion with an average cost of 0.53% for the year ended December 31, 2016, compared to an average balance of $52.2 billion with an average cost of 0.55% for 2015. The decrease in interest expense on deposits and customer-related accounts during the year ended December 31, 2016 was primarily due to the decrease in the interest rates paid on deposits during the year.


$30.9 million. 

6695





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

Item 7.    Management’s DiscussionIHC

The EPS mandated by Section 165 of the DFA Final Rule were enacted by the Board of Governors of the Federal Reserve
to strengthen regulatory oversight of FBOs. Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and Analysisnon-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. SFS’s results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company and the Company also elected to report its results prospectively. As a result of the 2017 contribution of SFS in 2017 and SAM in 2018, SHUSA's net income is understated by $1.0 million and $6.0 million for the years ended December 31, 2018 and 2017, respectively. In addition, a contribution to stockholder's equity of $4.4 million and $322.1 million was recorded on July 2, 2018, and July 1, 2017, respectively. These amounts are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.

On October 21, 2019, the Company entered into an agreement to sell the stock of Santander BanCorp (the holding company that owns BSPR) for a total consideration of approximately $1.1 billion, subject to adjustment based on the consolidated Santander BanCorp balance sheet at closing. At December 31, 2019, BSPR had 27 branches, approximately 1,000 employees, and total assets of approximately $6.0 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 a third party 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. Once it becomes apparent that this transaction is more likely than not to receive regulatory approval, the Company will recognize a deferred tax liability of approximately $50 million for the unremitted earnings of Santander BanCorp. Consummation of the transaction is not expected to result in any material gain or loss.

Basis of Presentation

These Consolidated Financial ConditionStatements include accounts of the Company and Resultsits 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 VOEs in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. These Consolidated Financial Statements have been prepared in accordance with GAAP and pursuant to SEC regulations. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and SCF for the periods indicated, and contain adequate disclosure of this interim financial information to make the information presented not misleading.

Certain prior-year amounts have been reclassified to conform to the current year presentation. These reclassifications did not have a material impact on the Company's consolidated financial condition or results of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and those differences may be material. The most significant estimates pertain to fair value measurements, the ALLL and reserve for unfunded lending commitments, accretion of discounts and subvention on RICs, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, and income taxes. Actual results may differ from the estimates, and the differences may be material to the Consolidated Financial Statements.

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Interest Expense on Borrowed FundsNOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)

Interest expense on borrowed funds increased $201.0 millionRecently Adopted Accounting Standards

Since January 1, 2019, the Company adopted the following FASB ASUs:
ASU 2016-02, Leases (Topic 842). The Company adopted this standard as of January 1, 2019, resulting in the recognition of a 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 year ended December 31, 2016 compared to 2015. This increase was attributablemodified retrospective approach, with application at the adoption date and a cumulative-effect adjustment to the increase in interest rates paid for the year ended December 31, 2016. This increase was primarily due to $1.6 billion of new debt issued by SHUSA, and net $1.4 billion of SC on-balance sheet securitization activity from December 31, 2015 to December 31, 2016. The averageopening balance of total borrowings was $47.5 billionretained 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 an average cost of 2.42% forsuch impact recorded to the year ended December 31, 2016, compared to an averageopening balance of $45.3 billionRetained 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.
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 an average costDown Round Features, (Part II) Replacement of 2.09%the Indefinite Deferral for 2015.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 2018-15, 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.
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.

Significant Accounting Policies

PROVISION FOR CREDIT LOSSESConsolidation

In accordance with the applicable accounting guidance for consolidations, the Consolidated Financial Statements include any VOEs in which the Company has a controlling financial interest and any VIEs for which the Company is deemed to be the primary beneficiary. The Company consolidates its VIEs if the Company has (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity's economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., the Company is considered to be the primary beneficiary). The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the noncontrolling shareholders do not hold any substantive participating or controlling rights. Interests in VIEs and VOEs can include equity interests in corporations, partnerships and similar legal entities, subordinated debt, securitizations, derivatives contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments.


97




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

Upon the occurrence of certain significant events, as required by the VIE model, the Company reassesses whether a legal entity in which the Company is involved is a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Company has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the entities with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively, with assets and liabilities of a newly consolidated VIE initially recorded at fair value. A gain or loss may be recognized upon deconsolidation of a VIE, depending on the carrying amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.

The Company uses the equity method to account for unconsolidated investments in VOEs if the Company has significant influence over the entity's operating and financing decisions but does not maintain a controlling financial interest. Unconsolidated investments in VOEs or VIEs in which the Company has a voting or economic interest of less than 20% generally are carried at cost less any impairment. These investments are included in Other assets on the Consolidated Balance Sheets, and the Company's proportionate share of income or loss is included in Miscellaneous income, net within the Consolidated Statements of Operations.

Sales of RICs and Leases

The Company, through SC, transfers RICs into newly formed Trusts which then issue one or more classes of notes payable backed by the RICs. The Company’s continuing involvement with the credit facilities and Trusts are in the form of servicing loans held by the SPEs and, generally, through holding a residual interest in the SPE. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and are consolidated when the Company has: (a) power over the significant activities of the entity and (b) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company has power over the significant activities of those Trusts as servicer of the financial assets held in the Trust. Servicing fees are not considered significant variable interests in the Trusts; however, when the Company also retains a residual interest in the Trust, either in the form of a debt security or equity interest, the Company has an obligation to absorb losses or the right to receive benefits that are potentially significant to the SPE. Accordingly, these Trusts are consolidated within the Consolidated Financial Statements, and the associated RICs, borrowings under credit facilities and securitization notes payable remain on the Consolidated Balance Sheets. Securitizations involving Trusts in which the Company does not retain a residual interest or any other debt or equity interest are treated as sales of the associated RICs. While these Trusts are included in our Consolidated Financial Statements, they are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by the Trusts, are available only to satisfy the notes payable related to the securitized RICs, and are not available to the Company's creditors or other subsidiaries.

The Company also sells RICs and leases to VIEs or directly to third parties. The Company may determine that these transactions meet sale accounting treatment in accordance with applicable guidance. Due to the nature, purpose, and activity of these transactions, the Company either does not hold potentially significant variable interests or is not the primary beneficiary as a result of the Company's limited further involvement with the financial assets. The transferred financial assets are removed from the Company's Consolidated Balance Sheets at the time the sale is completed. The Company generally remains the servicer of the financial assets and receives servicing fees. The Company also recognizes a gain or loss for the difference between the fair value, as measured based on sales proceeds plus (or minus) the value of any servicing asset (or liability) retained and the carrying value of the assets sold.

See further discussion on the Company's securitizations in Note 7 to these Consolidated Financial Statements.

Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash and amounts due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. Cash and cash equivalents have original maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits.


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

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

Investment Securities and Other Investments

Investment in debt securities are classified as either AFS, HTM, trading, or other investments. Investments in equity securities are generally recorded at fair value with changes recorded in earnings. Management determines the appropriate classification at the time of purchase.

Debt securities expected to be held for an indefinite period of time are classified as AFS and are carried at fair value, with temporary unrealized gains and losses reported as a component of accumulated other comprehensive income within stockholder's equity, net of estimated income taxes.

Debt securities purchased which the Company has the positive intent and ability to hold until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for payments, amortization of premium and accretion of discount. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in OCI and in the carrying value of the HTM securities. Such amounts are amortized over the remaining lives of the securities.

The Company conducts a comprehensive security-level impairment assessment quarterly on all securities with a fair value that is less than their amortized cost basis to determine whether the loss represents OTTI. The quarterly OTTI assessment takes into consideration whether (i) the Company has the intent to sell or, (ii) it is more likely than not that it will be required to sell the security before the expected recovery of its amortized cost. The Company also considers whether or not it would expect to receive all of the contractual cash flows from the investment based on its assessment of the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. The Company also considers the severity of the impairment in its assessment. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item, and the non-credit component is recorded within accumulated OCI.

Realized gains and losses on sales of investment securities are recognized on the trade date and included in earnings within Net (losses)/gains on sale of investment securities, which is a component of non-interest income. Unamortized premiums and discounts are recognized in interest income over the estimated life of the security using the interest method.

Debt securities held for trading purposes and equity securities are carried at fair value, with changes in fair value recorded in non-interest income. Investments that are purchased principally for the purpose of economically hedging the MSR in the near term are classified as trading securities and carried at fair value, with changes in fair value recorded as a component of the Miscellaneous income, net line of the Consolidated Statements of Operations.

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB. Although FHLB and FRB stock are equity interests in the FHLB and FRB, respectively, neither has a readily determinable fair value, because ownership is restricted and they are not readily marketable. FHLB stock can be sold back only at its par value of $100 per share and only to FHLBs or to another member institution. Accordingly, FHLB stock and FRB stock are carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

See Note 3 to the Consolidated Financial Statements for details on the Company's investments.

LHFI

LHFI include commercial and consumer loans (including RICs) originated by the Company as well as loans acquired by the Company, which the Company intends to hold for the foreseeable future or until maturity. RICs consist largely of nonprime automobile finance receivables that are acquired individually from dealers at a nonrefundable discount from the contractual principal amount. RICs also include receivables originated through a direct lending program and loan portfolios purchased from other lenders.

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

Originated LHFI

Originated LHFI are reported net of cumulative charge offs, unamortized loan origination fees and costs, and unamortized discounts and premiums. Interest on loans is credited to income as it is earned. For most of the Company's originated LHFI, loan origination fees and certain direct loan origination costs and premiums and discounts are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the effective interest method. For RICs, loan origination fees and costs, premiums and discounts are deferred and amortized over their estimated lives as adjustments to interest income utilizing the effective interest method using estimated prepayment speeds, which are updated on a monthly basis. The Company estimates future principal prepayments specific to pools of homogeneous loans, which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. Our estimated weighted average prepayment rates ranged from 5.1% to 11.0% at December 31, 2019 and 5.7% to 10.8% at December 31, 2018.

The Company’s LHFI are carried at amortized cost, net of the ALLL. When a RIC is originated, certain cost basis adjustments (the net discounts) to the principal balance of the loan are recognized in accordance with the accounting guidance for loan origination fees and costs in ASC 310-20. These cost basis adjustments generally include the following:

Origination costs.
Dealer discounts - dealer discounts to the principal balance of the loan generally occur in circumstances in which the contractual interest rate on the loan is not sufficient to compensate for the credit risk of the borrower.
Participation - participation fees, or premiums, paid to the dealer as a form of profit-sharing, rewarding the dealer for originating loans that perform.
Subvention - payments received from the vehicle manufacturer as compensation (yield enhancement) for the cost of below-market interest rates offered to consumers.

Originated loans are initially recorded at the proceeds paid to fund the loan. Loan origination fees and costs and any discount at origination for loans is considered by the Company to reflect yield enhancements and is accreted to income using the effective interest method.

See LHFS subsection below for accounting treatment when an HFI loan is re-designated as LHFS.

Purchased LHFI

Purchased loans are generally loans acquired in a bulk purchase or business combination. RICs acquired directly from a dealer are considered to be originated loans, not purchased loans.

Purchase discounts and premiums on purchased loans that are deemed performing are accreted over the remaining expected lives of the loans to their par values, generally using the retrospective effective interest method, which considers the impact of estimated prepayments that is updated on a quarterly basis. The purchase discount on personal unsecured loans (given their revolving nature) are amortized on a straight-line basis in accordance with ASC 310-20.

Purchased loans with evidence of credit quality deterioration as of the purchase date for which it is probable that the Company will not receive all contractually required payments receivable are accounted for as PCI loans. At acquisition, PCI loans are recorded at fair value with no allowance for credit losses, and accounted for individually or aggregated in pools based on similar risk characteristics. The Company estimates the amount and timing of expected cash flows for each loan or pool of loans. The expected cash flows in excess of the amount paid for the loans is referred to as the accretable yield and is recorded as interest income over the remaining estimated life of the loan or pool of loans.

The Company may irrevocably elect to account for certain loans acquired with evidence of credit deterioration at fair value in accordance with ASC 825. Accordingly, the Company does not recognize interest income for these loans and recognizes the fair value adjustments on these loans as part of other non-interest income in the Company’s Consolidated Statements of Operations. For certain loans which the Company has elected to account for at fair value that are not considered non-accrual, the Company separately recognizes interest income from the total fair value adjustment. No ALLL is recognized for loans that the Company has elected to account for at fair value.

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

ALLL for Loan Losses and Reserve for Unfunded Lending Commitments

The ALLL and reserve for unfunded lending commitments (together, the ACL) are maintained at levels that management considers adequate to provide for losses on the recorded investment of the loan portfolio, based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, 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 ALLL consists of two elements: (i) an allocated allowance, which is comprised of allowances established on loans specifically evaluated for impairment, and loans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends and both general economic conditions and other risk factors in the Company's loan portfolios, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

The ALLL includes the estimate of credit losses that management expects will be realized during the loss emergence period, including the amount of net discounts that is included in the loans' recorded investment 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.

Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover probable credit losses incurred in the Company’s HFI loan portfolios. The Company uses the incurred loss approach in providing an ACL on the recorded investment of its existing loans. This approach requires that loan loss provisions are recognized and the corresponding allowance recorded when, based on all available information, it is probable that a credit loss has been incurred. The estimate for credit losses for loans that are individually evaluated for impairment is generally determined through an analysis of the present value of the loan’s expected future cash flows, except for those that are deemed to be collateral dependent.  For those loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. In addition, when establishing the collective ACL for originated loans, the Company’s estimate of losses on recorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or when established delinquency thresholds have been met. Additional discussions related to the Company’s charge-off policies are provided in the “Charge-offs of Uncollectible Loans” section below.

When a loan in any portfolio or class has been determined to be impaired (e.g., TDRs and non-accrual commercial loans in excess of $1 million) as of the balance sheet date, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate. However, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. A specific reserve is established as a component of ACL for these impaired loans. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows (including the fair value of the collateral for collateral dependent loans) the Company recalculates the impairment and adjusts the specific reserve. Some impaired loans have risk characteristics similar to other impaired loans and may be aggregated for the measurement of impairment. For those impaired loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

The Company's allocated reserves are principally based on its various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's internal audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.


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

The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions 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.

The unallocated allowance is also established in consideration of several factors such as inherent delays in obtaining information regarding a customer's financial condition or changes in its unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, the Company has the ability to revise the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.

Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.

For the commercial loan portfolio segment, the Company has specialized credit officers 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 additional analysis is needed. For the commercial loan portfolio segment, risk ratings are assigned to each loan to differentiate risk within the portfolio, and are 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 positions. 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 no less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Risk Review group to ensure consistency and accuracy in risk ratings as well as appropriate frequency of risk rating review by the Company's credit officers. The Company's Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings.

When a loan's risk rating is downgraded beyond 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.

The consumer loan portfolio segment and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. 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.

Within the consumer loan portfolio segment, for both residential and home equity 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 for six LTV bands within the portfolios. LTV ratios are updated based on movements in the state-level Federal Housing Finance Agency house pricing indices.

For non-TDR RICs and personal unsecured loans, the Company estimates the ALLL at a level considered adequate to cover probable credit losses in the recorded investment of the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company’s judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan and lease losses.

In addition to the ALLL, management estimates probable losses related to unfunded lending commitments. Unfunded lending commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. 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 Consolidated Balance Sheets.


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

Risk factors are continuously reviewed and revised by management when conditions warrant. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the loan portfolio. The provision for credit losses for the year ended December 31, 2016 was $3.0 billion compared to $4.1 billion for the year ended December 31, 2015. This decrease for the year ended December 31, 2016 was primarily related to the buildup of the ALLL coverage ratio throughout 2015, mainly for the RIC and auto loan portfolio. The provision continues to reflect the growth of the RIC and auto loan portfolio.nationally published statistics is conducted on at least an annual basis.

The following table presentsACL is subject to review by banking regulators. The Company's primary bank regulators conduct examinations of the activityACL and make assessments regarding its adequacy and the methodology employed in its determination.

Interest Recognition and Non-accrual loans

Interest from loans is accrued when earned in accordance with the terms of the loan agreement. The accrual of interest is discontinued and uncollected interest is reversed once a loan is placed in non-accrual status. A loan is determined to be non-accrual when it is probable that scheduled payments of principal and interest will not be received when due according to the contractual terms of the loan agreement. The Company generally places commercial loans and consumer loans on non-accrual status when they become 90 days or more past due. Additionally, loans may be placed on nonaccrual status based on other circumstances, such as receipt of notification of a customer’s bankruptcy filing. When the collectability of the recorded loan balance of a nonaccrual loan is in doubt, any cash payments received from the borrower are applied first to reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Generally, a nonaccrual loan is returned to accrual status when, based on the Company’s judgment, the borrower’s ability to make the required principal and interest payments has resumed and collectability of remaining principal and interest is no longer doubtful. Interest income recognition resumes for nonaccrual loans that were accounted for on a cash basis method when they return to accrual status, while interest income that was previously recorded as a reduction in the ACLcarrying value of the loan would be recognized as interest income based on the effective yield to maturity on the loan. Collateral- dependent loans are generally not returned to accrual status. Please refer to the TDRs section below for discussion related to TDR loans placed on non-accrual status. Credit cards continue to accrue interest until they become 180 days past due, at which point they are charged-off.

For RICs, the periods indicated:accrual of interest is discontinued and accrued, but uncollected interest is reversed once a RIC becomes more than 60 days past due (i.e. 61 or more days past due), and is resumed if a delinquent account subsequently becomes 60 days or less past due. The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time. Loans accounted for using the FVO are not placed on nonaccrual.

  Year Ended December 31,
(in thousands) 2016 2015
ALLL, beginning of period $3,246,145
 $1,777,889
Charge-offs:    
Commercial (245,399) (175,234)
Consumer (4,720,135) (4,489,848)
Total charge-offs (4,965,534) (4,665,082)
Recoveries:    
Commercial 86,312
 65,217
Consumer 2,442,921
 2,030,177
Total recoveries 2,529,233
 2,095,394
Charge-offs, net of recoveries (2,436,301) (2,569,688)
Provision for loan and lease losses (1)
 3,004,620
 4,065,061
Other(2):
    
Consumer 
 (27,117)
ALLL, end of period $3,814,464
 $3,246,145
     
Reserve for unfunded lending commitments, beginning of period $149,021
 $134,003
(Release)/provision for unfunded lending commitments (1)
 (24,895) 14,682
(Gain)/loss on unfunded lending commitments (1,708) 336
Reserve for unfunded lending commitments, end of period 122,418
 149,021
Total ACL, end of period $3,936,882
 $3,395,166
Charge-off of Uncollectible Loans
(1)The provision for credit losses in the Consolidated Statements of Operations is the sum of the total provision for loan and lease losses and provision for unfunded lending commitments.
(2)The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1 billion of RICs as held-for-sale during the first quarter of 2015.

Any loan may be charged-off if a loss confirming event has occurred. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include bankruptcy (unsecured), foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when that collateral asset is the sole source of repayment. The Company generally charges off commercial loans when it is determined that the specific loan or a portion thereof is uncollectible. This determination is based on facts and circumstances of the individual loans and normally includes considering the viability of the related business, the value of any collateral, the ability and willingness of any guarantors to perform and the overall financial condition of the borrower. Partially charged-off loans continue to be evaluated on not less than 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 Company generally charges off consumer loans, or a portion thereof, as follows: residential mortgage loans and home equity loans are charged-off to the estimated fair value of their collateral (net of selling costs) when they become 180 days past due, and other loans (closed-end) are charged-off when they become 120 days past due. Loans with respect to which a bankruptcy notice is received or for which fraud is discovered are written down to the collateral value less costs to sell within 60 days of such notice or discovery. Revolving personal unsecured loans are charged off when they become 180 days past due. Credit cards are charged off when they are 180 days delinquent or within 60 days after the receipt of notification of the cardholder’s death or bankruptcy. Charge-offs are not required when it can be clearly demonstrated that repayment will occur regardless of delinquency status. Factors that would demonstrate repayment 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.

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

RICs and auto loans are charged off against the allowance in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. A net charge off represents the difference between the estimated net sales proceeds and the Company's net charge-offs decreased $133.4 millionrecorded investment in the related contract. Accounts in repossession that have been charged off and are pending liquidation are removed from loans and the related repossessed automobiles are included in Other assets in the Company's Consolidated Balance Sheets.

TDRs

TDRs are loans that have been modified for which the year ended December 31, 2016 comparedCompany has agreed to 2015.make certain concessions to customers to both meet the needs of the customers and maximize the ultimate recovery of the loan. TDRs occur when a borrower is experiencing financial difficulties and the loan is modified to provide a concession 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 on non-accrual status at the time of modification, unless the loan was performing immediately prior to modification and returned to accrual after a sustained period of repayment performance. Collateral dependent TDRs are generally not returned to accrual status. All costs incurred by the Company in connection with a TDR are expensed as incurred. The TDR classification remains on the loan until it is paid in full or liquidated.

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions and interest rate reductions. Commercial loan TDRs are generally restructured to allow for an upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically 12 months for monthly payment schedules). As TDRs, they will be 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.

Consumer charge-offs increased $230.3 million forLoan TDRs

The majority of the year ended December 31, 2016 compared to 2015. This increase was primarily due to a $251.1 million increase in charge-offs within the RICCompany's TDR balance is comprised of RICs and auto loan portfolio attributable to portfolio aging and mix shift, lower realized recovery rates, and smaller benefit from bankruptcy sales, partially offset by an $8.4 million decrease in charge-offs withinloans. The terms of the home equity loan portfolio and a $6.5 million decrease in home mortgage charge-offs. The increase in net charge-offsmodifications for the RIC and auto loan portfolio was substantially offset bygenerally include one or a smaller buildcombination of: a reduction of the ALLL primarily due to higher credit quality originations during 2016 compared to 2015.stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

Consumer recoveries increased $412.7 millionIn accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICs under which the consumer is allowed to defer a maximum of three payments per event to the end of the loan. More than 90% of deferrals granted are for two payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the year ended December 31, 2016 comparedlife of the loan for all automobile RICs is eight, while some marine and RV contracts have a maximum of twelve months extended to 2015. This increase was primarilyreflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs.

RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due tomore than 60 days. For loans on nonaccrual status, interest income is recognized on a $420.8 million increasecash basis. For TDR loans on nonaccrual status, the accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due.

At the time a deferral is granted on a RIC, all delinquent amounts may be deferred or paid, resulting in consumer autothe classification of the loan recoveries.

as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.

67104





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

Item 7.    Management’s DiscussionChanges in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and Analysiscash flow forecasts for loans classified as TDRs used in the determination of Financial Conditionthe adequacy of the ALLL 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 Resultstherefore 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 OperationsALLL and related provision for loan and lease losses.


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.

Consumer loan net charge-offsTDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status at the time of modification, and returned to accrual when they have made six consecutive on-time payments. In addition to those identified as TDRs above, loans discharged under Chapter 7 bankruptcy are considered TDRs and collateral-dependent, regardless of delinquency status. These loans are written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

TDR Impact to ALLL

The ALLL is established to recognize losses in funded loans that are probable and can be reasonably estimated. Prior to loans being placed in TDR status, the Company generally measures its allowance under a percentage of averageloss contingency methodology in which consumer loans was 5.2%with similar risk characteristics are pooled and loss experience information is monitored for the year ended December 31, 2016, compared to 5.7% for the year ended December 31, 2015.credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.

Commercial charge-offs increased $70.2 million forUpon TDR modification, the year ended December 31, 2016 comparedCompany generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence using the effective interest rate or fair value of collateral (less costs to 2015. This increase was primarily duesell). The amount of the required valuation allowance is equal to a $66.6 million increase in Corporate Banking charge-offs.the difference between the loan’s impaired value and the recorded investment.

Commercial recoveries increased $21.1 million forRIC TDRs that subsequently default continue to have impairment measured based on the year ended December 31, 2016 compared to 2015. This increase was primarily due to a $15.6 million increase in Commercial Real Estate recoveries, and a $7.6 million increase in Corporate Banking recoveries.

Commercial loan net charge-offs as a percentagedifference between the recorded investment of average commercial loans, including multifamily loans, were 0.3% for the year ended December 31, 2016 and 0.2% for the year ended December 31, 2015.


NON-INTEREST INCOME
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar Percentage
Consumer fees $499,591
 $495,727
 $3,864
 0.8 %
Commercial fees 190,248
 216,057
 (25,809) (11.9)%
Mortgage banking income, net 63,790
 108,569
 (44,779) (41.2)%
BOLI 57,796
 57,913
 (117) (0.2)%
Capital markets revenue 190,647
 141,667
 48,980
 34.6 %
Lease income 1,839,307
 1,482,850
 356,457
 24.0 %
Miscellaneous income (132,123) 383,425
 (515,548) (134.5)%
Net gain recognized in earnings 57,503
 18,827
 38,676
 205.4 %
Total non-interest income $2,766,759
 $2,905,035
 $(138,276) (4.8)%

Total non-interest income decreased $138.3 million for the year ended December 31, 2016 compared to the year ended 2015. The decrease for the year ended December 31, 2016 was primarily due to decreases in miscellaneous income attributable to the decrease in sale of operating leasesRIC and the mark-downpresent value of expected cash flows. For the Company's other consumer TDR portfolios, impairment on subsequently defaulted loans is generally measured based on the fair value associated with personal unsecured LHFS, partially offset by increases in lease income.of the collateral, if applicable, less its estimated cost to sell.

Consumer FeesTypically, 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 the fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

Consumer fees increased $3.9 million forImpaired loans

A loan is considered to be impaired when, based upon current information and events, it is probable that the year ended December 31, 2016 comparedCompany will be unable to 2015. This increase was primarilycollect all amounts due to a $9.7 million increase in insurance and investment activities. This was partially offset by a $5.8 million decrease in loan fee income, which was attributableaccording to the reductioncontractual terms of loans serviced by the Company due toloan. An insignificant delay (e.g., less than 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan sales and payoffs and lower reserve recourse releases in 2016.being identified as impaired.

Commercial Fees

Commercial fees consistsThe Company considers all of deposit overdraft fees, ATM deposit fees, cash management fees, letterits TDRs and all of credit fees, and loan syndication fees forits non-accrual commercial accounts. Commercial fees decreased $25.8loans in excess of $1 million forto be impaired as of the year ended December 31, 2016, comparedbalance sheet date. The Company may perform an impairment analysis on loans that fail to 2015.

Mortgage Banking Revenue
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar Percentage
Mortgage and multifamily servicing fees $42,996
 $45,151
 $(2,155) (4.8)%
Net gains on sales of residential mortgage loans and related securities 35,720
 49,682
 (13,962) (28.1)%
Net gains on sales of multifamily mortgage loans 6,368
 30,261
 (23,893) (79.0)%
Net gains / (losses) on hedging activities (723) 5,757
 (6,480) (112.6)%
Net (losses) / gains from changes in MSR fair value 3,887
 3,948
 (61) (1.5)%
MSR principal reductions (24,458) (26,230) 1,772
 (6.8)%
     Total mortgage banking income, net $63,790
 $108,569
 $(44,779) (41.2)%
meet this threshold if the nature of the collateral or business conditions warrant.

68105





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

Item 7.    Management’s DiscussionThe Company measures impairment on impaired loans based on the present value of expected future cash flows discounted at the loan's original effective interest rate, except that, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral, less the costs to sell, if the loan is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment and Analysisthe Company utilizes historical loan loss experience information as part of Financial Conditionits evaluation. When the Company determines that the present value of the estimated cash flows 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.

LHFS

LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Generally, residential loans are valued on an aggregate portfolio basis, and Resultscommercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Miscellaneous income, net. For residential mortgages for which the FVO is selected, direct loan origination fees are recorded in Miscellaneous income, net at origination.

All other LHFS which the Company does not have the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the lower of cost or fair value. When loans are transferred from HFI, the Company will recognize a charge-off to the ALLL, if warranted under the Company’s charge off policies. Any excess ALLL for the transferred loans is reversed through provision expense. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneous income, net as lower of cost or market adjustments.

Leases (as Lessor)

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease.

Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired in a business combination are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.

Lease payments due from customers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed if a delinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.

106




Mortgage banking income consistedNOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)

Under the accounting for impairment or disposal of fees associated with servicing loans not held bylong-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the Company, as well as originations, amortization, and changes inoperating lease, including the expected realizable fair value of MSRsthe leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and recourse reserves. Mortgage banking income also includes gainsthe proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of mortgage loans, home equity loans and home equity lines of credit, and MBS. Lastly, gains or losses on mortgage banking derivative and hedging transactionsleased assets are also included in Mortgage banking income.

Mortgage banking revenue decreased $44.8 millionMiscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. No impairment for leased assets was recognized during the yearyears ended December 31, 2016 compared to 2015. This decrease was primarily attributable to $23.9 million in lower gains on sales of multifamily mortgage loans, driven by lower provision releases, $14.0 million in lower gains on sales of residential mortgage loans driven by lower residential mortgage sale activity, and $6.5 million lower gains on hedging activity.2019, 2018, or 2017.

Since 2014, mortgage interest rates have remained stable, resulting in relative stability in mortgage banking fee fluctuations from rate changes.Leases (as Lessee)

The following table details certain residential mortgage rates for the Bank as of the dates indicated:
     
  30-Year Fixed 15-Year Fixed
December 31, 2014 3.99% 3.25%
March 31, 2015 3.88% 3.13%
June 30, 2015 4.13% 3.38%
September 30, 2015 3.88% 3.13%
December 31, 2015 4.13% 3.38%
March 31, 2016 3.63% 2.88%
June 30, 2016 3.50% 2.75%
September 30, 2016 3.50% 2.88%
December 31, 2016 4.38% 3.63%

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

Mortgage and multifamily servicing fees decreased $2.2 million for the year ended December 31, 2016 compared to 2015. At December 31, 2016 and December 31, 2015, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $621.1 million and $858.2 million, respectively. The decrease in loans serviced for others was primarily due to paydowns received during 2016.

Net gains on sales of residential mortgage loans and related securities decreased $14.0 million for the year ended December 31, 2016 compared to 2015. For the year ended December 31, 2016, the Company sold $2.2 billion of mortgage loans for a gain of $35.7 million, compared to $2.5 billion of loans sold for a gain of $49.7 million for the year ended December 31, 2015.

The Company periodically sells qualifying mortgage loans to the FHLMC, GNMA and FNMA in return for MBS issued by those agencies. The Company records these transactions as sales when the transfers met all the accounting criteria for a sale. For those loans sold to the agencies for which the Company retains the servicing rights, the Company recognizes the servicing rights at fair value. These loans are also generally sold with standard representation and warranty provisions which the Company recognizes at fair value. Any difference between the carrying value of the transferred mortgage loans and the fair value of MBS, servicing rights, and representation and warranty reserveslease liabilities are recognized as gain or lossupon lease commencement based on sale.

Net gains on sales of multifamily mortgage loans decreased $23.9 million for the year ended December 31, 2016 compared to 2015. This decrease was primarily due to a $3.0 million release in the FNMA recourse reserve for the year ended December 31, 2016 compared to a $29.9 million release for 2015.

The Company previously sold multifamily loans in the secondary market to FNMA while retaining servicing. In September 2009, the Bank elected to stop selling multifamily loans to FNMA and, since that time, has retained all production for the multifamily loan portfolio. Under the terms of the multifamily sales program with FNMA, the Company retained a portion of the credit risk associated with those loans. As a result of that agreement, the Company retains a 100% first loss position on each multifamily loan sold to FNMA under the program until the earlier to occur of (i) the aggregate approved losses on the multifamily loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole or (ii) all of the loans sold to FNMA under the program are fully paid off.


69





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



At December 31, 2016, the Company serviced loans with a principal balance of $341.7 million, for FNMA, compared to $552.1 million in 2015. These loans had a credit loss exposure of $34.4 million as of both December 31, 2016 and December 31, 2015. Losses, if any, resulting from representation and warranty defaults would be in addition to the Company's credit loss exposure. The servicing asset for these loans has completely amortized.

The Company has established a liability related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA. This liability represents the amount the Company estimated it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of lease payments over the lease term, discounted at the Company's estimated losses the portfolio is projectedrate of interest for a collateralized borrowing for a similar term. The lease term includes options to incur based upon specific internal information and an industry-based default curve withextend or terminate a range of estimated losses. At December 31, 2016 and December 31, 2015,lease when the Company hadconsiders it reasonably certain that such options will be exercised. Lease expense for operating leases is recognized on a liability of $3.8 millionstraight-line basis over the lease term.

Premises and $6.8 million, respectively, related toEquipment

Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the fair valuestraight-line method. Estimated useful lives are as follows:
Office buildings10 to 50 years
Leasehold improvements(1)
10 to 30 years
Software(2)
3 to 7 years
Furniture, fixtures and equipment3 to 10 years
Automobiles5 years
(1) Leasehold improvements are depreciated over the shorter of the retained credit exposureuseful lives of the assets or the remaining term of the leases.
(2) The standard depreciable period for multifamily loans sold to FNMA under this program.software is three years. However, for certain software implementation projects, a seven-year period is utilized.

Net gains/(losses) on hedging activities decreased $6.5 millionExpenditures for the year ended December 31, 2016, comparedmaintenance and repairs are charged to 2015. This variance for the year ended December 31, 2016 was primarily due to the decreaseOccupancy and equipment expense in the mortgage loan pipeline valuation and the Company's hedging strategy in the current mortgage rate environment.Consolidated Statements of Operations as incurred.

Net gains from changes in MSR fair value was $3.9 million for the year ended December 31, 2016, and a net gain of $3.9 million for 2015. The carrying value of the related MSRs at December 31, 2016 and December 31, 2015 was $146.6 million and $147.2 million, respectively. The MSR asset fair value changes for the year ended December 31, 2016 were the result of decreases in interest rates.

The Company recognized $24.5 million of principal reductions for the year ended December 31, 2016, compared to $26.2 million for 2015. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing and generally follows along with interest rates.

Equity Method InvestmentsCRITICAL ACCOUNTING ESTIMATES

Equity method investments gains/(losses), net consistsThis MD&A is based on the Consolidated Financial Statements and accompanying notes that have been prepared in accordance with GAAP. The significant accounting policies of income and losses on investments in unconsolidated entities and joint ventures in which the Company has an interest, but does not have a controlling interest. These include investmentsare described in community reinvestment projects and entities which own wind power generating projects. Equity method investments gains/(losses), net decreased $2.2 million for the year ended December 31, 2016, compared to 2015.

BOLI

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI decreased $0.1 million, for the year ended December 31, 2016 compared to 2015.

Capital Markets Revenue

Capital markets revenue increased $49.0 million for the year ended December 31, 2016, compared to 2015. The increase was primarily due to a $41.4 million increase in investment banking income and a $9.1 million increase in commission fees.

Lease Income

Lease income increased $356.5 million for the year ended December 31, 2016, compared to 2015. The average leased vehicle portfolio balance as of December 31, 2016 and December 31, 2015 was $9.1 billion and $7.5 billion, respectively. These increases were the result of the growth of the Company's lease portfolio.

Miscellaneous Income

Miscellaneous income decreased $515.5 million for the year ended December 31, 2016 compared to 2015, primarily due to additional lower of cost or market adjustments of $198.0 million on SC's personal unsecured portfolio. SC also earned $167.0 million less on lease and other miscellaneous sales for the year ended December 31, 2016, compared to 2015, primarily due to a lack of bulk loan and lease sales in 2016. Total other income decreased $332.8 million, including a $17.1 million decrease in miscellaneous income, mainly due to lower fair value adjustments on the Company's fair value option ("FVO") loan portfolio. For further discussion please see Note 181 to the Consolidated Financial Statements.

70





Item 7.    Management’s Discussion The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and Analysisjudgments that affect the reported amounts of Financial Conditionassets, liabilities, revenues and Resultsexpenses, and disclosure of Operations



Net gain/(losses) recognizedcontingent assets and liabilities. Actual results could differ from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, accordingly, have a greater possibility of producing results that could be materially different than originally reported. However, the Company is not currently aware of any likely events or circumstances that would result in earnings

The Company recognized $57.5 millionmaterially different results. Management identified accounting for ALLL and the reserve for unfunded lending commitments, estimates of gains forexpected residual values of leased vehicles subject to operating leases, accretion of discounts and subvention on RICs, goodwill, fair value measurements and income taxes as the year ended December 31, 2016Company's most critical accounting estimates, in net (losses)/gains on salethat they are important to the portrayal of investment
securitiesthe Company's financial condition and results and require management’s most difficult, subjective and complex judgments as a result of overall balance sheet and interest rate risk management. The net gain realized for the year ended December 31, 2016 was primarily comprisedneed to make estimates about the effects of the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, corporate debt securities with a book value of $1.4 billion for a gain of $5.9 million, MBS, including FHLMC residential debt securities and CMOs with a book value of $1.3 billion for a gain of $24.7 million, and state and municipal securities with a book value of $748.0 million for a gain of $19.9 million.

The Company recognized $18.8 million of gains for the year ended December 31, 2015, in net (losses)/gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net gain for the year ended December 31, 2015 was primarily comprised of the sale of state and municipal securities with a book value of $421.5 million for a gain of $12.1 million, the sale of corporate debt securities with a book value of $566.2 million for a gain of $6.7 million, and the sale of ABS with a book value of $683.9 million for a loss of $0.2 million, offset by other-than-temporary-impairment ("OTTI") of $1.1 million.matters that are inherently uncertain.


GENERAL AND ADMINISTRATIVE EXPENSES
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar Percentage
Compensation and benefits $1,719,645
 $1,598,497
 $121,148
 7.6 %
Occupancy and equipment expenses 618,597
 591,569
 27,028
 4.6 %
Technology expense 644,079
 601,865
 42,214
 7.0 %
Loan expense 415,267
 384,051
 31,216
 8.1 %
Lease expense 1,305,712
 1,121,531
 184,181
 16.4 %
Other administrative expenses 418,911
 426,887
 (7,976) (1.9)%
Total general and administrative expenses $5,122,211
 $4,724,400
 $397,811
 8.4 %
ALLL for Loan Losses and Reserve for Unfunded Lending Commitments

Total generalThe ALLL and administrative expenses increased $397.8 millionreserve for unfunded lending commitments represent management's best estimate of probable losses inherent in the loan portfolio. The adequacy of SHUSA's ALLL and reserve for unfunded lending commitments is regularly evaluated. This evaluation process is subject to several estimates and applications of judgment. Management's evaluation of the adequacy of the allowance to absorb loan and lease losses takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans that have loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. Management also considers loan quality, changes in the size and character of the loan portfolio, the amount of NPLs, and industry trends. Changes in these estimates could have a direct material impact on the provision for credit losses recorded in the Consolidated Statements of Operations and/or could result in a change in the recorded allowance and reserve for unfunded lending commitments. The loan portfolio represents the largest asset on the Consolidated Balance Sheets. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the ALLL and reserve for unfunded lending commitments in the Consolidated Balance Sheets. A discussion of the factors driving changes in the amount of the ALLL and reserve for unfunded lending commitments for the year ended December 31, 2016, compared to 2015. Factors contributing toperiods presented is included in the Credit Risk Management section of this increase were as follows:MD&A. 

CompensationThe ALLL includes: (i) an allocated allowance, which is comprised of allowances established on loans specifically evaluated for impairment and benefits expense increased $121.1 millionloans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends general economic conditions and other risk factors, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Generally, the year ended December 31, 2016 comparedCompany’s loans held for investment are carried at amortized cost, net of the ALLL. The ALLL includes the estimate of credit losses to 2015. be realized during the loss emergence period based on the recorded investment in the loan, including 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. Reserve levels are collectively reviewed for adequacy and approved quarterly.

The primary driver of this increase was the Company's headcount, in particular within its consumer finance subsidiary.
Occupancy and equipment expenses increased $27.0 million for the year ended December 31, 2016 from 2015. This was primarily due to an increase in depreciation expense for the year ended December 31, 2016 of $30.9 million due to more assets being placed in service. There was a decrease in rental expense, which was almost completely offset by an increase in maintenance and repair expense.
Technology services expense increased $42.2 million for the year ended December 31, 2016 compared to 2015. The increase was primarily dueallocated reserves are principally based on various models subject to the Company's increased technology services relating to Produban,Model Risk Management Framework. New models are approved by the Company's Model Risk Management Committee. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a Santander subsidiarydetailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and an increase in accounting and audit services expenses and outside bank service expense. Lease Losses Committee.

The increase was offset by a decrease in consulting service fees related to regulatory initiatives, including preparation for meeting the requirementsCompany's unallocated allowance is no more than 5% of the IHC which became effective on July 1, 2016.
Loan expense increased $31.2 millionoverall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for the year ended December 31, 2016 compared to 2015. This increase was primarily due to an increasecoverage of $51.0 million in loan collection expenses. This was offset by $19.9 million decrease in loan servicing and loan origination expenses, primarily associated with the activityinherent losses in the RICCompany's entire loan and autolease portfolio. Imprecisions include loss factors in the loan portfolio.
Lease expense increased $184.2 million forportfolio that may not have been discreetly contemplated in the year ended December 31, 2016 compared to 2015. This increase was primarily due to the continued growthgeneral and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's leased vehicle portfolio and depreciation associated with that portfolio.

historical unallocated ALLL positions are considered in light of these factors.

7146





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



OTHER EXPENSESValuation of Automotive Lease Assets and Residuals

The Company has significant investments in vehicles in SC's operating lease portfolio. In accounting for operating leases, management must make a determination at the beginning of the lease contract of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. At contract inception, the Company determines the projected residual value based on an internal evaluation of the expected future value. This evaluation is based on a proprietary model using internally-generated data that is compared against third-party, independent data for reasonableness. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a finance charge. However, since the customer is not obligated to purchase the vehicle at the end of the contract, the Company is exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of leased assets.

To account for residual risk, the Company depreciates automobile operating lease assets to estimated realizable value on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Periodically, the Company revises the projected value of the leased vehicle at termination based on current market conditions and other relevant data points, and adjusts depreciation expense appropriately over the remaining term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances, such as a systemic and material decline in used vehicle values occurs. These circumstances could include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices (which may have a pronounced impact on certain models of vehicles) or pervasive manufacturer defects (which may systemically affect the value of a particular brand or model). Impairment is determined to exist if the fair value of the leased asset is less than its carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by DCF. No such impairment was recognized in 2019, 2018, or 2017.

The Company's depreciation methodology for operating lease assets considers management's expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used vehicle values. The critical assumptions underlying the estimated carrying value of automobile lease assets include: (1) estimated market value information obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) our remarketing abilities, and (4) automobile manufacturer vehicle and marketing programs. Changes in these assumptions could have a significant impact on the value of the lease residuals. Expected residual values include estimates of payments from automobile manufacturers
related to residual support and risk-sharing agreements, if any. To the extent an automotive manufacturer is not able to fully honor its obligation relative to these agreements, the Company's depreciation expense would be negatively impacted.

Accretion of Discounts and Subvention on RICs

LHFI include the RIC portfolio which consists largely of nonprime automobile loans, and which are primarily acquired individually from dealers at a nonrefundable discount from the contractual principal amount. The Company also pays dealer participation on certain receivables. The amortization of discounts, subvention payments from manufacturers, and other origination costs are recognized as adjustments to the yield of the related contracts. The Company applies significant assumptions, including prepayment speeds, in estimating the accretion rates used to approximate effective yield.

The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield.

47





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Goodwill

The acquisition method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets acquired and liabilities assumed. The excess of the purchase price of an acquired business over the fair value of the identifiable assets and liabilities represents goodwill. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing.

As more fully described in Note 23 to the Consolidated Financial Statements, a reporting unit is an operating segment or one level below. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis on October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. As of December 31, 2019, the reporting units with assigned goodwill were Consumer and Business Banking, C&I, CRE & VF, CIB, and SC.

An entity's quantitative goodwill impairment analysis must be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, and that no impairment exists. An entity has an unconditional option to bypass the preceding qualitative assessment for any reporting unit in any period and proceed directly to the quantitative analysis of the goodwill impairment test.

The quantitative analysis requires a comparison of the fair value of each reporting unit to its carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, impairment is measured as the excess of the carrying amount over the fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit, and cannot subsequently be reversed even if the fair value of the reporting unit recovers. The Company utilizes the market capitalization approach to determine the fair value of its SC reporting unit, as it is a publicly traded company that has a single reporting unit. Determining the fair value of the remaining reporting units requires significant valuation inputs, assumptions, and estimates.

The Company determines the carrying value of each reporting unit using a risk-based capital approach. Certain of the Company's assets are assigned to a Corporate/Other category. These assets are related to the Company's corporate-only programs, such as BOLI, and are not employed in or related to the operations of a reporting unit or considered in determining the fair value of a reporting unit.

Goodwill impairment testing involves management's judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value. This is performed using widely-accepted valuation techniques, such as the guideline public company market approach (earnings and price-to-tangible book value multiples of comparable public companies), the market capitalization approach (share price of the reporting unit and control premium of comparable public companies), and the income approach (the DCF method). The Company uses a combination of these accepted methodologies to determine the fair valuation of reporting units. Several factors are taken into account, including actual operating results, future business plans, economic projections, and market data.

The guideline public company market approach ("market approach") includes earnings and price-to-tangible book value multiples of comparable public companies which were applied to the earnings and equity for all of the Company's reporting units. The market capitalization plus control premium approach was applied to the Company's SC reporting unit, as the SC reporting unit is a publicly traded subsidiary whose securities are traded in an active market.

In connection with the market capitalization plus control premium approach applied to the Company's SC reporting unit, the Company used SC's stock price as of the date of the annual impairment analysis. The Company also considered historical auto loan industry transactions and control premiums over the last three years in determining the control premium.


48





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The DCF method of the income approach incorporates the reporting units' forecasted cash flows, including a terminal value to estimate the fair value of cash flows beyond the final year of the forecasts. The discount rates utilized to obtain the net present value of the reporting units' cash flows were estimated using a capital asset pricing model. Significant inputs to this model include a risk-free rate of return, beta (which is a measure of the level of non-diversifiable risk associated with comparable companies for each specific reporting unit), market equity risk premium, and, in certain cases, additional premium for size and/or unsystematic company-specific risk factors. The Company utilized discount rates that it believes adequately reflect the risk and uncertainty in the financial markets. The Company estimated expected rates of equity returns based on historical market returns and risk/return rates for similar industries of the reporting unit. The Company uses its internal forecasts to estimate future cash flows, so actual results may differ from forecasted results.

All of the preceding fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions in the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impacts the estimated fair value of the aforementioned reporting units include such items as:

a prolonged downturn in the business environment in which the reporting units operate;
an economic recovery that significantly differs from our assumptions in timing or degree;
volatility in equity and debt markets resulting in higher discount rates and unexpected regulatory changes;
Specific to the SC reporting unit, a decrease in SC's share price would impact the fair value of the reporting segment.

Refer to the Financial Condition, Goodwill section of this MD&A for further details on the Company's goodwill, including the results of management's goodwill impairment analyses.

Fair Value Measurements

The Company uses fair value measurements to estimate the fair value of certain assets and liabilities for both measurement and disclosure purposes. Refer to Note 16 to the Consolidated Financial Statements for a description of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized. The Company follows the fair value hierarchy set forth in Note 16 to the Consolidated Financial Statements to prioritize the inputs utilized to measure fair value. The Company reviews and modifies, as necessary, the fair value hierarchy classifications on a quarterly basis. Accordingly, there may be reclassifications between hierarchy levels due to changes in inputs to the valuation techniques used to measure fair value.

The Company has numerous internal controls in place to ensure the appropriateness of fair value measurements, including controls over the inputs into and the outputs from the fair value measurements. Certain valuations are benchmarked to market indices when appropriate and available.

Considerable judgment is used in forming conclusions from observable market data used to estimate the Company's Level 2 fair value measurements and in estimating inputs to the Company's internal valuation models used to estimate Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, recovery rates and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, the Company's estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

49





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Income Taxes

The Company accounts for income taxes under the asset and liability method, which includes considerable judgment. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, including investments in subsidiaries. Deferred tax assets and liabilities are measured using enacted tax rates that apply or will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets. The critical assumptions used in the Company's deferred tax asset valuation allowance analysis are as follows: (a) the expectation of future earnings; (b) estimates of the Company's long-term annual growth rate, based on the Company's long-term economic outlook in the U.S.; (c) estimates of the dividend income payout ratio from the Company's consolidated subsidiary, SC, based on current policies and practices of SC; (d) estimates of book income to tax income differences, based on the analysis of historical differences and the historical timing of the reversal of temporary differences; (e) the ability to carry back losses to recoup taxes previously paid; (f) estimates of tax credits to be earned on current investments, based on the Company's evaluation of the credits applicable to each investment; (g) experience with operating loss and tax credit carryforwards not expiring unused; (h) estimates of applicable state tax rates based on current/most recent enacted tax rates and state apportionment calculations; (i) tax planning strategies; and (j) current tax laws. Significant judgment is required to assess future earnings trends and the timing of reversals of temporary differences. The Company makes certain assertions in regards to its investment in subsidiaries, which impact whether a deferred tax liability is recorded for the book over tax basis difference in the investment in these subsidiaries. This requires the Company to make judgments with respect to its ability to permanently reinvest its earnings in foreign subsidiaries and its ability to recover its investment in domestic subsidiaries in a tax free manner.

The Company bases its expectations of future earnings, which are used to assess the realizability of its deferred tax assets, on financial performance forecasts of its operating subsidiaries and unconsolidated investees. The budgets and estimates used in these forecasts are approved by the Company's management, and the assumptions underlying the forecasts are reviewed at least annually and adjusted as necessary based on current developments or when new information becomes available. The updates made and the variances between the Company's forecasts and its actual performance have not been significant enough to alter the Company's conclusions with regard to the realizability of its deferred tax asset. The Company continues to forecast sufficient taxable income to fully realize its current deferred tax assets. Forecasted taxable income is subject to changes in overall market and global economic conditions.

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws in the U.S., its states and municipalities, and abroad. Actual income taxes paid may vary from estimates depending on 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. Interest and penalties on income tax payments are included within income tax expense in the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority assuming full knowledge of the position and all relevant facts. See Note 15 of the Consolidated Financial Statements for details on the Company's income taxes.


50





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



RESULTS OF OPERATIONS

The following MD&A compares and discusses operating results for the years ended December 31, 2019 and 2018. For a discussion of our results of operations for 2018 versus 2017, See Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation" included in our 2018 Form 10-K, filed with the SEC on March 15, 2019.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar Percentage
Amortization of intangibles $70,034
 $79,921
 $(9,887) (12.4)%
Deposit insurance premiums and other costs 77,976
 61,503
 16,473
 26.8 %
Loss on debt extinguishment 114,232
 
 114,232
 100%
Equity investment expense, net 11,054
 8,818
 2,236
 25.4 %
Impairment of goodwill 
 4,507,095
 (4,507,095) (100.0)%
Investment income/expense on qualified affordable housing projects 1,741
 155
 1,586
 1,023.2 %
Total other expenses $275,037
 $4,657,492
 $(4,382,455) (94.1)%
 Year Ended December 31, Year To Date Change
(dollars in thousands)2019 2018 Dollar increase/(decrease) Percentage
Net interest income$6,442,768
 $6,344,850
 $97,918
 1.5 %
Provision for credit losses(2,292,017) (2,339,898) (47,881) (2.0)%
Total non-interest income3,729,117
 3,244,308
 484,809
 14.9 %
General, administrative and other expenses(6,365,852) (5,832,325) 533,527
 9.1 %
Income before income taxes1,514,016

1,416,935
 97,081
 6.9 %
Income tax provision472,199
 425,900
 46,299
 10.9 %
Net income$1,041,817
 $991,035
 $50,782
 5.1 %
Net income attributable to non-controlling interest288,648
 283,631
 5,017
 1.8 %
Net income attributable to SHUSA$753,169
 $707,404
 $45,765
 6.5 %

Total other expenses decreased $4.4The Company reported pre-tax income of $1.5 billion for the year ended December 31, 20162019, compared to 2015. The primary factorspre-tax income of $1.4 billion for the corresponding period in 2018. Factors contributing to this decrease were:change have been discussed further in the sections below.

Amortization
51





Item 7.    Management’s Discussion and Analysis of intangibles decreased $9.9Financial Condition and Results of Operations



                
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
 YEAR ENDED DECEMBER 31, 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)VolumeRate
EARNING ASSETS               
INVESTMENTS AND INTEREST EARNING DEPOSITS$22,175,778
 $551,713
 2.49% $21,342,992
 $522,677
 2.45% $29,036
$20,470
$8,566
LOANS(3):
            


Commercial loans33,452,626
 1,430,831
 4.28% 31,416,207
 1,325,001
 4.22% 105,830
86,791
19,039
Multifamily8,398,303
 346,766
 4.13% 8,191,487
 328,147
 4.01% 18,619
8,520
10,099
Total commercial loans41,850,929
 1,777,597
 4.25% 39,607,694
 1,653,148
 4.17% 124,449
95,311
29,138
Consumer loans:               
Residential mortgages9,959,837
 400,943
 4.03% 9,716,021
 392,660
 4.04% 8,283
9,189
(906)
Home equity loans and lines of credit5,081,252
 256,030
 5.04% 5,602,240
 261,745
 4.67% (5,715)(38,604)32,889
Total consumer loans secured by real estate15,041,089
 656,973
 4.37% 15,318,261
 654,405
 4.27% 2,568
(29,415)31,983
RICs and auto loans32,594,822
 4,972,829
 15.26% 27,559,139
 4,570,641
 16.58% 402,188
712,717
(310,529)
Personal unsecured2,449,744
 664,069
 27.11% 2,362,910
 630,394
 26.68% 33,675
23,407
10,268
Other consumer(4)
374,712
 27,014
 7.21% 526,170
 37,788
 7.18% (10,774)(10,932)158
Total consumer50,460,367
 6,320,885
 12.53% 45,766,480
 5,893,228
 12.88% 427,657
695,777
(268,120)
Total loans92,311,296
 8,098,482
 8.77% 85,374,174
 7,546,376
 8.84% 552,106
791,088
(238,982)
Intercompany investments
 
 % 3,572
 142
 3.98% (142)(142)
TOTAL EARNING ASSETS114,487,074
 8,650,195
 7.56% 106,720,738
 8,069,195
 7.56% 581,000
811,416
(230,416)
Allowance for loan losses(5)
(3,802,702)     (3,835,182)        
Other assets(6)
31,624,211
     28,346,465
        
TOTAL ASSETS$142,308,583
     $131,232,021
        
INTEREST-BEARING FUNDING LIABILITIES               
Deposits and other customer related accounts:               
Interest-bearing demand deposits$10,724,077
 $83,794
 0.78% $9,116,631
 $40,355
 0.44% $43,439
$8,071
$35,368
Savings5,794,992
 13,132
 0.23% 5,887,341
 12,325
 0.21% 807
(159)966
Money market24,962,744
 317,300
 1.27% 25,308,245
 248,683
 0.98% 68,617
(3,321)71,938
CDs8,291,400
 160,245
 1.93% 5,989,993
 87,765
 1.47% 72,480
39,944
32,536
TOTAL INTEREST-BEARING DEPOSITS49,773,213
 574,471
 1.15% 46,302,210
 389,128
 0.84% 185,343
44,535
140,808
BORROWED FUNDS:               
FHLB advances, federal funds, and repurchase agreements5,471,080
 143,804
 2.63% 2,066,575
 53,674
 2.60% 90,130
89,499
631
Other borrowings41,710,311
 1,489,152
 3.57% 38,152,038
 1,281,401
 3.36% 207,751
124,401
83,350
TOTAL BORROWED FUNDS (7)
47,181,391
 1,632,956
 3.46% 40,218,613
 1,335,075
 3.32% 297,881
213,900
83,981
TOTAL INTEREST-BEARING FUNDING LIABILITIES96,954,604
 2,207,427
 2.28% 86,520,823
 1,724,203
 1.99% 483,224
258,435
224,789
Noninterest bearing demand deposits14,572,605
     15,117,229
        
Other liabilities(8)
6,141,813
     5,490,385
        
TOTAL LIABILITIES117,669,022
     107,128,437
        
STOCKHOLDER’S EQUITY24,639,561
     24,103,584
        
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$142,308,583
     $131,232,021
        
                
NET INTEREST SPREAD (9)
    5.28%     5.57%    
NET INTEREST MARGIN (10)
    5.63%     5.95%    
NET INTEREST INCOME (11)
  $6,442,768
     $6,344,850
      
(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 LHFS.
(4)Other consumer primarily includes RV and marine loans.
(5)Refer to Note 4 to the 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 9 to the Consolidated Financial Statements for further discussion.
(7)Refer to Note 11 to the 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.



52





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



NET INTEREST INCOME
 Year Ended December 31, YTD Change
(dollars in thousands)2019 2018 Dollar increase/(decrease) Percentage
INTEREST INCOME:       
Interest-earning deposits$174,189
 $137,753
 $36,436
 26.5 %
Investments AFS280,927
 297,557
 (16,630) (5.6)%
Investments HTM70,815
 68,525
 2,290
 3.3 %
Other investments25,782
 18,842
 6,940
 36.8 %
Total interest income on investment securities and interest-earning deposits551,713
 522,677
 29,036
 5.6 %
Interest on loans8,098,482
 7,546,376
 552,106
 7.3 %
Total interest income8,650,195
 8,069,053
 581,142
 7.2 %
INTEREST EXPENSE:    
 
Deposits and customer accounts574,471
 389,128
 185,343
 47.6 %
Borrowings and other debt obligations1,632,956
 1,335,075
 297,881
 22.3 %
Total interest expense2,207,427
 1,724,203
 483,224
 28.0 %
NET INTEREST INCOME$6,442,768
 $6,344,850
 $97,918
 1.5 %

Net interest income increased $97.9 million for the year ended December 31, 20162019 compared to 2015. This decrease was primarily due to the Company's core deposit intangibles2018.

Interest Income on Investment Securities and purchased credit card relationships from its acquisitions in 2006Interest-Earning Deposits

Interest income on investment securities and before becoming fully amortized in the second quarter of 2016.
Deposit insurance premiums and other expensesinterest-earning deposits increased $16.5$29.0 million for the year ended December 31, 2016,2019 compared to 2015.2018. The average balances of investment securities and interest-earning deposits for the year ended December 31, 2019 was $22.2 billion with an average yield of 2.49%, compared to an average balance of $21.3 billion with an average yield of 2.45% for the corresponding period in 2018. The increase in interest income on investment securities and interest-earning deposits for the year ended December 31, 2019 was primarily due to an increase in the average yield on interest-earning deposits resulting from 2018 increases to the federal funds rate. During 2019, the federal funds rate was lowered three times; this has had an effect of partially offsetting increases in interest income on deposits and investments.

Interest Income on Loans

Interest income on loans increased $552.1 million for the year ended December 31, 2019, compared to 2018. This increase was primarily due to the growth of total loans. The average balance of total loans increased $6.9 billion for the year ended December 31, 2019 compared to 2018. This overall increase in loans was primarily driven by the continued growth of the commercial portfolio, auto loans and RICs; however, the average rate has decreased on the RIC portfolio due to more prime loan originations as a result of the SBNA origination program.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts increased $185.3 million for the year ended December 31, 2019 compared to 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 balance of total interest-bearing deposits was $49.8 billion with an average cost of 1.15% for the year ended December 31, 2019, compared to an average balance of $46.3 billion with an average cost of 0.84% for the year ended December 31, 2018.


53





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $297.9 million for the year ended December 31, 2019 compared to 2018. This increase in FDIC insurance premiumswas due to higher interest rates being paid and an additional $13.9 million FDIC quarterly surcharge which commenced in the third quarter of 2016.
There were $114.2 million of losses on debt extinguishmentincreased balances during the year ended December 31, 2016, compared to no such losses2019. The average balance of total borrowings was $47.2 billion with an average cost of 3.46% for the year ended December 31, 2015. These expenses were primarily related2019, compared to early termination fees incurred by the Company in associationan average balance of $40.2 billion with the 2016 terminationan average cost of FHLB advances. During the year ended December 31, 2016, the Bank terminated $3.8 billion3.32% for 2018. The average balance of FHLB advances.
There was no impairment of goodwill recordedborrowed funds increased for the year ended December 31, 2016. The Company recorded an impairment of goodwill2019 compared to the year ended December 31, 2018, primarily due to increases in the amount of $4.5 billion in 2015 related its SC reporting unit.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 was primarily comprised of the provision for loan and lease losses for the years ended December 31, 2019 and December 31, 2018 of $2.3 billion and $2.4 billion, respectively.
  Year Ended December 31, YTD Change
(in thousands) 2019 2018 DollarPercentage
ALLL, beginning of period $3,897,130
 $3,994,887
 $(97,757)(2.4)%
Charge-offs:       
Commercial (185,035) (108,750) (76,285)70.1 %
Consumer (5,364,673) (4,974,547) (390,126)7.8 %
Unallocated (275) 
 (275)100.0 %
Total charge-offs (5,549,983) (5,083,297) (466,686)9.2 %
Recoveries:       
Commercial 53,819
 60,140
 (6,321)(10.5)%
Consumer 2,954,391
 2,572,607
 381,784
14.8 %
Total recoveries 3,008,210
 2,632,747
 375,463
14.3 %
Charge-offs, net of recoveries (2,541,773) (2,450,550) (91,223)3.7 %
Provision for loan and lease losses (1)
 2,290,832
 2,352,793
 (61,961)(2.6)%
ALLL, end of period $3,646,189
 $3,897,130
 $(250,941)(6.4)%
Reserve for unfunded lending commitments, beginning of period $95,500
 $109,111
 $(13,611)(12.5)%
Release of reserves for unfunded lending commitments (1)
 1,185
 (12,895) 14,080
(109.2)%
Loss on unfunded lending commitments (4,859) (716) (4,143)578.6 %
Reserve for unfunded lending commitments, end of period 91,826
 95,500
 (3,674)(3.8)%
Total ACL, end of period $3,738,015
 $3,992,630
 $(254,615)(6.4)%
(1)The provision for credit losses in the 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 $91.2 million for the year ended December 31, 2019 compared to 2018.

Consumer charge-offs increased $390.1 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of a $391.2 million increase in RIC and consumer auto loan charge-offs.

Consumer recoveries increased $381.8 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of a $345.6 million increase in RIC and consumer auto loan recoveries, and a $21.1 million increase in indirect purchased loan recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 4.8% for the year ended December 31, 2019 compared to 5.2% in 2018.

54





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Commercial charge-offs increased $76.3 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of an $89.1 million increase in Corporate Banking charge-offs.

Commercial recoveries decreased $6.3 million for the year ended December 31, 2019 compared to 2018.

NON-INTEREST INCOME
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Consumer fees $391,495
 $413,934
 $(22,439) (5.4)%
Commercial fees 157,351
 154,213
 3,138
 2.0 %
Lease income 2,872,857
 2,375,596
 497,261
 20.9 %
Miscellaneous income, net 301,598
 307,282
 (5,684) (1.8)%
Net gains/(losses) recognized in earnings 5,816
 (6,717) 12,533
 186.6 %
Total non-interest income $3,729,117
 $3,244,308
 $484,809
 14.9 %

Total non-interest income increased $484.8 million for the year ended December 31, 2019 compared to 2018. This increase was primarily due to an increase in lease income. The increase was partially offset by decreases in consumer fees due to the reduction of loans serviced by the Company.

Consumer fees

Consumer fees decreased $22.4 million for the year ended December 31, 2019 compared to 2018. This decrease was primarily related to a decrease in loan fees income, which was attributable to a reduction in loans serviced by the Company.

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 year ended December 31, 2019 compared to 2018.

Lease income

Lease income increased $497.3 million for the year ended December 31, 2019 compared to 2018. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $15.3 billion for the year ended December 31, 2019, compared to $12.3 billion for 2018.

Miscellaneous income/(loss)
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Mortgage banking income, net $44,315
 $34,612
 $9,703
 28.0 %
BOLI 62,782
 58,939
 3,843
 6.5 %
Capital market revenue 197,042
 165,392
 31,650
 19.1 %
Net gain on sale of operating leases 135,948
 202,793
 (66,845) (33.0)%
Asset and wealth management fees 175,611
 165,765
 9,846
 5.9 %
Loss on sale of non-mortgage loans (397,965) (351,751) (46,214) (13.1)%
Other miscellaneous income, net 83,865
 31,532
 52,333
 166.0 %
     Total miscellaneous income/(loss) $301,598
 $307,282
 $(5,684) (1.8)%

Miscellaneous income decreased $5.7 million for the year ended December 31, 2019 compared to 2018. This decrease was primarily due to a decrease in net gain on sale of operating leases and an increase in loss on sale of non-mortgage loans, partially offset by an increase in capital market revenue and an increase in Other miscellaneous income due to lower losses on securitization transactions.

55





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar Percentage
Compensation and benefits $1,945,047
 $1,799,369
 $145,678
 8.1 %
Occupancy and equipment expenses 603,716
 659,789
 (56,073) (8.5)%
Technology, outside services, and marketing expense 656,681
 590,249
 66,432
 11.3 %
Loan expense 405,367
 384,899
 20,468
 5.3 %
Lease expense 2,067,611
 1,789,030
 278,581
 15.6 %
Other expenses 687,430
 608,989
 78,441
 12.9 %
Total general, administrative and other expenses $6,365,852
 $5,832,325
 $533,527
 9.1 %

Total general, administrative and other expenses increased $533.5 million for the year ended December 31, 2019 compared to 2018. The most significant factors contributing to these increases were as follows:

Technology, outside services, and marketing expense increased $66.4 million for the year ended December 31, 2019, compared to 2018. The increase was primarily due to increases in outside service expenses.
Lease expense increased $278.6 million for the year ended December 31, 2019 compared to 2018. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio.
Other expenses increased $78.4 million for the year ended December 31, 2019, compared to the corresponding period in 2018. This increase was primarily attributable to an increase in legal expenses and investments in qualified housing, offset by a decrease in operational risk. FDIC insurance premiums for the year ended December 31, 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 17 to the Consolidated Financial Statements.

INCOME TAX PROVISION

An income tax provision of $313.7$472.2 million was recorded for the year ended December 31, 2016,2019, compared to a benefitan income tax provision of $599.8$425.9 million for 2018. This resulted in an ETR of 31.2% for the year ended December 31, 2015. This resulted in an effective tax rate ("ETR") of 32.9% for the year ended December 31, 2016,2019, compared to 16.4%30.1% for the year ended December 31, 2015.

The income tax provision in 2016 included a provision of $36.0 million related to increases in reserves regarding a dispute with the United States for certain financing transactions. The lower income tax provision in 2015 was primarily due to a $996.1 million reduction in the deferred tax liability related to an impairment of goodwill with respect to the Company's investment in SC.

During 2015, the Company also increased the reserve by $104.2 million for income taxes under this dispute with the United States for certain financing transactions.2018.

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 15 to the Consolidated Financial Statements for the year-to-year comparison of the ETR.


LINE OF BUSINESS RESULTS

General

The Company's segments at December 31, 20162019 consisted of Consumer and Business Banking, Commercial Banking, Commercial Real Estate ("CRE"), GCB,C&I, 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 23 to the Consolidated Financial Statements.


72
56





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Results Summary

Consumer and Business Banking
 Year Ended December 31, YTD ChangeYear Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar increase/(decrease) Percentage2019 2018 Dollar increase/(decrease) Percentage
Net interest income $1,099,097
 $865,044
 $234,053
 27.1 %$1,504,887
 $1,298,571
 $206,316
 15.9 %
Total non-interest income 384,177
 301,758
 82,419
 27.3 %359,849
 310,839
 49,010
 15.8 %
Provision for credit losses 56,440
 42,629
 13,811
 32.4 %156,936
 100,523
 56,413
 56.1 %
Total expenses 1,565,151
 1,625,814
 (60,663) (3.7)%1,655,923
 1,575,407
 80,516
 5.1 %
Loss before income taxes (138,317) (501,641) 363,324
 72.4 %
Income/(loss) before income taxes51,877
 (66,520) 118,397
 178.0 %
Intersegment revenue 2,523
 1,207
 1,316
 109.0 %2,093
 2,507
 (414) (16.5)%
Total assets 19,828,173
 19,997,036
 (168,863) (0.8)%23,934,172
 21,024,740
 2,909,432
 13.8 %

Consumer and Business Banking reported a lossincome before income taxes of $138.3$51.9 million for the year ended December 31, 20162019, compared to losses before income taxes of $501.6$66.5 million for the year ended December 31, 2015.2018. Factors contributing to this change were as follows:were:

Net interest income increased $234.1$206.3 million for the year ended December 31, 2016 compared2019compared to 2015.2018. This increase was primarily driven by deposit product margin due to a higher interest rate environment combined with increased auto loan volumes.
Total non-interestNon-interest income increased $82.4by $49.0 million for the year ended December 31, 2016 compared2019compared to 2015.2018. This increase was the result of gains on the sale of 14 branches and gains on the sale of conforming mortgage loan portfolios.
The provision for credit losses increased by $13.8$56.4 million for the year ended December 31, 20162019 compared to 2015.2018. This increase was due to reserve builds for the large growth of the auto portfolio in 2019.
Total expenses decreased $60.7assets increased $2.9 billion for the year ended December 31, 2019 compared to 2018. This increase was primarily driven by an increase in auto loans.

C&I Banking
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $231,270
 $228,491
 $2,779
 1.2 %
Total non-interest income 71,323
 82,435
 (11,112) (13.5)%
(Release of) /provision for credit losses 31,796
 (35,069) 66,865
 190.7 %
Total expenses 238,681
 225,495
 13,186
 5.8 %
Income before income taxes 32,116
 120,500
 (88,384) (73.3)%
Intersegment revenue 6,377
 4,691
 1,686
 35.9 %
Total assets 7,031,238
 6,823,633
 207,605
 3.0 %

C&I reported income before income taxes of $32.1 million for the year ended December 31, 20162019, compared to 2015.

Commercial Banking
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar increase/(decrease) Percentage
Net interest income $349,834
 $276,407
 $73,427
 26.6 %
Total non-interest income 62,882
 53,052
 9,830
 18.5 %
Provision for credit losses 79,891
 17,398
 62,493
 359.2 %
Total expenses 210,984
 184,365
 26,619
 14.4 %
Income before income taxes 121,841
 127,696
 (5,855) (4.6)%
Intersegment revenue 4,127
 4,146
 (19) (0.5)%
Total assets 11,962,637
 16,581,175
 (4,618,538) (27.9)%

Commercial Banking reported income before income taxes of $121.8$120.5 million for 2018. Contributing to these changes were:

The provision for credit losses increased $66.9 million for the year ended December 31, 2016,2019 compared to 2018. This increase was 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.


57





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



CRE & VF
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $417,418
 $413,541
 $3,877
 0.9 %
Total non-interest income 11,270
 6,643
 4,627
 69.7 %
(Release of) /provision for credit losses 13,147
 15,664
 (2,517) (16.1)%
Total expenses 135,319
 116,392
 18,927
 16.3 %
Income before income taxes 280,222
 288,128
 (7,906) (2.7)%
Intersegment revenue 5,950
 4,729
 1,221
 25.8 %
Total assets 19,019,242
 18,888,676
 130,566
 0.7 %

CRE & VF reported income before income taxes of $280.2 million for the year ended December 31, 2019 compared to income before income taxes of $127.7$288.1 million for 2018. The results of this reportable segment were relatively consistent period-over-period.

CIB
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $152,083
 $136,582
 $15,501
 11.3 %
Total non-interest income 208,955
 195,023
 13,932
 7.1 %
(Release of)/Provision for credit losses 6,045
 9,335
 (3,290) (35.2)%
Total expenses 270,226
 234,949
 35,277
 15.0 %
Income before income taxes 84,767
 87,321
 (2,554) (2.9)%
Intersegment expense (14,420) (12,362) (2,058) (16.6)%
Total assets 9,943,547
 8,521,004
 1,422,543
 16.7 %

CIB reported income before income taxes of $84.8 million for the year ended December 31, 2015.2019, compared to income before income taxes of $87.3 million for 2018. Factors contributing to this change were as follows:were:

Net interest incomeTotal expenses increased $73.4$35.3 million for the year ended December 31, 20162019 compared to 2015. 2018, due to higher compensation related to higher headcount.
Total average gross loans were $11.9assets increased $1.4 billion for the year ended December 31, 20162019 compared to $10.4 billion2018, primarily driven by an increase in 2015.loan balances in the global transaction banking portfolio as a result of generating business with new customers.
Total non-interest
Other
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $72,535
 $240,110
 $(167,575) (69.8)%
Total non-interest income 415,473
 402,006
 13,467
 3.3 %
(Release of)/Provision for credit losses (7,322) 24,254
 (31,576) (130.2)%
Total expenses 770,254
 786,543
 (16,289) (2.1)%
Loss before income taxes (274,924) (168,681) (106,243) (63.0)%
Intersegment (expense)/revenue 
 435
 (435) (100.0)%
Total assets 40,648,746
 36,416,377
 4,232,369
 11.6 %

58





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The Other category reported losses before income increased $9.8taxes of $274.9 million for the year ended December 31, 20162019 compared to 2015.losses before income taxes of $168.7 million for 2018. Factors contributing to this change were:
The provision for credit losses increased $62.5
Net interest income decreased $167.6 million for the year ended December 31, 20162019 compared to 2015, primarily driven by reserves2018, due to higher interest rates.
The provision for the energy finance business line.
Total expenses increased $26.6credit losses decreased $31.6 million for the year ended December 31, 20162019 compared to 2015.2018, due to the release of reserves related to the sale of loan portfolios at BSPR, and loan portfolios that were in run-off.

SC

The 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.

  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $3,971,826
 $3,958,280
 $13,546
 0.3 %
Total non-interest income 2,760,370
 2,297,517
 462,853
 20.1 %
Provision for credit losses 2,093,749
 2,205,585
 (111,836) (5.1)%
Total expenses 3,284,179
 2,857,944
 426,235
 14.9 %
Income before income taxes 1,354,268
 1,192,268
 162,000
 13.6 %
Intersegment revenue 
 
 
 0.0%
Total assets 48,922,532
 43,959,855
 4,962,677
 11.3 %

SC reported income before income taxes of $1.4 billion for the year ended December 31, 2019, compared to income before income taxes of $1.2 billion for 2018. Contributing to this change were:

Total non-interest income increased $462.9 million for the year ended December 31, 2019 compared to 2018, due to increasing operating lease income from the continued growth in the operating lease vehicle portfolio.
The provision of credit losses decreased $111.8 million for the year ended December 31, 2019 compared to 2018, due to lower TDR balances and better recovery rates.
Total expenses increased $426.2 million for the year ended December 31, 2019 compared to 2018, due to increasing lease expense from the continued growth in the operating lease vehicle portfolio.
Total assets increased $5.0 billion for the year ended December 31, 2019 compared to 2018, due to continued growth in RICs and operating lease receivables. This growth was driven by increased originations.

59





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's LHFI portfolioconsisted of the following at the dates indicated:
  December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015
(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial LHFI:                    
CRE $8,468,023
 9.1% $8,704,481
 10.0% $9,279,225
 11.5% $10,112,043
 11.8% $9,846,236
 11.3%
C&I 16,534,694
 17.8% 15,738,158
 18.1% 14,438,311
 17.9% 18,812,002
 21.9% 20,908,107
 24.0%
Multifamily 8,641,204
 9.3% 8,309,115
 9.5% 8,274,435
 10.1% 8,683,680
 10.1% 9,438,463
 10.8%
Other commercial 7,390,795
 8.2% 7,630,004
 8.8% 7,174,739
 8.9% 6,832,403
 8.0% 6,257,072
 7.2%
Total commercial loans (1)
 41,034,716
 44.4% 40,381,758
 46.4% 39,166,710
 48.4% 44,440,128
 51.8% 46,449,878
 53.3%
                     
Consumer loans secured by real estate:                    
Residential mortgages 8,835,702
 9.5% 9,884,462
 11.4% 8,846,765
 11.0% 7,775,272
 9.1% 7,566,301
 8.7%
Home equity loans and lines of credit 4,770,344
 5.1% 5,465,670
 6.3% 5,907,733
 7.3% 6,001,192
 7.1% 6,151,232
 7.1%
Total consumer loans secured by real estate 13,606,046
 14.6% 15,350,132
 17.7% 14,754,498
 18.3% 13,776,464
 16.2% 13,717,533
 15.8%
                     
Consumer loans not secured by real estate:                    
RICs and auto loans 36,456,747
 39.3% 29,335,220
 33.7% 24,966,121
 30.9% 25,573,721
 29.8% 24,647,798
 28.3%
Personal unsecured loans 1,291,547
 1.4% 1,531,708
 1.8% 1,285,677
 1.6% 1,234,094
 1.4% 1,177,998
 1.4%
Other consumer 316,384
 0.3% 447,050
 0.4% 617,675
 0.8% 795,378
 0.8% 1,032,579
 1.2%
                     
Total consumer loans 51,670,724
 55.6% 46,664,110
 53.6% 41,623,971
 51.6% 41,379,657
 48.2% 40,575,908
 46.7%
Total LHFI $92,705,440
 100.0% $87,045,868
 100.0% $80,790,681
 100.0% $85,819,785
 100.0% $87,025,786
 100.0%
                     
Total LHFI with:                    
Fixed $61,775,942
 66.6% $56,696,491
 65.1% $50,703,619
 62.8% $51,752,761
 60.3% $52,283,715
 60.1%
Variable 30,929,498
 33.4% 30,349,377
 34.9% 30,087,062
 37.2% 34,067,024
 39.7% 34,742,071
 39.9%
Total LHFI $92,705,440
 100.0% $87,045,868
 100.0% $80,790,681
 100.0% $85,819,785
 100.0% $87,025,786
 100.0%
(1) As of December 31, 2019, the Company had $395.8 million of commercial loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans increased approximately $653.0 million, or 1.6%, from December 31, 2018 to December 31, 2019. This increase was comprised of increases in C&I loans of $796.5 million and multifamily loans of $332.1 million, offset by decreases in other commercial loans of $239.2 million, and CRE loans of $236.5 million. The increase is reflective of continued investment of resources to grow the commercial business.

  At December 31, 2019, Maturing
(in thousands) 
In One Year
Or Less
 
One to Five
Years
 
After Five
Years
 
Total (1)
CRE loans $1,748,087
 $5,245,277

$1,474,659
 $8,468,023
C&I and other commercial 10,683,269
 11,367,553

1,990,960
 24,041,782
Multifamily loans 734,815
 5,447,661

2,458,728
 8,641,204
Total $13,166,171

$22,060,491

$5,924,347
 $41,151,009
Loans with:        
Fixed rates $4,815,879
 $8,569,337

$3,455,594
 $16,840,810
Variable rates 8,350,292
 13,491,154

2,468,753
 24,310,199
Total $13,166,171

$22,060,491

$5,924,347
 $41,151,009
(1) Includes LHFS.

60





Item 7.    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 $1.7 billion, or 11.4%, from December 31, 2018 to December 31, 2019. This decrease was comprised of a decrease in the residential mortgage portfolio of $1.0 billion, primarily due to the sale of residential mortgage loans to the FNMA in 2019, and a decrease in the home equity loans and lines of credit portfolio of $695.3 million.

Consumer Loans Not Secured By Real Estate

RICs and auto loans

RICs and auto loans increased $7.1 billion, or 24.3%, from December 31, 2018 to December 31, 2019. The increase in the RIC and auto loan portfolio was primarily due to an increase of purchased financial receivables from third-party lenders and originations, net of securitizations. 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 are pledged against warehouse lines or securitization bonds. Refer to further discussion of these in Note 11 to the Consolidated Financial Statements.

As of December 31, 2019, 66.2% (includes loans with no FICO score equivalent to 8.7% of the total portfolio) of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a FICO score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. While underwriting guidelines are 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 decreased 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, DTI ratios, 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 December 31, 2019, a typical RIC was originated with an average annual percentage rate of 16.3% and was purchased from the dealer at a premium of 0.5%. 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 December 31, 2019 by $370.8 million.

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 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 December 31, 2019, SC's personal unsecured portfolio was held-for-sale and thus does not have a related allowance.

61





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 Committees 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, 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, credit scores, and adherence to underwriting policies that emphasize conservative LTV ratios of generally no more than 80%. Residential mortgage loans originated or purchased in excess of an 80% LTV ratio are generally insured by private mortgage insurance, unless otherwise guaranteed or insured by the Federal, state, or local government. SHUSA also utilizes underwriting standards which comply with those of the FHLMC or 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.

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.


62





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 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) December 31, 2019 December 31, 2018 Dollar Percentage
Non-accrual loans:        
Commercial:        
CRE $83,117
 $88,500
 $(5,383) (6.1)%
C&I 153,428
 189,827
 (36,399) (19.2)%
Multifamily 5,112
 13,530
 (8,418) (62.2)%
Other commercial 31,987
 72,841
 (40,854) (56.1)%
Total commercial loans 273,644
 364,698
 (91,054) (25.0)%
         
Consumer loans secured by real estate:  
  
    
Residential mortgages 134,957
 216,815
 (81,858) (37.8)%
Home equity loans and lines of credit 107,289
 115,813
 (8,524) (7.4)%
Consumer loans not secured by real estate:     

 

RICs and auto loans 1,643,459
 1,545,322
 98,137
 6.4 %
Personal unsecured loans 2,212
 3,602
 (1,390) (38.6)%
Other consumer 11,491
 9,187
 2,304
 25.1 %
Total consumer loans 1,899,408
 1,890,739
 8,669
 0.5 %
Total non-accrual loans 2,173,052
 2,255,437
 (82,385) (3.7)%
         
Other real estate owned 66,828
 107,868
 (41,040) (38.0)%
Repossessed vehicles 212,966
 224,046
 (11,080) (4.9)%
Other repossessed assets 4,218
 1,844
 2,374
 128.7 %
Total OREO and other repossessed assets 284,012
 333,758
 (49,746) (14.9)%
Total non-performing assets $2,457,064
 $2,589,195
 $(132,131) (5.1)%
         
Past due 90 days or more as to interest or principal and accruing interest $93,102
 $98,979
 $(5,877) (5.9)%
Annualized net loan charge-offs to average loans (1)
 2.8% 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 2.3% 2.6%    n/a    n/a
ALLL as a percentage of total NPLs 167.8% 172.8%    n/a    n/a
(1) Annualized net loan charge-offs are based on year-to-date charge-offs.

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 $179.9 million and $98.8 million at December 31, 2019 and December 31, 2018, respectively. This increase was primarily due to loans to one large borrower within the CRE portfolio.

Potential problem consumer loans amounted to $4.7 billion at December 31, 2019 and December 31, 2018. Management has included these loans in its evaluation of the Company's ACL and reserved for them during the respective periods.

Non-performing assets decreased to $2.5 billion, or 1.6% of total assets, at December 31, 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.


63





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Commercial

Commercial NPLs decreased $91.1 million from December 31, 2018 to December 31, 2019. Commercial NPLs accounted for 0.7% and 0.9% of commercial LHFI at December 31, 2019 and December 31, 2018, respectively. The decrease in commercial NPLs was comprised of decreases of $36.4 million in C&I and $40.9 million in the Other commercial 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 increased by $98.1 million from December 31, 2018 to December 31, 2019. Non-performing RICs and auto loans accounted for 4.5% and 5.3% of total RICs and auto loans at December 31, 2019 and December 31, 2018, respectively.

Consumer Loans Secured by Real Estate

The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of December 31, 2019 and December 31, 2018, respectively:
  December 31, 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 $134,957
 $107,289
 $216,815
 $115,813
Total LHFI 8,835,702
 4,770,344
 9,884,462
 5,465,670
NPLs as a percentage of total LHFI 1.5% 2.2% 2.2% 2.1%
NPLs in foreclosure status 15.5% 84.2% 43.3% 56.7%

The NPL ratio is usually 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. As of December 31, 2019, the consumer loans secured by real estate portfolio has a higher NPL ratio compared to the residential mortgage portfolio, primarily due to the NPL loan sale in 2019.

64





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 December 31, 2019 and December 31, 2018, the Company's delinquencies consisted of the following:
  December 31, 2019 December 31, 2018
(dollars in thousands) Consumer Loans Secured by Real EstateRICs and auto loansPersonal Unsecured and Other Consumer LoansCommercial LoansTotal Consumer Loans Secured by Real EstateRICs and auto loansPersonal Unsecured and Other Consumer LoansCommercial LoansTotal
Total delinquencies $404,945$4,768,833$206,703$339,844$5,720,325 $495,854$4,760,361$226,181$232,264$5,714,660
Total loans(1)
 $13,902,871$36,456,747$2,615,036$41,151,009$94,125,663 $15,564,653$29,335,220$3,047,515$40,381,758$88,329,146
Delinquencies as a % of loans 2.9%13.1%7.9%0.8%6.1% 3.2%16.2%7.4%0.6%6.5%
(1)Includes LHFS.

Overall, total delinquencies increased by $5.7 million, or 0.1%, from December 31, 2018 to December 31, 2019, primarily driven by commercial loans, which increased $107.6 million, offset by consumer loans secured by real estate, which decreased $90.9 million. The increase in the commercial portfolio was due to loans to two customers that became delinquent in the fourth quarter of 2019, partially offset by the mortgage decrease due to the NPL and FNMA sales.

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 a sustained period of repayment performance, as long as the Company believes the principal and interest of the restructured loan will be paid in full. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.

The following table summarizes TDRs at the dates indicated:
  As of December 31, 2019
(in thousands) Commercial% Consumer Loans Secured by Real Estate% RICs and Auto Loans% Other Consumer% Total TDRs
Performing $64,538
49.5% $182,105
67.8% $3,332,246
86.6% $67,465
91.7% $3,646,354
Non-performing 65,741
50.5% 86,335
32.2% 515,573
13.4% 6,128
8.3% 673,777
Total $130,279
100.0% $268,440
100.0% $3,847,819
100.0% $73,593
100.0% $4,320,131
               
% of loan portfolio 0.3%n/a
 2.0%n/a
 10.6%n/a
 4.6%n/a
 4.7%
(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% $141,605
79.6% $5,069,879
Non-performing 107,024
57.6% 100,543
27.7% 664,688
12.7% 36,235
20.4% 908,490
Total $185,768
100.0% $362,992
100.0% $5,251,769
100.0% $177,840
100.0% $5,978,369
               
% of loan portfolio 0.5%n/a
 2.3%n/a
 17.9%n/a
 9.0%n/a
 6.9%
(1) Excludes LHFS.

65





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table provides a summary of TDR activity:
  Year Ended December 31, 2019 Year Ended December 31, 2018
(in thousands) RICs and Auto Loans 
All Other Loans(1)
 RICs and Auto Loans 
All Other Loans(1)(2)
TDRs, beginning of period $5,251,769
 $726,600
 $6,037,695
 $805,292
New TDRs(1)
 1,153,160
 145,135
 1,877,058
 192,733
Charged-Off TDRs (1,389,044) (13,706) (1,706,788) (14,554)
Sold TDRs (1,139) (83,204) (2,884) (7,148)
Payments on TDRs (1,166,927) (302,513) (953,312) (249,723)
TDRs, end of period $3,847,819
 $472,312
 $5,251,769
 $726,600
(1)New TDRs includes drawdowns on lines of credit that have previously been classified as TDRs.
(2) Rollforward adjusted through the New TDRs line item to include RV/Marine TDRs in the amount of $56.0 million that were not identified at December 31, 2018.

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.

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.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table presents the allocation of the ALLL and the percentage of each loan type to total LHFI at the dates indicated:
  December 31, 2019 December 31, 2018
(dollars in thousands) Amount 
% of Loans
to Total LHFI
 Amount % of Loans
to Total LHFI
Allocated allowance:        
Commercial loans $399,829
 44.4% $441,083
 46.4%
Consumer loans 3,199,612
 55.6% 3,409,024
 53.6%
Unallocated allowance 46,748
 n/a
 47,023
 n/a
Total ALLL 3,646,189
 100.0% 3,897,130
 100.0%
Reserve for unfunded lending commitments 91,826
   95,500
  
Total ACL $3,738,015
   $3,992,630
  

General

The ACL decreased by $254.6 million from December 31, 2018 to December 31, 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.

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

Commercial

For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3 million), the Company has specialized credit officers, a monitoring unit, and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and/or additional analysis is needed. For the commercial loan portfolios, risk ratings are assigned to each loan to differentiate risk within the portfolio, reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrower’s current risk profile and the related collateral position.

The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower’s risk rating on at least an annual basis, and more frequently if warranted. This reassessment process is managed by credit officers and is overseen by the credit monitoring group to ensure consistency and accuracy in risk ratings, as well as the appropriate frequency of risk rating reviews by the Company’s credit officers. The Company’s Credit Risk Review Committee assesses whether the Company’s Credit Risk Review Framework and risk management guidelines established by the Company’s Board and applicable laws and regulations are being followed, and reports key findings and relevant information to the Board. The Company’s Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded below a certain level, the Company’s Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management’s strategies for the customer relationship going forward.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. If a loan is identified as impaired and is collateral-dependent, an initial appraisal is obtained to provide a baseline to determine the property’s fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of the asset, obsolescence, etc.), an appraisal is obtained more frequently. At a minimum, updated appraisals for impaired loans are obtained within a 12-month period if the loan remains outstanding for that period of time.

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

The portion of the ALLL related to the commercial portfolio was $399.8 million at December 31, 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.

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

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

The Company considers the delinquency status of its senior liens in cases in which the Company services the lien. The Company currently services the senior lien on 23.5% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.1% 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.

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.

The allowance for consumer loans was $3.2 billion and $3.4 billion at December 31, 2019 and December 31, 2018, respectively. The allowance as a percentage of HFI consumer loans was 6.2% at December 31, 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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 December 31, 2019 and December 31, 2018, respectively.

Reserve for Unfunded Lending Commitments

The reserve for unfunded lending commitments decreased $3.7 million from $95.5 million at December 31, 2018 to $91.8 million at December 31, 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 FHLB and FRB stock. MBS consist of pass-through, CMOs and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s at the date of issuance. The Company’s AFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.

Total investment securities AFS increased $2.7 billion to $14.3 billion at December 31, 2019, compared to $11.6 billion at December 31, 2018. During the year ended December 31, 2019, the composition of the Company's investment portfolio changed due to an increase in U.S. Treasury securities and MBS, partially offset by a decrease in ABS. U.S. Treasuries increased by $2.3 billionprimarily due to investment purchases of $3.8 billion as offset by $1.5 billion of sales. MBS increased by $739.4 million primarily due to investment purchases and a decrease in unrealized losses, partially offset by sales, maturities and principal paydowns. For additional information with respect to the Company’s investment securities, see Note 3 to the 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 $3.9 billion at December 31, 2019. The Company had 99 investment securities classified as HTM as of December 31, 2019.

Total gross unrealized losses on investment securities AFS decreased by $258.2 million during the year ended December 31, 2019. This decrease was primarily related to a decrease in unrealized losses of $246.1 million on MBS, primarily due to a decrease in interest rates.

The average life of the AFS investment portfolio (excluding certain ABS) at December 31, 2019 was approximately 3.86 years. The average effective duration of the investment portfolio (excluding certain ABS) at December 31, 2019 was approximately 2.85 years. The actual maturities of MBS AFS will differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table presents the fair value of investment securities by obligor at the dates indicated:
(in thousands) December 31, 2019 December 31, 2018
Investment securities AFS:    
U.S. Treasury securities and government agencies $9,735,337
 $5,485,392
FNMA and FHLMC securities 4,326,299
 5,550,628
State and municipal securities 9
 16
Other securities (1)
 278,113
 596,951
Total investment securities AFS 14,339,758
 11,632,987
Investment securities HTM:    
U.S. government agencies 3,938,797
 2,750,680
Total investment securities HTM(2)
 3,938,797
 2,750,680
Other investments 995,680
 805,357
Total investment portfolio $19,274,235
 $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 December 31, 2019:
  December 31, 2019
(in thousands) Amortized Cost Fair Value
FNMA $2,467,867
 $2,463,166
GNMA (1)
 9,581,198
 9,601,626
Government - Treasuries 4,086,733
 4,090,938
Total $16,135,798
 $16,155,730
(1)Includes U.S. government agency MBS.

GOODWILL

The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At December 31, 2019, goodwill totaled $4.4 billion and represented 3.0% of total assets and 18.2% of total stockholder's equity. The following table shows goodwill by reporting units at December 31, 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 December 31, 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 23 to the Consolidated Financial Statements for additional details on the change in reportable segments.

The Company conducted its annual goodwill impairment tests as of October 1, 2019 using generally accepted valuation methods. The Company completes a quarterly review for impairment indicators over each of its reporting units, which includes consideration of economic and organizational factors that could impact the fair value of the Company's reporting units. At the completion of the 2019 fourth 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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



For the Consumer and Business Banking reporting unit's fair valuation analysis, an equal weighting of the market approach ("market approach") and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.4x was selected based on publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 9.1%, which was most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Consumer and Business Banking reporting unit by 10.3%, indicating the reporting unit was not considered to be impaired.

For the C&I reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the marketplace that were determined to be comparable. The projected TBV of 1.4x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 12.7%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 18.0%, indicating the C&I reporting unit was not considered to be impaired.

For the CRE&VF reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the marketplace that were determined to be comparable. The projected TBV of 1.5x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 9.4%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 20.5%, indicating the CRE&VF reporting unit was not considered to be impaired or at risk for impairment.

For the CIB reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.3x was selected based on the selected publicly traded peers of the reporting unit and was equally considered with the projected earnings multiples of 8.0x and 7.5x and 7.0x, which were
applied to the reporting unit's 2019, 2020, and 2021 projected earnings, respectively, due to the nature of the business, which operates outside of the traditional savings and loan bank model. For the income approach, the Company selected a discount rate of 10.3%, which is most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the CIB reporting unit by 25.2%, indicating that the CIB reporting unit was not considered to be impaired or at risk for impairment.

For the SC reporting unit's fair valuation analysis, the Company used only the market capitalization approach. For the market capitalization approach, SC's stock price from October 1, 2019 of $25.53 was used and a 25.0% control premium was used based on the Company's review of transactions observable in the market-place that were determined to be comparable. The results of the fair value analyses exceeded the carrying value of the SC reporting unit by 67.9%, indicating that the SC reporting unit was not considered to be impaired. Management continues to monitor SC's stock price, along with changes in the financial position and results of operations that would impact the reporting unit's carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2019.

Management continues to monitor changes in financial position and results of operations that would impact each of the reporting units estimated fair value or carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2019.

DEFERRED TAXES AND OTHER TAX ACTIVITY

The Company had a net deferred tax liability balance of $1.0 billion at December 31, 2019 (consisting of a deferred tax asset balance of $503.7 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 $429.9 million increase in net deferred liabilities for the year ended December 31, 2019 was primarily due to an increase in deferred tax liabilities related to accelerated depreciation from leasing transactions and changes in depreciation on company owned assets.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 7 and Note 20 to the 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 IRS, please refer to Note 15 to the 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 December 31, 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 December 31, 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.

Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the years ended December 31, 2019 and 2018, the Company paid cash dividends of $400.0 million, and $410.0 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 December 31, 2019:
  SHUSA
       
  December 31, 2019 
Well-capitalized Requirement(1)
 
Minimum Requirement(1)
CET1 capital ratio 14.63% 6.50% 4.50%
Tier 1 capital ratio 15.80% 8.00% 6.00%
Total capital ratio 17.23% 10.00% 8.00%
Leverage ratio 13.13% 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
       
  December 31, 2019 
Well-capitalized Requirement(2)
 
Minimum Requirement(2)
CET1 capital ratio 15.80% 6.50% 4.50%
Tier 1 capital ratio 15.80% 8.00% 6.00%
Total capital ratio 16.77% 10.00% 8.00%
Leverage ratio 12.77% 5.00% 4.00%
(2)As defined by OCC regulations. The Bank's ratios are presented on a Basel III phasing-in basis.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Commercial Real Estate
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar increase/(decrease) Percentage
Net interest income $287,387
 $272,999
 $14,388
 5.3 %
Total non-interest income 24,264
 44,170
 (19,906) (45.1)%
Provision for credit losses 6,025
 25,719
 (19,694) (76.6)%
Total expenses 87,941
 72,095
 15,846
 22.0 %
Income before income taxes 217,685
 219,355
 (1,670) (0.8)%
Intersegment revenue 2,273
 2,814
 (541) (19.2)%
Total assets 14,630,450
 15,085,971
 (455,521) (3.0)%
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.

CRE reported income before income taxes of $217.7 millionIn June 2019, the Company announced its planned capital actions for the year ended December 31, 2016 comparedperiod 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 income before income taxesSantander, (2) common stock dividends paid by SC, and (3) an authorization to repurchase up to $1.1 billion of $219.4 millionSC’s outstanding common stock.  Refer to the Liquidity and Capital Resources section below for discussion of the year ended December 31, 2015. Factors contributing to this change were as follows:capital actions taken, including SC’s share repurchase plans and activities.

Net interest income increased $14.4 millionRefer to the Liquidity and Capital Resources section below for discussion of the year ended December 31, 2016 comparedcapital actions taken, including SC's share repurchase plans and activities.

LIQUIDITY AND CAPITAL RESOURCES

Overall

The Company continues to 2015.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 average balanceCompany's Asset/Liability Committee reviews and approves the Company's liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements.

Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would increase its borrowing costs 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 segment's gross loans increased to $15.2 billion for the year ended December 31, 2016 compared to $14.5 billion in 2015. The average balance of deposits was $843.3 million for the year ended December 31, 2016 compared to $787.5 million for 2015.
Total non-interest income decreased $19.9 million for the year ended December 31, 2016 compared to 2015.
The provision for credit losses decreased $19.7 million for the year ended December 31, 2016 compared to 2015.
Total expenses increased $15.8 million for the year ended December 31, 2016 compared to 2015.
Total assets were $14.6 billion as of December 31, 2016 compared to $15.1 billion as of December 31, 2015.MD&A.

GCB
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar increase/(decrease) Percentage
Net interest income $237,635
 $218,917
 $18,718
 8.6 %
Total non-interest income 82,765
 89,208
 (6,443) (7.2)%
Provision for credit losses 7,952
 40,881
 (32,929) (80.5)%
Total expenses 118,804
 108,718
 10,086
 9.3 %
Income before income taxes 193,644
 158,526
 35,118
 22.2 %
Intersegment expense (9,052) (9,601) 549
 5.7 %
Total assets 9,389,271
 12,092,986
 (2,703,715) (22.4)%
Sources of Liquidity

GCB reported income before income taxes of $193.6 million for the year ended December 31, 2016 compared to income before income taxes of $158.5 million for the year ended December 31, 2015. Factors contributing to this change were as follows:Company and Bank

Net interest income increased $18.7 million forThe Company and the year ended December 31, 2016 comparedBank have several sources of funding to 2015.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 average balanceCompany has the following major sources of this segment's grossfunding 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

SC requires a significant amount of liquidity to originate and acquire loans were $9.3and 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 forof stockholders’ equity that supports its access to the year ended December 31, 2016 compared to $9.6 billion for 2015. The average balance of deposits was $2.2 billion for the year ended December 31, 2016 compared to $1.8 billion for 2015.
Total non-interest income decreased $6.4 million for the year ended December 31, 2016 compared to 2015.
The provision forsecuritization markets, credit losses decreased $32.9 million for the year ended December 31, 2016 compared to 2015.
Total expenses increased $10.1 million for the year ended December 31, 2016 compared to 2015.
Total assets were $9.4 billion as of December 31, 2016, compared to $12.1 billion as of December 31, 2015.facilities, and flow agreements.


74





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Other
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar increase/(decrease) Percentage
Net interest income $(63,191) $246,151
 $(309,342) (125.7)%
Total non-interest income 792,457
 873,413
 (80,956) (9.3)%
Provision for credit losses 52,490
 75,293
 (22,803) (30.3)%
Total expenses 1,152,027
 955,719
 196,308
 20.5 %
Income/(loss) before income taxes (475,251) 88,552
 (563,803) (636.7)%
Intersegment revenue 129
 1,434
 (1,305) (91.0)%
Total assets 44,010,655
 42,586,543
 1,424,112
 3.3 %

The Other category reported losses before income taxes of $475.3 million forDuring the year ended December 31, 2016, compared2019, SC completed on-balance sheet funding transactions totaling approximately $18.2 billion, including:

securitizations on its SDART platform for approximately $3.2 billion;
securitizations on its DRIVE, deeper subprime platform, for approximately $4.5 billion;
lease securitizations on its SRT platform for approximately $3.7 billion;
lease securitization on its PSRT platform for approximately $1.2 billion;
private amortizing lease facilities for approximately $4.6 billion;
securitization on its SREV platform for approximately $0.9 billion;
issuance of retained bonds on its SDART platform for approximately $129.8 million; and
issuance of a retained bond on its SRT platform for approximately $60.4 million.

For information regarding SC's debt, see Note 11 to losses before income taxes of $88.6the 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 year endedrevolving 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 subordinated loan described above. At December 31, 2015. Factors contributing2019, 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. 

Available Liquidity

As of December 31, 2019, the Bank had approximately $20.3 billion in committed liquidity from the FHLB and the FRB. Of this change wereamount, $12.4 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At December 31, 2019 and December 31, 2018, liquid assets (cash and cash equivalents and LHFS) and securities AFS exclusive of securities pledged as follows:collateral) totaled approximately $15.0 billion and $15.9 billion, respectively. These amounts represented 24.3% and 25.8% of total deposits at December 31, 2019 and December 31, 2018, respectively. As of December 31, 2019, the Bank, BSI and BSPR had $1.1 billion, $1.3 billion, and $838.4 million, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.

BSPR has $647.6 million in committed liquidity from the FHLB, all of which was unused as of December 31, 2019, as well as $2.2 billion in liquid assets aside from cash unused as of December 31, 2019.


75





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Cash, cash equivalents, and restricted cash

As of January 1, 2018, the classification of restricted cash within the Company's SCF changed. Refer to Note 1 to the Consolidated Financial Statements for additional details.
  Year Ended December 31,
(in thousands) 2019 2018 2017
Net cash flows from operating activities $6,849,157
 $7,015,061
 $4,964,060
Net cash flows from investing activities (17,242,333) (12,460,839) 3,281,179
Net cash flows from financing activities 11,197,124
 5,829,308
 (10,959,272)

Cash flows from operating activities

Net interest income decreased $309.3 million for the year ended December 31, 2016 compared to 2015.
Total non-interest income decreased $81.0 million for the year ended December 31, 2016 compared 2015.
The provision for credit losses decreased $22.8 million for the year ended December 31, 2016 compared to 2015.
Total expenses increased $196.3 million for the year ended December 31, 2016 compared to 2015.

SC
  Year Ended December 31, YTD Change
(dollars in thousands) 2016 2015 Dollar increase/(decrease) Percentage
Net interest income $4,448,535
 $4,614,402
 $(165,867) (3.6)%
Total non-interest income 1,432,634
 1,303,643
 128,991
 9.9 %
Provision for credit losses 2,468,199
 2,785,871
 (317,672) (11.4)%
Total expenses 2,252,259
 1,842,562
 409,697
 22.2 %
Income before income taxes 1,160,711
 1,289,612
 (128,901) (10.0)%
Intersegment revenue 
 
 
 0.0%
Total assets 38,539,104
 35,567,663
 2,971,441
 8.4 %

SC reported income before income taxes of $1.2cash flow from operating activities was $6.8 billion for the year ended December 31, 2016 compared to2019, which was primarily comprised of net income before income taxes of $1.3$1.0 billion, $1.6 billion in proceeds from sales of LHFS, $2.4 billion in depreciation, amortization and accretion, and $2.3 billion of provisions for credit losses, partially offset by $1.5 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $7.0 billion for the year ended December 31, 2015. Factors contributing to this change were as follows:2018, which was primarily comprised of net income of $991.0 million, $4.3 billion in proceeds from sales of LHFS, $1.9 billion in depreciation, amortization and accretion, and $2.3 billion of provision for credit losses, partially offset by $3.0 billion of originations of LHFS, net of repayments.

Net interest income decreased $165.9 millioncash flow from operating activities was $5.0 billion for the year ended December 31, 2016 compared to 2015. The fluctuation2017, which was primarily relatedcomprised of net income of $958.0 million, $4.6 billion in proceeds from sales of LHFS, $1.6 billion in depreciation, amortization and accretion, and $2.8 billion of provision for credit losses, partially offset by $4.9 billion of originations of LHFS, net of repayments.

Cash flows from investing activities

For the year ended December 31, 2019, net cash flow from investing activities was $(17.2) billion, primarily due to $10.2 billion in normal loan activity, $10.5 billion of purchases of investment securities AFS, $8.6 billion in operating lease purchases and originations, and $1.6 billion of purchases of HTM investment securities, partially offset by $8.1 billion of AFS investment securities sales, maturities and prepayments, $2.6 billion in proceeds from sales of LHFI, and $3.5 billion in proceeds from sales and terminations of operating leases.

For the year ended December 31, 2018, net cash flow from investing activities was $(12.5) billion, primarily due to $8.5 billion in normal loan activity, $2.4 billion of purchases of investment securities AFS, and $9.9 billion in operating lease purchases and originations, partially offset by $3.9 billion of AFS investment securities sales, maturities and prepayments, $1.0 billion in proceeds from sales of LHFI, and $3.6 billion in proceeds from sales and terminations of operating leases.

For the year ended December 31, 2017, net cash flow from investing activities was $3.3 billion, primarily due to $8.4 billion of AFS investment securities sales, maturities and prepayments, $2.7 billion in normal loan activity, $3.1 billion in proceeds from sales and terminations of operating leases, and $1.2 billion in proceeds from sales of LHFI, partially offset by $6.2 billion of purchases of investment securities AFS and $6.0 billion in operating lease purchases and originations.

Cash flows from financing activities

For the year ended December 31, 2019, net cash flow from financing activities was $11.2 billion, which was primarily due to an increase in interest expense during the period. SC's costnet borrowing activity of funds increased during 2016 due$5.6 billion and a $6.3 billion increase in deposits, partially offset by $400.0 million in dividends paid on common stock and $338.0 million in stock repurchases attributable to higher market rates and increased spreads.NCI.

Total non-interest income increased $129.0 millionNet cash flow from financing activities for the year ended December 31, 2016 compared2018 was $5.8 billion, which was primarily due to 2015
an increase in net borrowing activity of $5.9 billion, partially offset by $410.0 million in dividends paid on common stock and $200.0 million in redemption of preferred stock.
The provision for credit losses decreased $317.7 million
Net cash flow from financing activities for the year ended December 31, 2016 compared to 2015. This decrease2017 was $(11.0) billion, which was primarily attributabledue to a decrease in net borrowing activity of $4.7 billion and a $6.2 billion decrease in deposits.

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


76





Item 7.    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 lowerspecific portfolio underlying certain credit lines, result in an event of cost 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 fair value adjustment that was recorded in 2015 relatedremove 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 transferimpacted warehouse facility.

SC has one credit facility with eight banks providing an aggregate commitment of $5.0 billion for the exclusive use of providing short-term liquidity needs to support Chrysler Finance lease financing. As of December 31, 2019, there was an outstanding balance of approximately $1.1 billion on this facility in the 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 eleven banks providing an aggregate commitment of $6.5 billion for the exclusive use of providing short-term liquidity needs to support core and Chrysler Capital loan financing. As of December 31, 2019, there was an outstanding balance of approximately $3.9 billion on these facilities in the 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 December 31, 2019 and December 31, 2018, there were outstanding balances of $422.3 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 $5.7 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 personal unsecuredSecurities Act, and privately issues amortizing notes. SC has on-balance sheet securitizations outstanding in the market with a cumulative ABS balance of approximately $28.0 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.


77





Item 7.    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 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 portfoliocommitments and satisfying deposit withdrawal requests.

SIS uses liquidity primarily to heldsupport underwriting transactions.

The primary use of liquidity for sale from heldBSI is to meet customer liquidity requirements, such as maturing deposits, investment activities, funds transfers, and payment of its operating expenses.

BSPR uses liquidity for investment that did not recurfunding loan commitments and satisfying deposit withdrawal requests.

At December 31, 2019, the Company's liquidity to meet debt payments, debt service and debt maturities was in 2016.excess of 12 months.
Total expenses increased $409.7 million for
Dividends, Contributions and Stock Issuances

As of December 31, 2019, the Company had 530,391,043 shares of common stock outstanding. During the year ended December 31, 2016 compared2019, the Company paid dividends of $400.0 million to 2015, attributableits sole shareholder, Santander. During the first quarter of 2020, the Company declared a cash dividend of $125.0 million on its common stock, which was paid on March 2, 2020.

During the year ended December 31, 2019, Santander made cash contributions of $88.9 million to growththe 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 and November 2019. Further, SC declared a cash dividend of $0.22 per share, which was paid on February 20, 2020, to shareholders of record as of the close of business on February 10, 2020. SC has paid a total of $291.5 million in dividends through December 31, 2019, of which $85.2 million has been paid to NCI and $206.3 million has been paid to the Company, which eliminates in the leased vehicle portfolioconsolidated results of the Company.

The following table presents information regarding the shares of SC Common Stock repurchased during the year ended December 31, 2019 ($ in thousands, except per share amounts):
$200 Million Share Repurchase Program - January 2019 (1)
  
Total cost (including commissions paid) of shares repurchased $17,780
Average price per share $18.40
Number of shares repurchased 965,430
   
$400 Million Share Repurchase Program - May 2019 through June 2019  
Total cost (including commissions paid) of shares repurchased $86,864
Average price per share $23.16
Number of shares repurchased 3,749,692
   
$1.1 Billion Share Repurchase Program - July 2019 through June 2020  
Total cost (including commissions paid) of shares repurchased $233,350
Average price per share $25.47
Number of shares repurchased 9,155,288
(1) During the year ended December 31, 2018, SC purchased 9.5 million shares of SC Common Stock under its share repurchase program at a cost of approximately $182 million.

78





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



In June 2018, the SC Board of Directors announced purchases of up to $200 million, excluding commissions, of outstanding SC Common Stock through June 2019.

In May 2019, the Company announced an amendment to its 2018 capital plan, which authorized SC to repurchase up to $400 million of outstanding SC 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 outstanding SC Common Stock through the end of the second quarter of 2020.

During the year ended December 31, 2019, SC purchased 13.9 million shares of SC Common Stock under its share repurchase program at a cost of approximately $338 million, excluding commissions.

On January 30, 2020, SC commenced a tender offer to purchase for cash up to $1 billion of shares of SC Common Stock, at a range of between $23 and $26 per share. The tender offer expired on February 27, 2020 and was closed on March 4, 2020. In connection with the completion of the tender offer, SC acquired approximately 17.5 million shares of SC Common Stock for approximately $455.4 million. After the completion of the tender offer, SHUSA's ownership in SC increased leased vehicle expenses. Compensation expense also increasedto approximately 76.3%.

During the year ended December 31, 2019, SHUSA's subsidiaries had the following capital activity which eliminated in 2016 comparedconsolidation:
The Bank declared and paid $250.0 million in dividends to 2015,SHUSA.
BSI declared and paid $25.0 million in dividends to SHUSA.
Santander BanCorp declared and paid $1.25 million in dividends to SHUSA.
SHUSA contributed $110.0 million to SSLLC.
SHUSA contributed $105.0 million to SFS.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

The Company enters into contractual obligations in the normal course of business as SC continuesa source of funds for its asset growth and asset/liability management and to investmeet required capital needs. These obligations require the Company to make cash payments over time as detailed in its control and compliance functions.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)
 $7,136,454
 $5,830,669
 $1,305,785
 $
 $
Notes payable - revolving facilities 5,399,931
 1,864,182
 3,535,749
 
 
Notes payable - secured structured financings 28,206,898
 203,114
 10,381,235
 11,461,822
 6,160,727
Other debt obligations (1) (2)
 14,569,222
 2,728,846
 3,607,386
 4,580,226
 3,652,764
CDs (1)
 9,493,234
 7,037,872
 2,354,465
 94,654
 6,243
Non-qualified pension and post-retirement benefits 124,840
 13,376
 26,860
 26,996
 57,608
Operating leases(3)
 794,537
 139,597
 250,416
 197,677
 206,847
Total contractual cash obligations $65,725,116
 $17,817,656
 $21,461,896
 $16,361,375
 $10,084,189
Other commitments:          
Commitments to extend credit $30,685,478
 $5,623,071
 $5,044,127
 $7,282,066
 $12,736,214
Letters of credit 1,592,726
 1,090,622
 238,958
 227,671
 35,475
Total Contractual Obligations and Other Commitments $98,003,320
 $24,531,349
 $26,744,981
 $23,871,112
 $22,855,878
(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 December 31, 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 or interest of $82.9 million.

Excluded from the above table are deposits of $58.0 billion that are due on demand by customers.


7579





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 14 and Note 20 to the 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.

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month LIBOR. Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income and balance sheet valuation simulations, shocks to those simulations, and scenario and market value analyses, and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.

Net Interest Income Simulation Analysis

The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense, to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.

The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes at December 31, 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 December 31, 2019 December 31, 2018
Down 100 basis points (1.12)% (3.07)%
Up 100 basis points 1.31 % 2.87 %
Up 200 basis points 2.56 % 5.58 %

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.


80





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at December 31, 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 December 31, 2019 December 31, 2018
Down 100 basis points (3.01)% (1.55)%
Up 100 basis points (0.49)% (1.25)%
Up 200 basis points (3.17)% (3.49)%

As of December 31, 2019, the Company’s profile reflected a decrease of MVE of 3.01% for downward parallel interest rate shocks of 100 basis points and an increase of 0.49% 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 NMDs).

In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates 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 16 to the Consolidated Financial Statements.


81





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 14 to the Consolidated Financial Statements.

BORROWINGS AND OTHER DEBT OBLIGATIONS

The Company has term loans and lines of credit with Santander and other lenders. The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. In addition, SC has warehouse lines of credit and securitizes some of its RICs and operating leases, which are structured secured financings. Total borrowings and other debt obligations at December 31, 2019 were $50.7 billion, compared to $45.0 billion at December 31, 2018. Total borrowings increased $5.7 billion, primarily due to new debt issuances of $3.8 billion, an increase in FHLB advances at the Bank of $2.2 billion and an overall increase of $2.2 billion in SC debt, partially offset by $2.3 billion of debt maturities and calls. See further detail on borrowings activity in Note 11 to the Consolidated Financial Statements.

  Year Ended December 31,
(Dollars in thousands) 2019 2018
Parent Company & other subsidiary borrowings and other debt obligations    
Parent Company senior notes:    
Balance $9,949,214 $8,351,685
Weighted average interest rate at year-end 3.68% 3.79%
Maximum amount outstanding at any month-end during the year $9,949,214 $8,351,685
Average amount outstanding during the year $8,961,588 $7,626,199
Weighted average interest rate during the year 3.81% 3.66%
Junior subordinated debentures to capital trusts:(1)
    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $154,640
Average amount outstanding during the year $0 $118,650
Weighted average interest rate during the year % 3.92%
Subsidiary subordinated notes:    
Balance $602 $40,703
Weighted average interest rate at year-end 2.00% 2.00%
Maximum amount outstanding at any month-end during the year $41,026 $40,934
Average amount outstanding during the year $30,791 $40,784
Weighted average interest rate during the year 2.12% 2.03%
Subsidiary short-term and overnight borrowings:    
Balance $1,831 $59,900
Weighted average interest rate at year-end 0.38% 1.86%
Maximum amount outstanding at any month-end during the year $34,323 $132,827
Average amount outstanding during the year $19,162 $71,432
Weighted average interest rate during the year 3.42% 2.19%
(1) Includes related common securities.

82





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Year Ended December 31,
(Dollars in thousands) 2019 2018
Bank borrowings and other debt obligations    
REIT preferred:    
Balance $125,943 $145,590
Weighted average interest rate at year-end 13.17% 13.22%
Maximum amount outstanding at any month-end during the year $146,066 $145,590
Average amount outstanding during the year $133,068 $144,827
Weighted average interest rate during the year 13.04% 13.22%
Bank subordinated notes:    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $192,125
Average amount outstanding during the year $0 $78,408
Weighted average interest rate during the year % 9.04%
Term loans:    
Balance $0 $126,172
Weighted average interest rate at year-end % 8.57%
Maximum amount outstanding at any month-end during the year $126,257 $139,888
Average amount outstanding during the year $21,023 $130,722
Weighted average interest rate during the year 5.86% 5.70%
Securities sold under repurchase agreements:    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $150,000
Average amount outstanding during the year $0 $41,096
Weighted average interest rate during the year % 1.90%
FHLB advances:    
Balance $7,035,000 $4,850,000
Weighted average interest rate at year-end 2.30% 2.74%
Maximum amount outstanding at any month-end during the year $7,035,000 $4,850,000
Average amount outstanding during the year $5,465,329 $2,025,479
Weighted average interest rate during the year 2.63% 2.61%

83





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Year Ended December 31,
(Dollars in thousands) 2019 2018
SC borrowings and other debt obligations    
Revolving credit facilities:    
Balance $5,399,931 $4,478,214
Weighted average interest rate at year-end 3.44% 3.92%
Maximum amount outstanding at any month-end during the year $6,753,790 $5,632,053
Average amount outstanding during the year $5,532,273 $5,043,462
Weighted average interest rate during the year 6.58% 5.60%
Public securitizations:    
Balance $18,807,773 $19,225,169
Weighted average interest rate range at year-end  1.35% - 3.42%
  1.16% - 3.53%
Maximum amount outstanding at any month-end during the year $19,656,531 $19,647,748
Average amount outstanding during the year $19,000,303 $18,353,127
Weighted average interest rate during the year 2.54% 2.52%
Privately issued amortizing notes:    
Balance $9,334,112 $7,676,351
Weighted average interest rate range at year-end  1.05% - 3.90%
  0.88% - 3.17%
Maximum amount outstanding at any month-end during the year $9,334,112 $7,676,351
Average amount outstanding during the year $7,983,672 $6,379,987
Weighted average interest rate during the year 3.48% 3.54%

NON-GAAP FINANCIAL MEASURES

The Company's non-GAAP information has limitations as an analytical tool and, therefore, should not be considered in isolation or as a substitute for analysis of our results or any performance measures under GAAP as set forth in the Company's financial statements. These limitations should be compensated for by relying primarily on the Company's GAAP results and using this non-GAAP information only as a supplement to evaluate the Company's performance.

The Company considers various measures when evaluating capital utilization and adequacy. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because GAAP does not include capital ratio measures, the Company believes that there are no comparable GAAP financial measures to these ratios. These ratios are not formally defined by GAAP and are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess the Company's capital adequacy using these ratios, the Company believes they are useful to provide investors the ability to assess its capital adequacy on the same basis. The Company believes these non-GAAP measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures may allow readers to compare certain aspects of the Company's capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Company's calculations may not be directly comparable with those of other organizations, and the usefulness of these measures to investors may be limited. As a result, the Company encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.


84





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table includes the related GAAP measures included in our non-GAAP financial measures.
 Year Ended December 31,  
(Dollars in thousands)2019 2018 2017 2016 
2015(1)
  
Return on Average Assets:           
Net income/(loss)$1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)  
Average assets142,308,583
 131,232,021
 134,522,957
 141,921,781
 140,461,913
  
Return on average assets0.73% 0.76% 0.71% 0.45% (2.18)%  
            
Return on Average Equity:           
Net income/(loss)$1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)  
Average equity24,639,561
 24,103,584
 23,388,410
 22,232,729
 25,495,652
  
Return on average equity4.23% 4.11% 4.10% 2.88% (11.98)%  
            
Average Equity to Average Assets:           
Average equity$24,639,561
 $24,103,584
 $23,388,410
 $22,232,729
 $25,495,652
  
Average assets142,308,583
 131,232,021
 134,522,957
 141,921,781
 140,461,913
  
Average equity to average assets17.31% 18.37% 17.39% 15.67% 18.15%  
            
Efficiency Ratio:           
General, administrative, and other expenses
(numerator)
$6,365,852
 $5,832,325
 $5,764,324
 $5,386,194
 $9,381,892
  
            
Net interest income$6,442,768
 $6,344,850
 $6,423,950
 $6,564,692
 $6,901,406
  
Non-interest income3,729,117
 3,244,308
 2,901,253
 2,755,705
 2,905,035
  
   Total net interest income and non-interest income (denominator)10,171,885
 9,589,158
 9,325,203
 9,320,397
 9,806,441
  
            
Efficiency ratio62.58% 60.82% 61.81% 57.79% 95.67%  
(1) General, administrative, and other expenses includes $4.5 billion goodwill impairment charge on SC.  
            
            
 Transitional 
Fully Phased In(4)
 SBNA SHUSA SBNA SHUSA
 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2019
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1
(1)
 
Common Equity
Tier 1
(1)
            
Total stockholder's equity (GAAP)$13,680,941
 $13,407,676
 $22,021,460
 $21,321,057
 $13,680,941
 $22,021,460
Goodwill(3,402,637) (3,402,637) (4,444,389) (4,444,389) (3,402,637) (4,444,389)
Intangible assets(1,802) (2,176) (416,204) (475,193) (1,802) (416,204)
Deferred taxes on goodwill and intangible assets242,333
 238,747
 397,485
 392,563
 242,333
 397,485
Other adjustments to CET1(3)
(238,923) (230,942) (39,362) (39,275) (238,923) (39,362)
Disallowed deferred tax assets(129,885) (167,701) (215,330) (317,667) (129,885) (215,330)
Accumulated other comprehensive loss69,792
 336,332
 88,207
 321,652
 69,792
 88,207
CET1 capital (numerator)$10,219,819
 $10,179,299
 $17,391,867
 $16,758,748
 $10,219,819
 $17,391,867
RWAs (denominator)(2)
64,677,883
 59,394,280
 118,898,213
 107,915,606
 66,140,440
 119,981,713
Ratio15.80% 17.14% 14.63% 15.53% 15.45% 14.50%
            
(1)CET1 is calculated under Basel III regulations required as of January 1, 2015.
(2)Under the banking agencies' risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together with the measure for market risk, resulting in the Company's and the Bank's total RWAs.
(3)Represents the impact of NCI, transitional and other intangible adjustments for regulatory capital.
(4)Represents non-GAAP measures

85





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA

The following table presented selected quarterly consolidated financial data (unaudited):
  THREE MONTHS ENDED
(in thousands) December 31, 2019 September 30,
2019
 June 30,
2019
 March 31,
2019
 December 31, 2018 September 30,
2018
 June 30,
2018
 March 31,
2018
Total interest income $2,147,955
 $2,185,107
 $2,176,090
 $2,141,043
 $2,094,575
 $2,042,938
 $2,001,073
 $1,930,467
Total interest expense 548,907
 565,997
 554,365
 538,158
 490,925
 444,177
 408,987
 380,114
Net interest income 1,599,048
 1,619,110
 1,621,725
 1,602,885
 1,603,650
 1,598,761
 1,592,086
 1,550,353
Provision for credit losses 607,539
 603,635
 480,632
 600,211
 731,202
 621,014
 433,802
 553,880
Net interest income after provision for credit loss 991,509
 1,015,475
 1,141,093
 1,002,674
 872,448
 977,747
 1,158,284
 996,473
Total fees and other income 866,385
 998,865
 960,605
 897,446
 806,664
 823,744
 818,754
 801,863
Gain/(loss) on investment securities, net 3,170
 2,267
 2,379
 (2,000) (4,785) (1,688) 419
 (663)
General, administrative and other expenses 1,647,808
 1,633,244
 1,542,386
 1,542,414
 1,490,829
 1,450,387
 1,449,749
 1,441,360
Income before income taxes 213,256
 383,363
 561,691
 355,706
 183,498
 349,416
 527,708
 356,313
Income tax provision 87,732
 112,927
 155,326
 116,214
 51,738
 109,949
 168,151
 96,062
Net income before NCI 125,524
 270,436
 406,365
 239,492
 131,760
 239,467
 359,557
 260,251
Less: Net income attributable to NCI 38,562
 66,831
 110,743
 72,512
 31,861
 72,491
 104,141
 75,138
Net income attributable to SHUSA $86,962
 $203,605
 $295,622
 $166,980
 $99,899
 $166,976
 $255,416
 $185,113

2019 FOURTH QUARTER RESULTS

SHUSA reported net income for the fourth quarter of 2019 of $125.5 million compared to net income of $270.4 million for the third quarter of 2019. The most significant period-over-period variances were:
an increase in total fees and other income of $132.5 million, primarily comprised of the mark to market on the personal unsecured portfolio HFS included in miscellaneous income, net.
a decrease in the income tax provision of $25.2 million primarily due to lower income before taxes.

SHUSA reported net income for the fourth quarter of 2019 of $125.5 million, compared to net income of $131.8 million for the fourth quarter of 2018. The most significant period over period variances were:
an increase in interest expense of $58.0 million, due to higher deposit volume and rates.
a decrease in the provision for credit losses of $123.6 million as a result of lower TDR balances and better recovery rates
an increase in general and administrative and other expenses of $157.0 million, including an increase in lease expense of $78.0 million, resulting from the increasing leased vehicle portfolio, and an increase in compensation and benefits expense of $45.7 million as a result of increased headcount.
an increase in income tax provision of $36.0 million as a result of higher income before taxes.



86




ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated by reference from Part II, Item 7, MD&A — "Asset and Liability Management" above.


ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS


87





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Tothe Board of Directors and Stockholder of
Santander Holdings USA, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Santander Holdings USA, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income (loss), of stockholder's equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


88





Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 11, 2020

We have served as the Company’s auditor since 2016.



89





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
 December 31, 2019 December 31, 2018
ASSETS   
Cash and cash equivalents$7,644,372
 $7,790,593
Investment securities:   
AFS at fair value14,339,758
 11,632,987
HTM (fair value of $3,957,227 and $2,676,049 as of December 31, 2019 and December 31, 2018, respectively)3,938,797
 2,750,680
Other investments (includes trading securities of $1,097 and $10 as of December 31, 2019 and December 31, 2018, respectively)995,680
 805,357
LHFI(1) (5)
92,705,440
 87,045,868
ALLL (5)
(3,646,189) (3,897,130)
Net LHFI89,059,251
 83,148,738
LHFS (2)
1,420,223
 1,283,278
Premises and equipment, net (3)
798,122
 805,940
Operating lease assets, net (5)(6)
16,495,739
 14,078,793
Goodwill4,444,389
 4,444,389
Intangible assets, net416,204
 475,193
BOLI1,860,846
 1,833,290
Restricted cash (5)
3,881,880
 2,931,711
Other assets (4) (5)
4,204,216
 3,653,336
TOTAL ASSETS$149,499,477
 $135,634,285
LIABILITIES   
Accrued expenses and payables$4,476,072
 $3,035,848
Deposits and other customer accounts67,326,706
 61,511,380
Borrowings and other debt obligations (5)
50,654,406
 44,953,784
Advance payments by borrowers for taxes and insurance153,420
 160,728
Deferred tax liabilities, net1,521,034
 1,212,538
Other liabilities (5)
969,009
 912,775
TOTAL LIABILITIES125,100,647
 111,787,053
Commitments and contingencies (Note 20)
 
STOCKHOLDER'S EQUITY   
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both December 31, 2019 and December 31, 2018)17,954,441
 17,859,304
Accumulated other comprehensive loss(88,207) (321,652)
Retained earnings4,155,226
 3,783,405
TOTAL SHUSA STOCKHOLDER'S EQUITY22,021,460
 21,321,057
NCI2,377,370
 2,526,175
TOTAL STOCKHOLDER'S EQUITY24,398,830
 23,847,232
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY$149,499,477
 $135,634,285
(1) LHFI includes $102.0 million and $126.3 million of loans recorded at fair value at December 31, 2019 and December 31, 2018, respectively.
(2) Includes $289.0 million and $209.5 million of loans recorded at the FVO at December 31, 2019 and December 31, 2018, respectively.
(3) Net of accumulated depreciation of $1.5 billion and $1.4 billion at December 31, 2019 and December 31, 2018, respectively.
(4) Includes MSRs of $130.9 million and $149.7 million at December 31, 2019 and December 31, 2018, respectively, for which the Company has elected the FVO. See Note 16 to these Consolidated Financial Statements for additional information.
(5) The Company has interests in certain Trusts that are considered VIEs for accounting purposes. At December 31, 2019 and December 31, 2018, LHFI included $26.5 billion and $24.1 billion, Operating leases assets, net included $16.5 billion and $14.0 billion, restricted cash included $1.6 billion and $1.6 billion, other assets included $625.4 million and $685.4 million, Borrowings and other debt obligations included $34.2 billion and $31.9 billion, and Other liabilities included $188.1 million and $122.0 million of assets or liabilities that were included within VIEs, respectively. See Note 7 to these Consolidated Financial Statements for additional information.
(6) Net of accumulated depreciation of $4.2 billion and $3.5 billion at December 31, 2019 and December 31, 2018, respectively.
See accompanying unaudited notes to Consolidated Financial Statements.

90





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
 Year Ended December 31,
 2019 2018 2017
INTEREST INCOME:     
Loans$8,098,482
 $7,546,376
 $7,377,345
Interest-earning deposits174,189
 137,753
 86,205
Investment securities:     
AFS280,927
 297,557
 352,601
HTM70,815
 68,525
 38,609
Other investments25,782
 18,842
 21,319
TOTAL INTEREST INCOME8,650,195
 8,069,053
 7,876,079
INTEREST EXPENSE:     
Deposits and other customer accounts574,471
 389,128
 241,044
Borrowings and other debt obligations1,632,956
 1,335,075
 1,211,085
TOTAL INTEREST EXPENSE2,207,427
 1,724,203
 1,452,129
NET INTEREST INCOME6,442,768
 6,344,850
 6,423,950
Provision for credit losses2,292,017
 2,339,898
 2,759,944
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES4,150,751
 4,004,952
 3,664,006
NON-INTEREST INCOME:     
Consumer and commercial fees548,846
 568,147
 616,438
Lease income2,872,857
 2,375,596
 2,017,775
Miscellaneous income, net(1) (2)
301,598
 307,282
 269,484
TOTAL FEES AND OTHER INCOME3,723,301
 3,251,025
 2,903,697
Net gain/(loss) on sale of investment securities5,816
 (6,717) (2,444)
TOTAL NON-INTEREST INCOME3,729,117
 3,244,308
 2,901,253
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES:     
Compensation and benefits1,945,047
 1,799,369
 1,895,326
Occupancy and equipment expenses603,716
 659,789
 669,113
Technology, outside service, and marketing expense656,681
 590,249
 581,164
Loan expense405,367
 384,899
 386,468
Lease expense2,067,611
 1,789,030
 1,553,096
Other expenses687,430
 608,989
 679,157
TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES6,365,852
 5,832,325
 5,764,324
INCOME BEFORE INCOME TAX PROVISION/(BENEFIT)1,514,016
 1,416,935
 800,935
Income tax provision/(benefit)472,199
 425,900
 (157,040)
NET INCOME INCLUDING NCI1,041,817
 991,035
 957,975
LESS: NET INCOME ATTRIBUTABLE TO NCI288,648
 283,631
 405,625
NET INCOME ATTRIBUTABLE TO SHUSA$753,169
 $707,404
 $552,350
(1) Netted down by impact of$404.6 million, $382.3 million, and $386.4 million for the years ended December 31, 2019, 2018 and 2017 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 Consolidated Financial Statements.

91





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)

 Year Ended December 31,
 2019 2018 2017
NET INCOME INCLUDING NCI$1,041,817
 $991,035
 $957,975
OCI, NET OF TAX     
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments, net of tax (1) (2)
(301) (3,796) 337
Net unrealized gains/(losses) on AFS and HTM investment securities, net of tax (2)
222,887
 (80,891) (9,744)
Pension and post-retirement actuarial gains, net of tax (2)
10,859
 560
 4,184
TOTAL OTHER COMPREHENSIVE GAIN / (LOSS), NET OF TAX233,445
 (84,127) (5,223)
COMPREHENSIVE INCOME1,275,262
 906,908
 952,752
NET INCOME ATTRIBUTABLE TO NCI288,648
 283,631
 405,625
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA$986,614
 $623,277
 $547,127

(1) Excludes $(18.3) million, $(3.1) million, and $6.0 million of OCI attributable to NCI for the years ended December 31, 2019, 2018 and 2017, respectively.
(2) Excludes $39.1 million impact of OCI reclassified to Retained earnings as a result of the adoption of ASU 2018-02 for the year ended December 31, 2018.

See accompanying unaudited notes to Consolidated Financial Statements.


92





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(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, 2017530,391
 $195,445
 $16,599,497
 $(193,208) $3,020,149
 $2,756,875
 $22,378,758
Cumulative effect adjustment upon adoption of ASU 2016-09
 
 (26,457) 
 14,763
 37,401
 25,707
Comprehensive (loss)/income Attributable to SHUSA
 
 
 (5,223) 552,350
 
 547,127
Other comprehensive income attributable to NCI
 
 
 
 
 6,048
 6,048
Net income attributable to NCI
 
 
 
 
 405,625
 405,625
Impact of SC Stock Option Activity
 
 
 
 
 22,116
 22,116
Contribution of SFS from Shareholder (Note 1)  
 430,783
 
 (108,705) 
 322,078
Capital contribution from shareholder (Note 13)
 
 11,747
 
 
 
 11,747
Contribution of incremental SC shares from shareholder
 
 707,589
 
 
 (707,589) 
Dividends paid to NCI
 
 
 
 
 (4,475) (4,475)
Stock issued in connection with employee benefit and incentive compensation plans
 
 (149) 
 
 850
 701
Dividends declared and paid on common stock
 
 
 
 (10,000) 
 (10,000)
Dividends declared and paid on preferred stock
 
 
 
 (14,600) 
 (14,600)
Balance, December 31, 2017530,391
 $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) 47,549
 
 8,455
Comprehensive (loss)/income attributable to SHUSA
 
 
 (84,127) 707,404
 
 623,277
Other comprehensive loss attributable to NCI
 
 
 
 
 (3,130) (3,130)
Net income attributable to NCI
 
 
 
 
 283,631
 283,631
Impact of SC stock option activity
 
 
 
 
 12,411
 12,411
Contribution from shareholder and related tax impact (Note 13)
 
 88,468
 
 
 
 88,468
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
 
 
 
 (410,000) 
 (410,000)
Dividends paid to NCI
 
 
 
 
 (57,511) (57,511)
Stock repurchase attributable to NCI
 
 43,430
 
 
 (226,077) (182,647)
Dividends paid on preferred stock
 
 
 
 (10,950) 
 (10,950)
Balance, December 31, 2018530,391
 $
 $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
 
 
 233,445
 753,169
 
 986,614
Other comprehensive loss attributable to NCI
 
 
 
 
 (18,265) (18,265)
Net income attributable to NCI
 
 
 
 
 288,648
 288,648
Impact of SC stock option activity
 
 
 
 
 10,176
 10,176
Contribution from shareholder (Note 13)
 
 88,927
 
 
 
 88,927
Dividends declared and paid on common stock
 
 
 
 (400,000) 
 (400,000)
Dividends paid to NCI
 
 
 
 
 (85,160) (85,160)
Stock repurchase attributable to NCI
 
 6,210
 
 
 (344,204) (337,994)
Balance, December 31, 2019530,391
 $
 $17,954,441
 $(88,207) $4,155,226
 $2,377,370
 $24,398,830
See accompanying unaudited notes to Consolidated Financial Statements.

93




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)






Year Ended December 31,
 2019
2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:     
Net income including NCI$1,041,817
 $991,035
 $957,975
Adjustments to reconcile net income to net cash provided by operating activities:     
Impairment of goodwill
 
 10,536
Provision for credit losses2,292,017
 2,339,898
 2,759,944
Deferred tax expense/(benefit)339,152
 416,875
 (196,614)
Depreciation, amortization and accretion2,402,611
 1,913,225
 1,606,862
Net loss on sale of loans397,037
 379,181
 373,532
Net (gain)/loss on sale of investment securities(5,816) 6,717
 2,444
Loss on debt extinguishment2,735
 3,470
 30,349
Net (gain)/loss on real estate owned, premises and equipment, and other assets(19,637) 10,610
 (9,567)
Stock-based compensation317
 913
 4,674
Equity (income)/loss on equity method investments(1,584) (4,324) 28,323
Originations of LHFS, net of repayments(1,462,963) (2,982,366) (4,920,570)
Purchases of LHFS(387) (1,381) (4,280)
Proceeds from sales of LHFS1,563,206
 4,264,959
 4,601,777
Net change in:     
Revolving personal loans(360,922) (371,716) (329,168)
Other assets, BOLI and trading securities(152,520) (200,380) (99,306)
Other liabilities814,094
 248,345
 147,149
NET CASH PROVIDED BY OPERATING ACTIVITIES6,849,157
 7,015,061
 4,964,060
      
CASH FLOWS FROM INVESTING ACTIVITIES:     
Proceeds from sales of AFS investment securities1,423,579
 1,262,409
 3,216,595
Proceeds from prepayments and maturities of AFS investment securities6,688,603
 2,616,417
 5,231,910
Purchases of AFS investment securities(10,534,918) (2,421,286) (6,248,059)
Proceeds from prepayments and maturities of HTM investment securities392,971
 338,932
 200,085
Purchases of HTM investment securities(1,595,777) (135,898) (352,786)
Proceeds from sales of other investments264,364
 153,294
 327,029
Proceeds from maturities of other investments13,673
 45
 560
Purchases of other investments(369,361) (214,427) (217,007)
Proceeds from sales of LHFI2,583,563
 1,016,652
 1,227,052
Proceeds from the sales of equity method investments
 
 25,145
Distributions from equity method investments4,539
 9,889
 10,522
Contributions to equity method and other investments(228,275) (122,816) (87,267)
Proceeds from settlements of BOLI policies34,941
 20,931
 37,028
Purchases of LHFI(897,907) (1,243,574) (723,793)
Net change in loans other than purchases and sales(10,184,035) (8,462,103) 2,724,489
Purchases and originations of operating leases(8,597,560) (9,859,861) (6,036,193)
Proceeds from the sale and termination of operating leases3,502,677
 3,588,820
 3,119,264
Manufacturer incentives794,237
 1,098,055
 878,219
Proceeds from sales of real estate owned and premises and equipment68,491
 53,569
 112,497
Purchases of premises and equipment(216,810) (159,887) (164,111)
Net cash paid for branch disposition(329,328) 
 
Upfront fee paid to FCA(60,000) 
 
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES(17,242,333) (12,460,839) 3,281,179
      
CASH FLOWS FROM FINANCING ACTIVITIES:     
Net change in deposits and other customer accounts6,286,153
 680,277
 (6,218,010)
Net change in short-term borrowings191,931
 (168,769) (50,331)
Net proceeds from long-term borrowings48,043,664
 46,461,404
 43,325,311
Repayments of long-term borrowings(44,522,618) (43,277,142) (44,005,642)
Proceeds from FHLB advances (with terms greater than 3 months)4,435,000
 4,900,000
 1,000,000
Repayments of FHLB advances (with terms greater than 3 months)(2,500,000) (2,000,000) (5,000,000)
Net change in advance payments by borrowers for taxes and insurance(7,308) 1,407
 (4,177)
Cash dividends paid to preferred stockholders
 (10,950) (14,600)
Dividends paid on common stock(400,000) (410,000) (10,000)
Dividends paid to NCI(85,160) (57,511) (4,475)
Stock repurchase attributable to NCI(337,994) (182,647) 
Proceeds from the issuance of common stock4,529
 8,204
 13,652
Capital contribution from shareholder88,927
 85,035
 9,000
Redemption of preferred stock
 (200,000) 
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES11,197,124
 5,829,308
 (10,959,272)
      
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH803,948
 383,530
 (2,714,033)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD10,722,304
 10,338,774
 13,052,807
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (1)
$11,526,252
 $10,722,304
 $10,338,774
      
SUPPLEMENTAL DISCLOSURES     
Income taxes paid, net$35,355
 $26,261
 $3,954
Interest paid2,210,838
 1,694,850
 1,442,484
      
NON-CASH TRANSACTIONS     
Loans transferred to/(from) other real estate owned(1,423) 86,467
 44,650
Loans transferred from/(to) HFI (from)/to HFS, net2,727,067
 731,944
 202,760
Unsettled sales of investment securities
 
 39,783
Contribution of SFS from shareholder (2)

 
 322,078
Contribution of incremental SC shares from shareholder
 
 707,589
Contribution of SAM from shareholder (2)

 4,396
 
AFS investment securities transferred to HTM investment securities
 1,167,189
 
Adoption of lease accounting standard:     
ROU assets664,057
 
 
Accrued expenses and payables705,650
 
 

(1) The years ended December 31, 2019, 2018, and 2017 include cash and cash equivalents balances of $7.6 billion, $7.8 billion, and $6.5 billion, respectively, and restricted cash balances of $3.9 billion, $2.9 billion, and $3.8 billion, respectively.
(2) The contributions of SFS and SAM were accounted for as non-cash transactions. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

See accompanying unaudited notes to Consolidated Financial Statements.

94





NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Introduction

SHUSA is the Parent Company of SBNA, a national banking association; SC, a consumer finance company; Santander BanCorp, a financial holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, BSPR; SSLLC, a broker-dealer headquartered in Boston, Massachusetts; BSI, a financial services company headquartered in Miami, Florida that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; and SIS, a registered broker-dealer headquartered 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, SAM, are registered investment advisers with the SEC. SHUSA is headquartered in Boston and the Bank's home office is in Wilmington, Delaware. SHUSA is a wholly-owned subsidiary of 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. SC's primary business is the indirect origination and servicing of 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.

SAF is SC’s primary vehicle brand, and is available as a finance option for automotive dealers across the United States. Since May 2013, under its agreement with FCA, SC has operated as FCA's preferred provider for consumer loans, leases, and dealer loans and provides 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 20 for additional details. On June 28, 2019, SC entered into an amendment to its agreement with FCA, which modified that agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions.

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. However, in 2015, SC announced its exit from personal lending and, accordingly, all of its personal lending assets are classified as HFS at December 31, 2019.

As of December 31, 2019, SC was owned approximately 72.4% by SHUSA and 27.6% by other shareholders. SC Common Stock is listed on the NYSE under the trading symbol "SC."

During 2019, SBNA completed the sale of 14 bank branches and four 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. 

95




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

IHC

The EPS mandated by Section 165 of the DFA Final Rule were enacted by the Board of Governors of the Federal Reserve
to strengthen regulatory oversight of FBOs. Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as 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. SFS’s results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company and the Company also elected to report its results prospectively. As a result of the 2017 contribution of SFS in 2017 and SAM in 2018, SHUSA's net income is understated by $1.0 million and $6.0 million for the years ended December 31, 2018 and 2017, respectively. In addition, a contribution to stockholder's equity of $4.4 million and $322.1 million was recorded on July 2, 2018, and July 1, 2017, respectively. These amounts are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.

On October 21, 2019, the Company entered into an agreement to sell the stock of Santander BanCorp (the holding company that owns BSPR) for a total consideration of approximately $1.1 billion, subject to adjustment based on the consolidated Santander BanCorp balance sheet at closing. At December 31, 2019, BSPR had 27 branches, approximately 1,000 employees, and total assets of approximately $6.0 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 a third party 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. Once it becomes apparent that this transaction is more likely than not to receive regulatory approval, the Company will recognize a deferred tax liability of approximately $50 million for the unremitted earnings of Santander BanCorp. Consummation of the transaction is not expected to result in any material gain or loss.

Basis of Presentation

These 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 VOEs in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. These Consolidated Financial Statements have been prepared in accordance with GAAP and pursuant to SEC regulations. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and SCF for the periods indicated, and contain adequate disclosure of this interim financial information to make the information presented not misleading.

Certain prior-year amounts have been reclassified to conform to the current year presentation. These reclassifications did not have a material impact on the Company's consolidated financial condition or results of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and those differences may be material. The most significant estimates pertain to fair value measurements, the ALLL and reserve for unfunded lending commitments, accretion of discounts and subvention on RICs, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, and income taxes. Actual results may differ from the estimates, and the differences may be material to the Consolidated Financial Statements.

96




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

Recently Adopted Accounting Standards

Since January 1, 2019, the Company adopted the following FASB ASUs:
ASU 2016-02, Leases (Topic 842). The Company adopted this standard as of January 1, 2019, resulting in the recognition of a 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.
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 2018-15, 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.
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.

Significant Accounting Policies

Consolidation

In accordance with the applicable accounting guidance for consolidations, the Consolidated Financial Statements include any VOEs in which the Company has a controlling financial interest and any VIEs for which the Company is deemed to be the primary beneficiary. The Company consolidates its VIEs if the Company has (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity's economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., the Company is considered to be the primary beneficiary). The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the noncontrolling shareholders do not hold any substantive participating or controlling rights. Interests in VIEs and VOEs can include equity interests in corporations, partnerships and similar legal entities, subordinated debt, securitizations, derivatives contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments.


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

Upon the occurrence of certain significant events, as required by the VIE model, the Company reassesses whether a legal entity in which the Company is involved is a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Company has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the entities with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively, with assets and liabilities of a newly consolidated VIE initially recorded at fair value. A gain or loss may be recognized upon deconsolidation of a VIE, depending on the carrying amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.

The Company uses the equity method to account for unconsolidated investments in VOEs if the Company has significant influence over the entity's operating and financing decisions but does not maintain a controlling financial interest. Unconsolidated investments in VOEs or VIEs in which the Company has a voting or economic interest of less than 20% generally are carried at cost less any impairment. These investments are included in Other assets on the Consolidated Balance Sheets, and the Company's proportionate share of income or loss is included in Miscellaneous income, net within the Consolidated Statements of Operations.

Sales of RICs and Leases

The Company, through SC, transfers RICs into newly formed Trusts which then issue one or more classes of notes payable backed by the RICs. The Company’s continuing involvement with the credit facilities and Trusts are in the form of servicing loans held by the SPEs and, generally, through holding a residual interest in the SPE. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and are consolidated when the Company has: (a) power over the significant activities of the entity and (b) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company has power over the significant activities of those Trusts as servicer of the financial assets held in the Trust. Servicing fees are not considered significant variable interests in the Trusts; however, when the Company also retains a residual interest in the Trust, either in the form of a debt security or equity interest, the Company has an obligation to absorb losses or the right to receive benefits that are potentially significant to the SPE. Accordingly, these Trusts are consolidated within the Consolidated Financial Statements, and the associated RICs, borrowings under credit facilities and securitization notes payable remain on the Consolidated Balance Sheets. Securitizations involving Trusts in which the Company does not retain a residual interest or any other debt or equity interest are treated as sales of the associated RICs. While these Trusts are included in our Consolidated Financial Statements, they are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by the Trusts, are available only to satisfy the notes payable related to the securitized RICs, and are not available to the Company's creditors or other subsidiaries.

The Company also sells RICs and leases to VIEs or directly to third parties. The Company may determine that these transactions meet sale accounting treatment in accordance with applicable guidance. Due to the nature, purpose, and activity of these transactions, the Company either does not hold potentially significant variable interests or is not the primary beneficiary as a result of the Company's limited further involvement with the financial assets. The transferred financial assets are removed from the Company's Consolidated Balance Sheets at the time the sale is completed. The Company generally remains the servicer of the financial assets and receives servicing fees. The Company also recognizes a gain or loss for the difference between the fair value, as measured based on sales proceeds plus (or minus) the value of any servicing asset (or liability) retained and the carrying value of the assets sold.

See further discussion on the Company's securitizations in Note 7 to these Consolidated Financial Statements.

Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash and amounts due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. Cash and cash equivalents have original maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits.


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

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

Investment Securities and Other Investments

Investment in debt securities are classified as either AFS, HTM, trading, or other investments. Investments in equity securities are generally recorded at fair value with changes recorded in earnings. Management determines the appropriate classification at the time of purchase.

Debt securities expected to be held for an indefinite period of time are classified as AFS and are carried at fair value, with temporary unrealized gains and losses reported as a component of accumulated other comprehensive income within stockholder's equity, net of estimated income taxes.

Debt securities purchased which the Company has the positive intent and ability to hold until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for payments, amortization of premium and accretion of discount. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in OCI and in the carrying value of the HTM securities. Such amounts are amortized over the remaining lives of the securities.

The Company conducts a comprehensive security-level impairment assessment quarterly on all securities with a fair value that is less than their amortized cost basis to determine whether the loss represents OTTI. The quarterly OTTI assessment takes into consideration whether (i) the Company has the intent to sell or, (ii) it is more likely than not that it will be required to sell the security before the expected recovery of its amortized cost. The Company also considers whether or not it would expect to receive all of the contractual cash flows from the investment based on its assessment of the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. The Company also considers the severity of the impairment in its assessment. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item, and the non-credit component is recorded within accumulated OCI.

Realized gains and losses on sales of investment securities are recognized on the trade date and included in earnings within Net (losses)/gains on sale of investment securities, which is a component of non-interest income. Unamortized premiums and discounts are recognized in interest income over the estimated life of the security using the interest method.

Debt securities held for trading purposes and equity securities are carried at fair value, with changes in fair value recorded in non-interest income. Investments that are purchased principally for the purpose of economically hedging the MSR in the near term are classified as trading securities and carried at fair value, with changes in fair value recorded as a component of the Miscellaneous income, net line of the Consolidated Statements of Operations.

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB. Although FHLB and FRB stock are equity interests in the FHLB and FRB, respectively, neither has a readily determinable fair value, because ownership is restricted and they are not readily marketable. FHLB stock can be sold back only at its par value of $100 per share and only to FHLBs or to another member institution. Accordingly, FHLB stock and FRB stock are carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

See Note 3 to the Consolidated Financial Statements for details on the Company's investments.

LHFI

LHFI include commercial and consumer loans (including RICs) originated by the Company as well as loans acquired by the Company, which the Company intends to hold for the foreseeable future or until maturity. RICs consist largely of nonprime automobile finance receivables that are acquired individually from dealers at a nonrefundable discount from the contractual principal amount. RICs also include receivables originated through a direct lending program and loan portfolios purchased from other lenders.

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

Originated LHFI

Originated LHFI are reported net of cumulative charge offs, unamortized loan origination fees and costs, and unamortized discounts and premiums. Interest on loans is credited to income as it is earned. For most of the Company's originated LHFI, loan origination fees and certain direct loan origination costs and premiums and discounts are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the effective interest method. For RICs, loan origination fees and costs, premiums and discounts are deferred and amortized over their estimated lives as adjustments to interest income utilizing the effective interest method using estimated prepayment speeds, which are updated on a monthly basis. The Company estimates future principal prepayments specific to pools of homogeneous loans, which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. Our estimated weighted average prepayment rates ranged from 5.1% to 11.0% at December 31, 2019 and 5.7% to 10.8% at December 31, 2018.

The Company’s LHFI are carried at amortized cost, net of the ALLL. When a RIC is originated, certain cost basis adjustments (the net discounts) to the principal balance of the loan are recognized in accordance with the accounting guidance for loan origination fees and costs in ASC 310-20. These cost basis adjustments generally include the following:

Origination costs.
Dealer discounts - dealer discounts to the principal balance of the loan generally occur in circumstances in which the contractual interest rate on the loan is not sufficient to compensate for the credit risk of the borrower.
Participation - participation fees, or premiums, paid to the dealer as a form of profit-sharing, rewarding the dealer for originating loans that perform.
Subvention - payments received from the vehicle manufacturer as compensation (yield enhancement) for the cost of below-market interest rates offered to consumers.

Originated loans are initially recorded at the proceeds paid to fund the loan. Loan origination fees and costs and any discount at origination for loans is considered by the Company to reflect yield enhancements and is accreted to income using the effective interest method.

See LHFS subsection below for accounting treatment when an HFI loan is re-designated as LHFS.

Purchased LHFI

Purchased loans are generally loans acquired in a bulk purchase or business combination. RICs acquired directly from a dealer are considered to be originated loans, not purchased loans.

Purchase discounts and premiums on purchased loans that are deemed performing are accreted over the remaining expected lives of the loans to their par values, generally using the retrospective effective interest method, which considers the impact of estimated prepayments that is updated on a quarterly basis. The purchase discount on personal unsecured loans (given their revolving nature) are amortized on a straight-line basis in accordance with ASC 310-20.

Purchased loans with evidence of credit quality deterioration as of the purchase date for which it is probable that the Company will not receive all contractually required payments receivable are accounted for as PCI loans. At acquisition, PCI loans are recorded at fair value with no allowance for credit losses, and accounted for individually or aggregated in pools based on similar risk characteristics. The Company estimates the amount and timing of expected cash flows for each loan or pool of loans. The expected cash flows in excess of the amount paid for the loans is referred to as the accretable yield and is recorded as interest income over the remaining estimated life of the loan or pool of loans.

The Company may irrevocably elect to account for certain loans acquired with evidence of credit deterioration at fair value in accordance with ASC 825. Accordingly, the Company does not recognize interest income for these loans and recognizes the fair value adjustments on these loans as part of other non-interest income in the Company’s Consolidated Statements of Operations. For certain loans which the Company has elected to account for at fair value that are not considered non-accrual, the Company separately recognizes interest income from the total fair value adjustment. No ALLL is recognized for loans that the Company has elected to account for at fair value.

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

ALLL for Loan Losses and Reserve for Unfunded Lending Commitments

The ALLL and reserve for unfunded lending commitments (together, the ACL) are maintained at levels that management considers adequate to provide for losses on the recorded investment of the loan portfolio, based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, 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 ALLL consists of two elements: (i) an allocated allowance, which is comprised of allowances established on loans specifically evaluated for impairment, and loans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends and both general economic conditions and other risk factors in the Company's loan portfolios, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

The ALLL includes the estimate of credit losses that management expects will be realized during the loss emergence period, including the amount of net discounts that is included in the loans' recorded investment 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.

Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover probable credit losses incurred in the Company’s HFI loan portfolios. The Company uses the incurred loss approach in providing an ACL on the recorded investment of its existing loans. This approach requires that loan loss provisions are recognized and the corresponding allowance recorded when, based on all available information, it is probable that a credit loss has been incurred. The estimate for credit losses for loans that are individually evaluated for impairment is generally determined through an analysis of the present value of the loan’s expected future cash flows, except for those that are deemed to be collateral dependent.  For those loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. In addition, when establishing the collective ACL for originated loans, the Company’s estimate of losses on recorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or when established delinquency thresholds have been met. Additional discussions related to the Company’s charge-off policies are provided in the “Charge-offs of Uncollectible Loans” section below.

When a loan in any portfolio or class has been determined to be impaired (e.g., TDRs and non-accrual commercial loans in excess of $1 million) as of the balance sheet date, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate. However, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. A specific reserve is established as a component of ACL for these impaired loans. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows (including the fair value of the collateral for collateral dependent loans) the Company recalculates the impairment and adjusts the specific reserve. Some impaired loans have risk characteristics similar to other impaired loans and may be aggregated for the measurement of impairment. For those impaired loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

The Company's allocated reserves are principally based on its various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's internal audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.


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

The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions 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.

The unallocated allowance is also established in consideration of several factors such as inherent delays in obtaining information regarding a customer's financial condition or changes in its unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, the Company has the ability to revise the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.

Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.

For the commercial loan portfolio segment, the Company has specialized credit officers 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 additional analysis is needed. For the commercial loan portfolio segment, risk ratings are assigned to each loan to differentiate risk within the portfolio, and are 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 positions. 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 no less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Risk Review group to ensure consistency and accuracy in risk ratings as well as appropriate frequency of risk rating review by the Company's credit officers. The Company's Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings.

When a loan's risk rating is downgraded beyond 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.

The consumer loan portfolio segment and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. 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.

Within the consumer loan portfolio segment, for both residential and home equity 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 for six LTV bands within the portfolios. LTV ratios are updated based on movements in the state-level Federal Housing Finance Agency house pricing indices.

For non-TDR RICs and personal unsecured loans, the Company estimates the ALLL at a level considered adequate to cover probable credit losses in the recorded investment of the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company’s judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan and lease losses.

In addition to the ALLL, management estimates probable losses related to unfunded lending commitments. Unfunded lending commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. 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 Consolidated Balance Sheets.


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

Risk factors are continuously reviewed and revised by management when conditions warrant. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis.

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

Interest Recognition and Non-accrual loans

Interest from loans is accrued when earned in accordance with the terms of the loan agreement. The accrual of interest is discontinued and uncollected interest is reversed once a loan is placed in non-accrual status. A loan is determined to be non-accrual when it is probable that scheduled payments of principal and interest will not be received when due according to the contractual terms of the loan agreement. The Company generally places commercial loans and consumer loans on non-accrual status when they become 90 days or more past due. Additionally, loans may be placed on nonaccrual status based on other circumstances, such as receipt of notification of a customer’s bankruptcy filing. When the collectability of the recorded loan balance of a nonaccrual loan is in doubt, any cash payments received from the borrower are applied first to reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Generally, a nonaccrual loan is returned to accrual status when, based on the Company’s judgment, the borrower’s ability to make the required principal and interest payments has resumed and collectability of remaining principal and interest is no longer doubtful. Interest income recognition resumes for nonaccrual loans that were accounted for on a cash basis method when they return to accrual status, while interest income that was previously recorded as a reduction in the carrying value of the loan would be recognized as interest income based on the effective yield to maturity on the loan. Collateral- dependent loans are generally not returned to accrual status. Please refer to the TDRs section below for discussion related to TDR loans placed on non-accrual status. Credit cards continue to accrue interest until they become 180 days past due, at which point they are charged-off.

For RICs, the accrual of interest is discontinued and accrued, but uncollected interest is reversed once a RIC becomes more than 60 days past due (i.e. 61 or more days past due), and is resumed if a delinquent account subsequently becomes 60 days or less past due. The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time. Loans accounted for using the FVO are not placed on nonaccrual.

Charge-off of Uncollectible Loans

Any loan may be charged-off if a loss confirming event has occurred. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include bankruptcy (unsecured), foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when that collateral asset is the sole source of repayment. The Company generally charges off commercial loans when it is determined that the specific loan or a portion thereof is uncollectible. This determination is based on facts and circumstances of the individual loans and normally includes considering the viability of the related business, the value of any collateral, the ability and willingness of any guarantors to perform and the overall financial condition of the borrower. Partially charged-off loans continue to be evaluated on not less than 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 Company generally charges off consumer loans, or a portion thereof, as follows: residential mortgage loans and home equity loans are charged-off to the estimated fair value of their collateral (net of selling costs) when they become 180 days past due, and other loans (closed-end) are charged-off when they become 120 days past due. Loans with respect to which a bankruptcy notice is received or for which fraud is discovered are written down to the collateral value less costs to sell within 60 days of such notice or discovery. Revolving personal unsecured loans are charged off when they become 180 days past due. Credit cards are charged off when they are 180 days delinquent or within 60 days after the receipt of notification of the cardholder’s death or bankruptcy. Charge-offs are not required when it can be clearly demonstrated that repayment will occur regardless of delinquency status. Factors that would demonstrate repayment 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.

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

RICs and auto loans are charged off against the allowance in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. A net charge off represents the difference between the estimated net sales proceeds and the Company's recorded investment in the related contract. Accounts in repossession that have been charged off and are pending liquidation are removed from loans and the related repossessed automobiles are included in Other assets in the Company's Consolidated Balance Sheets.

TDRs

TDRs are loans that have been modified for which the Company has agreed to make certain concessions to customers to both meet the needs of the customers and maximize the ultimate recovery of the loan. TDRs occur when a borrower is experiencing financial difficulties and the loan is modified to provide a concession 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 on non-accrual status at the time of modification, unless the loan was performing immediately prior to modification and returned to accrual after a sustained period of repayment performance. Collateral dependent TDRs are generally not returned to accrual status. All costs incurred by the Company in connection with a TDR are expensed as incurred. The TDR classification remains on the loan until it is paid in full or liquidated.

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions and interest rate reductions. Commercial loan TDRs are generally restructured to allow for an upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically 12 months for monthly payment schedules). As TDRs, they will be 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.

Consumer Loan TDRs

The majority of the Company's TDR balance is comprised of RICs and auto loans. The terms of the modifications for the RIC and auto loan portfolio generally include one or a combination of: a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

In accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICs under which the consumer is allowed to defer a maximum of three payments per event to the end of the loan. More than 90% of deferrals granted are for two payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the life of the loan for all automobile RICs is eight, while some marine and RV contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs.

RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans on nonaccrual status, interest income is recognized on a cash basis. For TDR loans on nonaccrual status, the accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due.

At the time a deferral is granted on a RIC, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.

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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the ALLL 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 ALLL and related provision for loan and lease losses.

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.

Consumer TDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status at the time of modification, and returned to accrual when they have made six consecutive on-time payments. In addition to those identified as TDRs above, loans discharged under Chapter 7 bankruptcy are considered TDRs and collateral-dependent, regardless of delinquency status. These loans are written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

TDR Impact to ALLL

The ALLL is established to recognize losses in funded loans that are probable and can be reasonably estimated. Prior to loans being placed in TDR status, the Company generally measures its allowance under a loss contingency methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.

Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence using the effective interest rate or fair value of collateral (less costs to sell). The amount of the required valuation allowance 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 subsequently defaulted loans 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 the fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

Impaired loans

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 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

The Company considers all of its TDRs and all of its non-accrual commercial loans in excess of $1 million to be impaired as of the balance sheet date. The Company may perform an impairment analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant.

105




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

The Company measures impairment on impaired loans based on the present value of expected future cash flows discounted at the loan's original effective interest rate, except that, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral, less the costs to sell, if the loan is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment and the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

LHFS

LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Generally, residential loans are valued on an aggregate portfolio basis, and commercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Miscellaneous income, net. For residential mortgages for which the FVO is selected, direct loan origination fees are recorded in Miscellaneous income, net at origination.

All other LHFS which the Company does not have the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the lower of cost or fair value. When loans are transferred from HFI, the Company will recognize a charge-off to the ALLL, if warranted under the Company’s charge off policies. Any excess ALLL for the transferred loans is reversed through provision expense. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneous income, net as lower of cost or market adjustments.

Leases (as Lessor)

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease.

Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired in a business combination are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.

Lease payments due from customers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed if a delinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.

106




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

Under the accounting for impairment or disposal of long-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and the proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of leased assets are included in Miscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. No impairment for leased assets was recognized during the years ended December 31, 2019, 2018, or 2017.

Leases (as Lessee)

Operating lease ROU assets and lease liabilities are recognized upon lease commencement based on the present value of lease payments over the lease term, discounted at the Company's estimated rate of interest for a collateralized borrowing for a similar term. The lease term includes options to extend or terminate a lease when the Company considers it reasonably certain that such options will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Premises and Equipment

Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the straight-line method. Estimated useful lives are as follows:
Office buildings10 to 50 years
Leasehold improvements(1)
10 to 30 years
Software(2)
3 to 7 years
Furniture, fixtures and equipment3 to 10 years
Automobiles5 years
(1) Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the remaining term of the leases.
(2) The standard depreciable period for software is three years. However, for certain software implementation projects, a seven-year period is utilized.

Expenditures for maintenance and repairs are charged to Occupancy and equipment expense in the Consolidated Statements of Operations as incurred.

CRITICAL ACCOUNTING ESTIMATES

This MD&A is based on the Consolidated Financial Statements and accompanying notes that have been prepared in accordance with GAAP. The significant accounting policies of the Company are described in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, accordingly, have a greater possibility of producing results that could be materially different than originally reported. However, the Company is not currently aware of any likely events or circumstances that would result in materially different results. Management identified accounting for ALLL and the reserve for unfunded lending commitments, accretion of discounts and subvention on RICs, estimates of expected residual values of leased vehicles subject to operating leases, accretion of discounts and subvention on RICs, goodwill, fair value measurements and income taxes as the Company's most critical accounting estimates, in that they are important to the portrayal of the Company's financial condition and results and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.

ALLL for Originated LoansLoan Losses and Reserve for Unfunded Lending Commitments

The ALLL and reserve for unfunded lending commitments represent management's best estimate of probable losses inherent in the loan portfolio. The adequacy of SHUSA's ALLL and reserve for unfunded lending commitments is regularly evaluated. This evaluation process is subject to several estimates and applications of judgment. Management's evaluation of the adequacy of the allowance to absorb loan and lease losses takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans that have loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. Management also considers loan quality, changes in the size and character of the loan portfolio, the amount of NPLs, and industry trends. Changes in these estimates could have a direct material impact on the provision for credit losses recorded in the Consolidated Statements of Operations and/or could result in a change in the recorded allowance and reserve for unfunded lending commitments. The loan portfolio represents the largest asset on the Consolidated Balance Sheets. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the ALLL and reserve for unfunded lending commitments in the Consolidated Balance Sheets. A discussion of the factors driving changes in the amount of the ALLL and reserve for unfunded lending commitments for the periods presented is included in the Credit Risk Management section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A").&A. 

The ALLL includes: (i) an allocated allowance, which is comprised of allowances established on loans individuallyspecifically evaluated for impairment (specific reserves) and loans collectively evaluated for impairment, (general reserves) based on historical loan and lease loss experience adjusted for current trends general economic conditions and other risk factors, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Generally, the Company’s loans held for investment are carried at amortized cost, net of the ALLL. The ALLL includes the estimate of credit losses to be realized during the loss emergence period based on the recorded investment in the loan, including 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. Reserve levels are collectively reviewed for adequacy and approved quarterly.

The Company's allocated reserves are principally based on various models subject to the Company's Model Risk Management framework.Framework. New models are approved by the Company's Model Risk Management Committee. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.

The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions include loss factors 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.


7646





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



ALLL for Purchased Loans

The Company assesses the collectability of the recorded investment in ICs and personal unsecured loans on a collective basis quarterly and determines the ALLL at levels considered adequate to cover probable credit losses incurred in the portfolio. Purchased loans, including the loans acquired at the Change in Control, were initially recognized at fair value with no allowance. The Company only recognizes an allowance for loan losses on purchased loans through a provision expense when incurred losses in the portfolio exceed the unaccreted purchase discount on the portfolio.

Loans purchased in a bulk purchase or business combination are expected to have greater uncertainty in cash flows, which generally results in larger discounts compared to newly originated loans. Purchase discounts on purchased loans are accreted over the remaining expected lives of the loans using the retrospective effective interest method. The unamortized portion of the purchase discount is a reduction to the loans’ recorded investment and therefore reduces the allowance requirements. Because the loans purchased in a bulk purchase or in a business combination are initially recognized at fair value with no allowance, the Company considers the entire discount on the purchased portfolio as available to absorb the credit losses in the purchased portfolio when determining the ACL. Except for purchased loan portfolios acquired with evidence of credit deterioration (on which we elected to apply the FVO), this accounting policy is applicable to all loan purchases, including loan portfolio acquisitions or business combinations. Currently, the portfolio acquired in the Change of Control is the only purchased loan portfolio meeting this criterion.

The other considerations utilized by the Company to determine the ALLL for purchased loans are described in the “Allowance for Loan and Lease Losses for Originated Loans and Reserve for Unfunded Lending Commitments” section above.

Accretion of Discounts and Subvention on RICs

LHFI include the RIC portfolio which consists largely of nonprime automobile loans, and which are primarily acquired individually from dealers at a nonrefundable discount from the contractual principal amount. The Company also pays dealer participation on certain receivables. The amortization of discounts, subvention payments from manufacturers, and other origination costs are recognized as adjustments to the yield of the related contracts. The Company applies significant assumptions including prepayment speeds in estimating the accretion rates used to approximate effective yield.

The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield.

Valuation of Automotive Lease Assets and Residuals

The Company has significant investments in vehicles in SC's operating lease portfolio. In accounting for operating leases, management must make a determination at the beginning of the lease contract of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. At contract inception, the Company determines the projected residual value based on an internal evaluation of the expected future value. This evaluation is based on a proprietary model using internally-generated data that is compared against third party,third-party, independent data for reasonableness. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a finance charge. However, since the customer is not obligated to purchase the vehicle at the end of the contract, the Company is exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of leased assets.

To account for residual risk, the Company depreciates automobile operating lease assets to estimated realizable value on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Periodically, the Company revises the projected value of the leased vehicle at termination based on current market conditions and other relevant data points, and adjusts depreciation expense appropriately over the remaining term of the lease.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The Company periodically evaluates its investment in operating leases for impairment if circumstances, such as a systemic and material decline in used vehicle values occurs. ThisThese circumstances could include, for example, a decline in the residual value of our lease portfolio due for example, to an event caused by shocks to oil and gas prices that(which may have a pronounced impact on certain models of vehiclesvehicles) or pervasive manufacturer defects among other events that could(which may systemically affect the value of a particular brand or model of leased asset, which indicates that an impairment may exist.model). Impairment is determined to exist if the fair value of the leased asset is less than its carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows ("DCF").DCF. No such impairment was recognized in 2017, 2016,2019, 2018, or 2015.2017.

The Company's depreciation methodology for operating lease assets considers management's expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used vehicle values. The critical assumptions underlying the estimated carrying value of automobile lease assets include: (1) estimated market value information obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) SC'sour remarketing abilities, and (4) automobile manufacturer vehicle and marketing programs. Changes in these assumptions could have a significant impact on the value of the lease residuals. Expected residual values include estimates of payments from automobile manufacturers
related to residual support and risk-sharing agreements, if any. To the extent an automotive manufacturer is not able to fully honor its obligation relative to these agreements, the Company's depreciation expense would be negatively impacted.

Accretion of Discounts and Subvention on RICs

LHFI include the RIC portfolio which consists largely of nonprime automobile loans, and which are primarily acquired individually from dealers at a nonrefundable discount from the contractual principal amount. The Company also pays dealer participation on certain receivables. The amortization of discounts, subvention payments from manufacturers, and other origination costs are recognized as adjustments to the yield of the related contracts. The Company applies significant assumptions, including prepayment speeds, in estimating the accretion rates used to approximate effective yield.

The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield.

47





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Goodwill

The acquisition method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets acquired and liabilities assumed. The excess of the purchase price of an acquired business over the fair value of the identifiable assets and liabilities represents goodwill. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing.

As more fully described in Note 23 to the Consolidated Financial Statements, a reporting unit is an operating segment or one level below. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis on October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. As of December 31, 2017,2019, the reporting units with assigned goodwill were Consumer and Business Banking, C&I, CRE Commercial Banking, GCB,& VF, CIB, and SC.

An entity's quantitative goodwill impairment analysis must be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, and that no impairment exists. An entity has an unconditional option to bypass the preceding qualitative assessment for any reporting unit in any period and proceed directly to the first stepquantitative analysis of the goodwill impairment test.

The quantitative analysis requires a comparison of the fair value of each reporting unit to its carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, impairment is measured as the excess of the carrying amount over the fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit, and cannot subsequently be reversed even if the fair value of the reporting unit recovers. The Company utilizes the market capitalization approach to determine the fair value of its SC reporting unit, as it is a publicly traded company that has a single reporting unit. Determining the fair value of the remaining reporting units requires significant valuation inputs, assumptions, and estimates.

The Company determines the carrying value of each reporting unit using a risk-based capital approach. Certain of the Company's assets are assigned to a Corporate/Other category. These assets are related to the Company's corporate-only programs, such as BOLI, and are not employed in or related to the operations of a reporting unit or considered in determining the fair value of a reporting unit.

Goodwill impairment testing involves management's judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value. This is performed using widely-accepted valuation techniques, such as the guideline public company market approach (earnings and price-to-tangible book value multiples of comparable public companies), the market capitalization approach (share price of the reporting unit and control premium of comparable public companies), and the income approach (the DCF method).

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The Company uses a combination of these accepted methodologies to determine the fair valuation of reporting units. Several factors are taken into account, including actual operating results, future business plans, economic projections, and market data.

The guideline public company market approach ("market approach") includes earnings and price-to-tangible book value multiples of comparable public companies which were applied to the earnings and equity for all of the Company's reporting units. In addition, theThe market capitalization plus control premium approach was applied to the Company's SC reporting unit, as the SC reporting unit is a publicly traded subsidiary whose securities are traded in an active market.

In connection with the market capitalization plus control premium approach applied to the Company's SC reporting unit, the Company used SC's stock price as of the date of the annual impairment analysis. The Company also considered historical auto loan industry transactions and control premiums over the last three years in determining the control premium.


48





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The DCF method of the income approach incorporatedincorporates the reporting units' forecasted cash flows, including a terminal value to estimate the fair value of cash flows beyond the final year of the forecasts. The discount rates utilized to obtain the net present value of the reporting units' cash flows were estimated using a capital asset pricing model. Significant inputs to this model include a risk-free rate of return, beta (which is a measure of the level of non-diversifiable risk associated with comparable companies for each specific reporting unit), market equity risk premium, and, in certain cases, additional premium for size and/or unsystematic company-specific risk factors. The Company utilized discount rates that it believes adequately reflect the risk and uncertainty in the financial markets. The Company estimated expected rates of equity returns based on historical market returns and risk/return rates for similar industries of the reporting unit. The Company uses its internal forecasts to estimate future cash flows, so actual results may differ from forecasted results.

All of the preceding fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions in the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impacts the estimated fair value of the aforementioned reporting units include such items as:

a prolonged downturn in the business environment in which the reporting units operate;
an economic recovery that significantly differs from our assumptions in timing or degree;
volatility in equity and debt markets resulting in higher discount rates;rates and
unexpected regulatory changes.changes;
Specific to the SC reporting unit, a decrease in SC's share price would impact the fair value of the reporting segmentsegment.

Refer to the Financial Condition, Goodwill section of this MD&A for further details on the Company's goodwill, including the results of management's goodwill impairment analyses.

Fair Value Measurements

The Company uses fair value measurements to estimate the fair value of certain assets and liabilities for both measurement and disclosure purposes. Refer to Note 1816 to the Consolidated Financial Statements for a description of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized. The Company follows the fair value hierarchy set forth in Note 1816 to the Consolidated Financial Statements to prioritize the inputs utilized to measure fair value. The Company reviews and modifies, as necessary, the fair value hierarchy classifications on a quarterly basis. Accordingly, there may be reclassifications between hierarchy levels due to changes in inputs to the valuation techniques used to measure fair value.

The Company has numerous internal controls in place to ensure the appropriateness of fair value measurements, including controls over the inputs into and the outputs from the fair value measurements. Certain valuations are benchmarked to market indices when appropriate and available.

Considerable judgment is used in forming conclusions from observable market data used to estimate the Company's Level 2 fair value measurements and in estimating inputs to the Company's internal valuation models used to estimate Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, recovery rates and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, the Company's estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

7949





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Income Taxes

The Company accounts for income taxes under the asset and liability method.method, which includes considerable judgment. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.bases, including investments in subsidiaries. Deferred tax assets and liabilities are measured using enacted tax rates that apply or will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets. The critical assumptions used in the Company's deferred tax asset valuation allowance analysis are as follows: (a) the expectation of future earnings; (b) estimates of the Company's long-term annual growth rate, based on the Company's long-term economic outlook in the U.S.; (c) estimates of the dividend income payout ratio from the Company's consolidated subsidiary, SC, based on the current policies and practices of SC; (d) estimates of book income to tax income differences, based on the analysis of historical differences and the historical timing of the reversal of temporary differences; (e) the ability to carry back losses to recoup taxes previously paid; (f) estimates of tax credits to be earned on current investments, based on the Company's evaluation of the credits applicable to each investment; (g) experience with operating loss and tax credit carry-forwardscarryforwards not expiring unused; (h) estimates of applicable state tax rates based on current/most recent enacted tax rates and state apportionment calculations; (i) tax planning strategies; and (j) current tax laws. Significant judgment is required to assess future earnings trends and the timing of reversals of temporary differences. The Company makes certain assertions in regards to its investment in subsidiaries, which impact whether a deferred tax liability is recorded for the book over tax basis difference in the investment in these subsidiaries. This requires the Company to make judgments with respect to its ability to permanently reinvest its earnings in foreign subsidiaries and its ability to recover its investment in domestic subsidiaries in a tax free manner.

The Company bases its expectations of future earnings, which are used to assess the realizability of its deferred tax assets, on financial performance forecasts of its operating subsidiaries and unconsolidated investees. The budgets and estimates used in these forecasts are approved by the Company's management, and the assumptions underlying the forecasts are reviewed at least annually and adjusted as necessary based on current developments or when new information becomes available. The updates made and the variances between the Company's forecasts and its actual performance have not been significant enough to alter the Company's conclusions with regard to the realizability of its deferred tax asset including the effect of the SC transaction that occurred in 2011 and the Change in Control that occurred in the first quarter of 2014.asset. The Company continues to forecast sufficient taxable income to fully realize its current deferred tax assets. Forecasted taxable income is subject to changes in overall market and global economic conditions.

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws in the U.S., its states and municipalities, and abroad. Actual income taxes paid may vary from estimates depending on 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 adjusts the balances as new information becomes available. Interest and penalties on income tax payments are included within income tax expense in the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority assuming full knowledge of the position and all relevant facts. See Note 15 of the Consolidated Financial Statements for details on the Company's income taxes.


8050





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



RESULTS OF OPERATIONS

The following MD&A compares and discusses operating results for the years ended December 31, 2019 and 2018. For a discussion of our results of operations for 2018 versus 2017, See Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation" included in our 2018 Form 10-K, filed with the SEC on March 15, 2019.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 Year Ended December 31, Year To Date Change
(dollars in thousands)2019 2018 Dollar increase/(decrease) Percentage
Net interest income$6,442,768
 $6,344,850
 $97,918
 1.5 %
Provision for credit losses(2,292,017) (2,339,898) (47,881) (2.0)%
Total non-interest income3,729,117
 3,244,308
 484,809
 14.9 %
General, administrative and other expenses(6,365,852) (5,832,325) 533,527
 9.1 %
Income before income taxes1,514,016

1,416,935
 97,081
 6.9 %
Income tax provision472,199
 425,900
 46,299
 10.9 %
Net income$1,041,817
 $991,035
 $50,782
 5.1 %
Net income attributable to non-controlling interest288,648
 283,631
 5,017
 1.8 %
Net income attributable to SHUSA$753,169
 $707,404
 $45,765
 6.5 %

The Company reported pre-tax income of $1.5 billion for the year ended December 31, 2019, compared to pre-tax income of $1.4 billion for the corresponding period in 2018. Factors contributing to this change have been discussed further in the sections below.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



                
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
 YEAR ENDED DECEMBER 31, 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)VolumeRate
EARNING ASSETS               
INVESTMENTS AND INTEREST EARNING DEPOSITS$22,175,778
 $551,713
 2.49% $21,342,992
 $522,677
 2.45% $29,036
$20,470
$8,566
LOANS(3):
            


Commercial loans33,452,626
 1,430,831
 4.28% 31,416,207
 1,325,001
 4.22% 105,830
86,791
19,039
Multifamily8,398,303
 346,766
 4.13% 8,191,487
 328,147
 4.01% 18,619
8,520
10,099
Total commercial loans41,850,929
 1,777,597
 4.25% 39,607,694
 1,653,148
 4.17% 124,449
95,311
29,138
Consumer loans:               
Residential mortgages9,959,837
 400,943
 4.03% 9,716,021
 392,660
 4.04% 8,283
9,189
(906)
Home equity loans and lines of credit5,081,252
 256,030
 5.04% 5,602,240
 261,745
 4.67% (5,715)(38,604)32,889
Total consumer loans secured by real estate15,041,089
 656,973
 4.37% 15,318,261
 654,405
 4.27% 2,568
(29,415)31,983
RICs and auto loans32,594,822
 4,972,829
 15.26% 27,559,139
 4,570,641
 16.58% 402,188
712,717
(310,529)
Personal unsecured2,449,744
 664,069
 27.11% 2,362,910
 630,394
 26.68% 33,675
23,407
10,268
Other consumer(4)
374,712
 27,014
 7.21% 526,170
 37,788
 7.18% (10,774)(10,932)158
Total consumer50,460,367
 6,320,885
 12.53% 45,766,480
 5,893,228
 12.88% 427,657
695,777
(268,120)
Total loans92,311,296
 8,098,482
 8.77% 85,374,174
 7,546,376
 8.84% 552,106
791,088
(238,982)
Intercompany investments
 
 % 3,572
 142
 3.98% (142)(142)
TOTAL EARNING ASSETS114,487,074
 8,650,195
 7.56% 106,720,738
 8,069,195
 7.56% 581,000
811,416
(230,416)
Allowance for loan losses(5)
(3,802,702)     (3,835,182)        
Other assets(6)
31,624,211
     28,346,465
        
TOTAL ASSETS$142,308,583
     $131,232,021
        
INTEREST-BEARING FUNDING LIABILITIES               
Deposits and other customer related accounts:               
Interest-bearing demand deposits$10,724,077
 $83,794
 0.78% $9,116,631
 $40,355
 0.44% $43,439
$8,071
$35,368
Savings5,794,992
 13,132
 0.23% 5,887,341
 12,325
 0.21% 807
(159)966
Money market24,962,744
 317,300
 1.27% 25,308,245
 248,683
 0.98% 68,617
(3,321)71,938
CDs8,291,400
 160,245
 1.93% 5,989,993
 87,765
 1.47% 72,480
39,944
32,536
TOTAL INTEREST-BEARING DEPOSITS49,773,213
 574,471
 1.15% 46,302,210
 389,128
 0.84% 185,343
44,535
140,808
BORROWED FUNDS:               
FHLB advances, federal funds, and repurchase agreements5,471,080
 143,804
 2.63% 2,066,575
 53,674
 2.60% 90,130
89,499
631
Other borrowings41,710,311
 1,489,152
 3.57% 38,152,038
 1,281,401
 3.36% 207,751
124,401
83,350
TOTAL BORROWED FUNDS (7)
47,181,391
 1,632,956
 3.46% 40,218,613
 1,335,075
 3.32% 297,881
213,900
83,981
TOTAL INTEREST-BEARING FUNDING LIABILITIES96,954,604
 2,207,427
 2.28% 86,520,823
 1,724,203
 1.99% 483,224
258,435
224,789
Noninterest bearing demand deposits14,572,605
     15,117,229
        
Other liabilities(8)
6,141,813
     5,490,385
        
TOTAL LIABILITIES117,669,022
     107,128,437
        
STOCKHOLDER’S EQUITY24,639,561
     24,103,584
        
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$142,308,583
     $131,232,021
        
                
NET INTEREST SPREAD (9)
    5.28%     5.57%    
NET INTEREST MARGIN (10)
    5.63%     5.95%    
NET INTEREST INCOME (11)
  $6,442,768
     $6,344,850
      
(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 LHFS.
(4)Other consumer primarily includes RV and marine loans.
(5)Refer to Note 4 to the 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 9 to the Consolidated Financial Statements for further discussion.
(7)Refer to Note 11 to the 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.



52





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



NET INTEREST INCOME
 Year Ended December 31, YTD Change
(dollars in thousands)2019 2018 Dollar increase/(decrease) Percentage
INTEREST INCOME:       
Interest-earning deposits$174,189
 $137,753
 $36,436
 26.5 %
Investments AFS280,927
 297,557
 (16,630) (5.6)%
Investments HTM70,815
 68,525
 2,290
 3.3 %
Other investments25,782
 18,842
 6,940
 36.8 %
Total interest income on investment securities and interest-earning deposits551,713
 522,677
 29,036
 5.6 %
Interest on loans8,098,482
 7,546,376
 552,106
 7.3 %
Total interest income8,650,195
 8,069,053
 581,142
 7.2 %
INTEREST EXPENSE:    
 
Deposits and customer accounts574,471
 389,128
 185,343
 47.6 %
Borrowings and other debt obligations1,632,956
 1,335,075
 297,881
 22.3 %
Total interest expense2,207,427
 1,724,203
 483,224
 28.0 %
NET INTEREST INCOME$6,442,768
 $6,344,850
 $97,918
 1.5 %

Net interest income increased $97.9 million for the year ended December 31, 2019 compared to 2018.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $29.0 million for the year ended December 31, 2019 compared to 2018. The average balances of investment securities and interest-earning deposits for the year ended December 31, 2019 was $22.2 billion with an average yield of 2.49%, compared to an average balance of $21.3 billion with an average yield of 2.45% for the corresponding period in 2018. The increase in interest income on investment securities and interest-earning deposits for the year ended December 31, 2019 was primarily due to an increase in the average yield on interest-earning deposits resulting from 2018 increases to the federal funds rate. During 2019, the federal funds rate was lowered three times; this has had an effect of partially offsetting increases in interest income on deposits and investments.

Interest Income on Loans

Interest income on loans increased $552.1 million for the year ended December 31, 2019, compared to 2018. This increase was primarily due to the growth of total loans. The average balance of total loans increased $6.9 billion for the year ended December 31, 2019 compared to 2018. This overall increase in loans was primarily driven by the continued growth of the commercial portfolio, auto loans and RICs; however, the average rate has decreased on the RIC portfolio due to more prime loan originations as a result of the SBNA origination program.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts increased $185.3 million for the year ended December 31, 2019 compared to 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 balance of total interest-bearing deposits was $49.8 billion with an average cost of 1.15% for the year ended December 31, 2019, compared to an average balance of $46.3 billion with an average cost of 0.84% for the year ended December 31, 2018.


53





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $297.9 million for the year ended December 31, 2019 compared to 2018. This increase was due to higher interest rates being paid and increased balances during the year ended December 31, 2019. The average balance of total borrowings was $47.2 billion with an average cost of 3.46% for the year ended December 31, 2019, compared to an average balance of $40.2 billion with an average cost of 3.32% for 2018. The average balance of borrowed funds increased for the year ended December 31, 2019 compared to the year ended December 31, 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 was primarily comprised of the provision for loan and lease losses for the years ended December 31, 2019 and December 31, 2018 of $2.3 billion and $2.4 billion, respectively.
  Year Ended December 31, YTD Change
(in thousands) 2019 2018 DollarPercentage
ALLL, beginning of period $3,897,130
 $3,994,887
 $(97,757)(2.4)%
Charge-offs:       
Commercial (185,035) (108,750) (76,285)70.1 %
Consumer (5,364,673) (4,974,547) (390,126)7.8 %
Unallocated (275) 
 (275)100.0 %
Total charge-offs (5,549,983) (5,083,297) (466,686)9.2 %
Recoveries:       
Commercial 53,819
 60,140
 (6,321)(10.5)%
Consumer 2,954,391
 2,572,607
 381,784
14.8 %
Total recoveries 3,008,210
 2,632,747
 375,463
14.3 %
Charge-offs, net of recoveries (2,541,773) (2,450,550) (91,223)3.7 %
Provision for loan and lease losses (1)
 2,290,832
 2,352,793
 (61,961)(2.6)%
ALLL, end of period $3,646,189
 $3,897,130
 $(250,941)(6.4)%
Reserve for unfunded lending commitments, beginning of period $95,500
 $109,111
 $(13,611)(12.5)%
Release of reserves for unfunded lending commitments (1)
 1,185
 (12,895) 14,080
(109.2)%
Loss on unfunded lending commitments (4,859) (716) (4,143)578.6 %
Reserve for unfunded lending commitments, end of period 91,826
 95,500
 (3,674)(3.8)%
Total ACL, end of period $3,738,015
 $3,992,630
 $(254,615)(6.4)%
(1)The provision for credit losses in the 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 $91.2 million for the year ended December 31, 2019 compared to 2018.

Consumer charge-offs increased $390.1 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of a $391.2 million increase in RIC and consumer auto loan charge-offs.

Consumer recoveries increased $381.8 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of a $345.6 million increase in RIC and consumer auto loan recoveries, and a $21.1 million increase in indirect purchased loan recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 4.8% for the year ended December 31, 2019 compared to 5.2% in 2018.

54





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Commercial charge-offs increased $76.3 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of an $89.1 million increase in Corporate Banking charge-offs.

Commercial recoveries decreased $6.3 million for the year ended December 31, 2019 compared to 2018.

NON-INTEREST INCOME
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Consumer fees $391,495
 $413,934
 $(22,439) (5.4)%
Commercial fees 157,351
 154,213
 3,138
 2.0 %
Lease income 2,872,857
 2,375,596
 497,261
 20.9 %
Miscellaneous income, net 301,598
 307,282
 (5,684) (1.8)%
Net gains/(losses) recognized in earnings 5,816
 (6,717) 12,533
 186.6 %
Total non-interest income $3,729,117
 $3,244,308
 $484,809
 14.9 %

Total non-interest income increased $484.8 million for the year ended December 31, 2019 compared to 2018. This increase was primarily due to an increase in lease income. The increase was partially offset by decreases in consumer fees due to the reduction of loans serviced by the Company.

Consumer fees

Consumer fees decreased $22.4 million for the year ended December 31, 2019 compared to 2018. This decrease was primarily related to a decrease in loan fees income, which was attributable to a reduction in loans serviced by the Company.

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 year ended December 31, 2019 compared to 2018.

Lease income

Lease income increased $497.3 million for the year ended December 31, 2019 compared to 2018. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $15.3 billion for the year ended December 31, 2019, compared to $12.3 billion for 2018.

Miscellaneous income/(loss)
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Mortgage banking income, net $44,315
 $34,612
 $9,703
 28.0 %
BOLI 62,782
 58,939
 3,843
 6.5 %
Capital market revenue 197,042
 165,392
 31,650
 19.1 %
Net gain on sale of operating leases 135,948
 202,793
 (66,845) (33.0)%
Asset and wealth management fees 175,611
 165,765
 9,846
 5.9 %
Loss on sale of non-mortgage loans (397,965) (351,751) (46,214) (13.1)%
Other miscellaneous income, net 83,865
 31,532
 52,333
 166.0 %
     Total miscellaneous income/(loss) $301,598
 $307,282
 $(5,684) (1.8)%

Miscellaneous income decreased $5.7 million for the year ended December 31, 2019 compared to 2018. This decrease was primarily due to a decrease in net gain on sale of operating leases and an increase in loss on sale of non-mortgage loans, partially offset by an increase in capital market revenue and an increase in Other miscellaneous income due to lower losses on securitization transactions.

55





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar Percentage
Compensation and benefits $1,945,047
 $1,799,369
 $145,678
 8.1 %
Occupancy and equipment expenses 603,716
 659,789
 (56,073) (8.5)%
Technology, outside services, and marketing expense 656,681
 590,249
 66,432
 11.3 %
Loan expense 405,367
 384,899
 20,468
 5.3 %
Lease expense 2,067,611
 1,789,030
 278,581
 15.6 %
Other expenses 687,430
 608,989
 78,441
 12.9 %
Total general, administrative and other expenses $6,365,852
 $5,832,325
 $533,527
 9.1 %

Total general, administrative and other expenses increased $533.5 million for the year ended December 31, 2019 compared to 2018. The most significant factors contributing to these increases were as follows:

Technology, outside services, and marketing expense increased $66.4 million for the year ended December 31, 2019, compared to 2018. The increase was primarily due to increases in outside service expenses.
Lease expense increased $278.6 million for the year ended December 31, 2019 compared to 2018. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio.
Other expenses increased $78.4 million for the year ended December 31, 2019, compared to the corresponding period in 2018. This increase was primarily attributable to an increase in legal expenses and investments in qualified housing, offset by a decrease in operational risk. FDIC insurance premiums for the year ended December 31, 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 17 to the Consolidated Financial Statements.

INCOME TAX PROVISION

An income tax provision of $472.2 million was recorded for the year ended December 31, 2019, compared to an income tax provision of $425.9 million for 2018. This resulted in an ETR of 31.2% for the year ended December 31, 2019, compared to 30.1% for 2018.

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 15 to the Consolidated Financial Statements for the year-to-year comparison of the ETR.

LINE OF BUSINESS RESULTS

General

The Company's segments at December 31, 2019 consisted of Consumer and Business Banking, C&I, 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 23 to the Consolidated Financial Statements.


56





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Results Summary

Consumer and Business Banking
 Year Ended December 31, YTD Change
(dollars in thousands)2019 2018 Dollar increase/(decrease) Percentage
Net interest income$1,504,887
 $1,298,571
 $206,316
 15.9 %
Total non-interest income359,849
 310,839
 49,010
 15.8 %
Provision for credit losses156,936
 100,523
 56,413
 56.1 %
Total expenses1,655,923
 1,575,407
 80,516
 5.1 %
Income/(loss) before income taxes51,877
 (66,520) 118,397
 178.0 %
Intersegment revenue2,093
 2,507
 (414) (16.5)%
Total assets23,934,172
 21,024,740
 2,909,432
 13.8 %

Consumer and Business Banking reported income before income taxes of $51.9 million for the year ended December 31, 2019, compared to losses before income taxes of $66.5 million for the year ended December 31, 2018. Factors contributing to this change were:

Net interest income increased $206.3 million for the year ended December 31, 2019compared to 2018. This increase was primarily driven by deposit product margin due to a higher interest rate environment combined with increased auto loan volumes.
Non-interest income increased by $49.0 million for the year ended December 31, 2019compared to 2018. This increase was the result of gains on the sale of 14 branches and gains on the sale of conforming mortgage loan portfolios.
The provision for credit losses increased $56.4 million for the year ended December 31, 2019 compared to 2018. This increase was due to reserve builds for the large growth of the auto portfolio in 2019.
Total assets increased $2.9 billion for the year ended December 31, 2019 compared to 2018. This increase was primarily driven by an increase in auto loans.

C&I Banking
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $231,270
 $228,491
 $2,779
 1.2 %
Total non-interest income 71,323
 82,435
 (11,112) (13.5)%
(Release of) /provision for credit losses 31,796
 (35,069) 66,865
 190.7 %
Total expenses 238,681
 225,495
 13,186
 5.8 %
Income before income taxes 32,116
 120,500
 (88,384) (73.3)%
Intersegment revenue 6,377
 4,691
 1,686
 35.9 %
Total assets 7,031,238
 6,823,633
 207,605
 3.0 %

C&I reported income before income taxes of $32.1 million for the year ended December 31, 2019, compared to income before income taxes of $120.5 million for 2018. Contributing to these changes were:

The provision for credit losses increased $66.9 million for the year ended December 31, 2019 compared to 2018. This increase was 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.


57





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



CRE & VF
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $417,418
 $413,541
 $3,877
 0.9 %
Total non-interest income 11,270
 6,643
 4,627
 69.7 %
(Release of) /provision for credit losses 13,147
 15,664
 (2,517) (16.1)%
Total expenses 135,319
 116,392
 18,927
 16.3 %
Income before income taxes 280,222
 288,128
 (7,906) (2.7)%
Intersegment revenue 5,950
 4,729
 1,221
 25.8 %
Total assets 19,019,242
 18,888,676
 130,566
 0.7 %

CRE & VF reported income before income taxes of $280.2 million for the year ended December 31, 2019 compared to income before income taxes of $288.1 million for 2018. The results of this reportable segment were relatively consistent period-over-period.

CIB
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $152,083
 $136,582
 $15,501
 11.3 %
Total non-interest income 208,955
 195,023
 13,932
 7.1 %
(Release of)/Provision for credit losses 6,045
 9,335
 (3,290) (35.2)%
Total expenses 270,226
 234,949
 35,277
 15.0 %
Income before income taxes 84,767
 87,321
 (2,554) (2.9)%
Intersegment expense (14,420) (12,362) (2,058) (16.6)%
Total assets 9,943,547
 8,521,004
 1,422,543
 16.7 %

CIB reported income before income taxes of $84.8 million for the year ended December 31, 2019, compared to income before income taxes of $87.3 million for 2018. Factors contributing to this change were:

Total expenses increased $35.3 million for the year ended December 31, 2019 compared to 2018, due to higher compensation related to higher headcount.
Total assets increased $1.4 billion for the year ended December 31, 2019 compared to 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
  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $72,535
 $240,110
 $(167,575) (69.8)%
Total non-interest income 415,473
 402,006
 13,467
 3.3 %
(Release of)/Provision for credit losses (7,322) 24,254
 (31,576) (130.2)%
Total expenses 770,254
 786,543
 (16,289) (2.1)%
Loss before income taxes (274,924) (168,681) (106,243) (63.0)%
Intersegment (expense)/revenue 
 435
 (435) (100.0)%
Total assets 40,648,746
 36,416,377
 4,232,369
 11.6 %

58





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The Other category reported losses before income taxes of $274.9 million for the year ended December 31, 2019 compared to losses before income taxes of $168.7 million for 2018. Factors contributing to this change were:

Net interest income decreased $167.6 million for the year ended December 31, 2019 compared to 2018, due to higher interest rates.
The provision for credit losses decreased $31.6 million for the year ended December 31, 2019 compared to 2018, due to the release of reserves related to the sale of loan portfolios at BSPR, and loan portfolios that were in run-off.

SC

The 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.

  Year Ended December 31, YTD Change
(dollars in thousands) 2019 2018 Dollar increase/(decrease) Percentage
Net interest income $3,971,826
 $3,958,280
 $13,546
 0.3 %
Total non-interest income 2,760,370
 2,297,517
 462,853
 20.1 %
Provision for credit losses 2,093,749
 2,205,585
 (111,836) (5.1)%
Total expenses 3,284,179
 2,857,944
 426,235
 14.9 %
Income before income taxes 1,354,268
 1,192,268
 162,000
 13.6 %
Intersegment revenue 
 
 
 0.0%
Total assets 48,922,532
 43,959,855
 4,962,677
 11.3 %

SC reported income before income taxes of $1.4 billion for the year ended December 31, 2019, compared to income before income taxes of $1.2 billion for 2018. Contributing to this change were:

Total non-interest income increased $462.9 million for the year ended December 31, 2019 compared to 2018, due to increasing operating lease income from the continued growth in the operating lease vehicle portfolio.
The provision of credit losses decreased $111.8 million for the year ended December 31, 2019 compared to 2018, due to lower TDR balances and better recovery rates.
Total expenses increased $426.2 million for the year ended December 31, 2019 compared to 2018, due to increasing lease expense from the continued growth in the operating lease vehicle portfolio.
Total assets increased $5.0 billion for the year ended December 31, 2019 compared to 2018, due to continued growth in RICs and operating lease receivables. This growth was driven by increased originations.

59





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



FINANCIAL CONDITION


LOAN PORTFOLIO

The Company's loans held for investment ("LHFI")LHFI portfolio consisted of the following at the dates indicated:
 December 31, 2017 December 31, 2016 December 31, 2015 December 31, 2014 December 31, 2013 December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015
(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial LHFI:                                        
Commercial real estate loans $9,279,225
 11.5% $10,112,043
 11.8% $9,846,236
 11.3% $9,741,442
 11.6% $10,356,603
 17.9%
Commercial and industrial loans 14,438,311
 17.9% 18,812,002
 21.9% 20,908,107
 24.0% 18,453,165
 22.1% 14,556,843
 25.3%
CRE $8,468,023
 9.1% $8,704,481
 10.0% $9,279,225
 11.5% $10,112,043
 11.8% $9,846,236
 11.3%
C&I 16,534,694
 17.8% 15,738,158
 18.1% 14,438,311
 17.9% 18,812,002
 21.9% 20,908,107
 24.0%
Multifamily 8,274,435
 10.1% 8,683,680
 10.1% 9,438,463
 10.8% 8,705,890
 10.4% 8,237,029
 14.3% 8,641,204
 9.3% 8,309,115
 9.5% 8,274,435
 10.1% 8,683,680
 10.1% 9,438,463
 10.8%
Other commercial 7,174,739
 8.9% 6,832,403
 8.0% 6,257,072
 7.2% 5,539,848
 6.6% 4,717,342
 8.2% 7,390,795
 8.2% 7,630,004
 8.8% 7,174,739
 8.9% 6,832,403
 8.0% 6,257,072
 7.2%
Total Commercial Loans (1)
 39,166,710
 48.4% 44,440,128
 51.8% 46,449,878
 53.3% 42,440,345
 50.7% 37,867,817
 65.7%
Total commercial loans (1)
 41,034,716
 44.4% 40,381,758
 46.4% 39,166,710
 48.4% 44,440,128
 51.8% 46,449,878
 53.3%
                                        
Consumer loans secured by real estate:              ��                         
Residential mortgages 8,846,765
 11.0% 7,775,272
 9.1% 7,566,301
 8.7% 8,190,461
 9.8% 11,152,747
 19.3% 8,835,702
 9.5% 9,884,462
 11.4% 8,846,765
 11.0% 7,775,272
 9.1% 7,566,301
 8.7%
Home equity loans and lines of credit 5,907,733
 7.3% 6,001,192
 7.0% 6,151,232
 7.1% 6,211,298
 7.4% 6,311,694
 10.9% 4,770,344
 5.1% 5,465,670
 6.3% 5,907,733
 7.3% 6,001,192
 7.1% 6,151,232
 7.1%
Total consumer loans secured by real estate 14,754,498
 18.3% 13,776,464
 16.1% 13,717,533
 15.8% 14,401,759
 17.2% 17,464,441
 30.2% 13,606,046
 14.6% 15,350,132
 17.7% 14,754,498
 18.3% 13,776,464
 16.2% 13,717,533
 15.8%
                                        
Consumer loans not secured by real estate:                                        
RICs and auto loans - originated 23,081,424
 28.6% 22,104,918
 25.8% 18,539,588
 21.3% 9,935,503
 11.9% 81,804
 0.1%
RICs and auto loans - purchased 1,834,868
 2.3% 3,468,803
 4.0% 6,108,210
 7.0% 12,449,526
 14.8% 
 %
Total RICs and auto loans 24,916,292
 30.9% 25,573,721
 29.8% 24,647,798
 28.3% 22,385,029
 26.7% 81,804
 0.1%
                    
RICs and auto loans 36,456,747
 39.3% 29,335,220
 33.7% 24,966,121
 30.9% 25,573,721
 29.8% 24,647,798
 28.3%
Personal unsecured loans 1,285,677
 1.6% 1,234,094
 1.4% 1,177,998
 1.4% 3,205,847
 3.8% 985,679
 1.7% 1,291,547
 1.4% 1,531,708
 1.8% 1,285,677
 1.6% 1,234,094
 1.4% 1,177,998
 1.4%
Other consumer 617,675
 0.8% 795,378
 0.9% 1,032,579
 1.2% 1,306,562
 1.6% 1,321,985
 2.3% 316,384
 0.3% 447,050
 0.4% 617,675
 0.8% 795,378
 0.8% 1,032,579
 1.2%
                                        
Total consumer loans 41,574,142
 51.6% 41,379,657
 48.2% 40,575,908
 46.7% 41,299,197
 49.3% 19,853,909
 34.3% 51,670,724
 55.6% 46,664,110
 53.6% 41,623,971
 51.6% 41,379,657
 48.2% 40,575,908
 46.7%
Total LHFI $80,740,852
 100.0% $85,819,785
 100.0% $87,025,786
 100.0% $83,739,542
 100.0% $57,721,726
 100.0% $92,705,440
 100.0% $87,045,868
 100.0% $80,790,681
 100.0% $85,819,785
 100.0% $87,025,786
 100.0%
                                        
Total LHFI with:                                        
Fixed $50,653,790
 62.7% $51,752,761
 60.3% $52,283,715
 60.1% $50,237,181
 60.0% $28,632,554
 49.6% $61,775,942
 66.6% $56,696,491
 65.1% $50,703,619
 62.8% $51,752,761
 60.3% $52,283,715
 60.1%
Variable 30,087,062
 37.3% 34,067,024
 39.7% 34,742,071
 39.9% 33,502,361
 40.0% 29,089,172
 50.4% 30,929,498
 33.4% 30,349,377
 34.9% 30,087,062
 37.2% 34,067,024
 39.7% 34,742,071
 39.9%
Total LHFI $80,740,852
 100.0% $85,819,785
 100.0% $87,025,786
 100.0% $83,739,542
 100.0% $57,721,726
 100.0% $92,705,440
 100.0% $87,045,868
 100.0% $80,790,681
 100.0% $85,819,785
 100.0% $87,025,786
 100.0%
(1)As of December 31, 2017,2019, the Company had $241.3$395.8 million of commercial loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans decreasedincreased approximately $5.3 billion,$653.0 million, or 11.9%1.6%, from December 31, 20162018 to December 31, 2017.2019. This decreaseincrease was primarily due to a decreasecomprised of increases in commercial and industrialC&I loans of $4.4 billion. Additionally, there was a decrease in$796.5 million and multifamily loans of $409.2$332.1 million, as the Company switches its focus from CRE loans.offset by decreases in other commercial loans of $239.2 million, and CRE loans decreased $832.8of $236.5 million. The increase is reflective of continued investment of resources to grow the commercial business.

 At December 31, 2017, Maturing At December 31, 2019, Maturing
(in thousands) 
In One Year
Or Less
 
One to Five
Years
 
After Five
Years
 
Total(1)
 
In One Year
Or Less
 
One to Five
Years
 
After Five
Years
 
Total (1)
CRE loans $2,274,947
 $5,508,376

$1,495,902
 $9,279,225
 $1,748,087
 $5,245,277

$1,474,659
 $8,468,023
Commercial and industrial loans and other 8,525,068
 11,338,691

1,898,469
 21,762,228
Multi-family loans 739,179
 6,341,184

1,194,072
 8,274,435
C&I and other commercial 10,683,269
 11,367,553

1,990,960
 24,041,782
Multifamily loans 734,815
 5,447,661

2,458,728
 8,641,204
Total $11,539,194

$23,188,251

$4,588,443
 $39,315,888
 $13,166,171

$22,060,491

$5,924,347
 $41,151,009
Loans with:                
Fixed rates $3,545,579
 $11,239,354

$2,267,162
 $17,052,095
 $4,815,879
 $8,569,337

$3,455,594
 $16,840,810
Variable rates 7,993,615
 11,948,897

2,321,281
 22,263,793
 8,350,292
 13,491,154

2,468,753
 24,310,199
Total $11,539,194

$23,188,251

$4,588,443
 $39,315,888
 $13,166,171

$22,060,491

$5,924,347
 $41,151,009
(1)Includes LHFS.
(1) Includes LHFS.

8160





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Consumer Loans Secured By Real Estate

Consumer loans secured by real estate increased $978.0 million,decreased $1.7 billion, or 7.1%11.4%, from December 31, 20162018 to December 31, 2017.2019. This increasedecrease was comprised of an increasea decrease in the residential mortgage portfolio of $1.1$1.0 billion, primarily due to an increasethe sale of residential mortgage loans to the FNMA in new loan originations, offset by2019, and a decrease in the home equity loans and lines of credit portfolio of $93.5$695.3 million.

Consumer Loans Not Secured By Real Estate

The consumer loan portfolio not secured by real estate decreased $783.5 million,RICs and auto loans

RICs and auto loans increased $7.1 billion, or 2.8%24.3%, from December 31, 20162018 to December 31, 2017.2019. The decreaseincrease in the RIC and auto loan portfolio was primarily due to a decreasean increase of purchased financial receivables from third-party lenders and originations, net of securitizations. RICs are collateralized by vehicle titles, and the lender has the right to repossess the vehicle in the RIC and auto loan portfolio-purchased of $1.6 billion, which was partially offset by a $1.0 billion increase in net new originations. The decrease inevent the RIC and auto loan portfolio-purchased was due to run-offconsumer defaults on the payment terms of the portfolio from normal paydown and chargeoff activity.contract. Most of the Company's RICs held for investment are pledged against warehouse lines or securitization bonds. Refer to further discussion of these in Note 11 to the Consolidated Financial Statements.

As of December 31, 2017, 68.1%2019, 66.2% (includes loans with no FICO score equivalent to 8.7% of the total portfolio) of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a Fair Isaac Corporation ("FICO®") score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. While underwriting guidelines wereare 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 decreasedecreased 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")DTI ratios, loan-to-value ("LTV")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 December 31, 2017,2019, a typical RIC was originated with an average annual percentage rate of 16.4%16.3% and was purchased from the dealer at a discountpremium of 0.7%0.5%. All of the Company's RICs and auto loans are fixed-rate loans.

Nonprime RICs and personal unsecured loans have a higher inherent risk of loss than prime loans. The Company records an ALLL to cover its estimate of inherent losses on its RICs incurred as of the balance sheet date. As of

Personal unsecured and other consumer loans

Personal unsecured and other consumer loans decreased from December 31, 2017, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.2018 to December 31, 2019 by $370.8 million.

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

SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of the agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. The Bluestem loan portfolio is carried as held for saleheld-for-sale in our Consolidated Financial Statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on this portfolio, and there may be further such adjustments required in future periods'period financial statements. Management is currently evaluating alternatives for the Bluestem portfolio. As of December 31, 2019, SC's personal unsecured portfolio was held-for-sale and thus does not have a related allowance.

8261





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 establishfurther 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 established.created. To ensure credit quality, authority to approve loans are executedoriginated in accordance with the Company’s credit and governance standards consistent with its Enterprise Risk Management Framework. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.

The Credit Risk Review group conducts ongoing independent reviews of the credit quality of the Company’s loan portfolios and credit management processes to ensure the accuracy of the risk ratings and adherence to established policies and procedures, verify compliance with applicable laws and regulations, provide objective measurement of the risk inherent in the loan portfolio, and ensure that proper documentation exists. The results of these periodic reviews are reported to business line management, Risk Management and the Audit CommitteeCommittees 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 natureliquidity and value of the collateral, collateral margin, economic conditions, or other factors. Loan credit quality is subject to scrutiny by business unit management, credit risk professionals, and Internal Audit.

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

Commercial Loans

Commercial loans principally represent commercial real estate loans (including multifamily loans), loans to commercial and industrialC&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. Commercial and industrialC&I loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estateCRE loans are originated primarily within the Mid-Atlantic, New York, and New England market areas and are secured by real estate at specified LTV ratios and often by a guarantee of the borrower.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")CLTV ratios are generally limited to 90% for both first and second liens. SHUSA originates and purchases fixed-rate and adjustable rate residential mortgage loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores, and adherence to underwriting policies that emphasize conservative LTV ratios of generally no more than 80%. Residential mortgage loans originated or purchased in excess of an 80% LTV ratio are generally insured by private mortgage insurance, unless otherwise guaranteed or insured by the Federal, state, or local government. SHUSA also utilizes underwriting standards which comply with those of the FHLMC or the FNMA. Credit risk is further reduced, since a portion of the Company’s fixed-rate mortgage loan production is sold to investors in the secondary market without recourse.

Consumer Loans Not Secured by Real Estate

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


8362





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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) December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018 Dollar Percentage
Non-accrual loans:            
Commercial:            
CRE $139,236
 $179,220
 $83,117
 $88,500
 $(5,383) (6.1)%
Commercial and industrial loans 230,481
 182,368
C&I 153,428
 189,827
 (36,399) (19.2)%
Multifamily 11,348
 8,196
 5,112
 13,530
 (8,418) (62.2)%
Other commercial 83,468
 11,097
 31,987
 72,841
 (40,854) (56.1)%
Total commercial loans 464,533
 380,881
 273,644
 364,698
 (91,054) (25.0)%
            
Consumer loans secured by real estate:  
  
  
  
    
Residential mortgages 265,436
 287,140
 134,957
 216,815
 (81,858) (37.8)%
Home equity loans and lines of credit 134,162
 120,065
 107,289
 115,813
 (8,524) (7.4)%
Consumer loans not secured by real estate:         

 

RICs and auto loans - originated 1,816,226
 1,045,587
RICs - purchased 256,617
 284,486
Total RICs and Auto loans 2,072,843
 1,330,073
    
RICs and auto loans 1,643,459
 1,545,322
 98,137
 6.4 %
Personal unsecured loans 2,366
 5,201
 2,212
 3,602
 (1,390) (38.6)%
Other consumer 10,657
 12,694
 11,491
 9,187
 2,304
 25.1 %
Total consumer loans 2,485,464
 1,755,173
 1,899,408
 1,890,739
 8,669
 0.5 %
Total non-accrual loans 2,949,997
 2,136,054
 2,173,052
 2,255,437
 (82,385) (3.7)%
            
Other real estate owned 130,777
 116,705
 66,828
 107,868
 (41,040) (38.0)%
Repossessed vehicles 210,692
 231,746
 212,966
 224,046
 (11,080) (4.9)%
Other repossessed assets 2,190
 3,838
 4,218
 1,844
 2,374
 128.7 %
Total other real estate owned ("OREO") and other repossessed assets 343,659
 352,289
Total OREO and other repossessed assets 284,012
 333,758
 (49,746) (14.9)%
Total non-performing assets $3,293,656
 $2,488,343
 $2,457,064
 $2,589,195
 $(132,131) (5.1)%
            
Past due 90 days or more as to interest or principal and accruing interest $96,461
 $93,845
 $93,102
 $98,979
 $(5,877) (5.9)%
Annualized net loan charge-offs to average loans 3.0% 2.7%
Annualized net loan charge-offs to average loans (1)
 2.8% 2.9%    n/a    n/a
Non-performing assets as a percentage of total assets 2.6% 1.8% 1.6% 1.9%    n/a    n/a
NPLs as a percentage of total loans 3.5% 2.4% 2.3% 2.6%    n/a    n/a
ALLL as a percentage of total NPLs 132.6% 178.6% 167.8% 172.8%    n/a    n/a
(1) Annualized net loan charge-offs are based on year-to-date charge-offs.

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 $112.3$179.9 million and $120.7$98.8 million at December 31, 20172019 and December 31, 2016,2018, respectively. This increase was primarily due to loans to one large borrower within the CRE portfolio.

Potential problem consumer loans amounted to $4.2$4.7 billion at both December 31, 20172019 and December 31, 2016.2018. Management has included these loans in its evaluation of the Company's ACL and reserved for them during the respective periods.

Non-performing assets increased during the perioddecreased to $3.3$2.5 billion, or 2.6%1.6% of total assets, at December 31, 2017,2019, compared to $2.5$2.6 billion, or 1.8%1.9% of total assets, at December 31, 2016,2018, primarily attributable to an increasea decrease in NPLs in the commercial and industrial and RIC portfolios. The increase in the non-accrual commercial and industrial NPL portfolio was driven by obligors that experienced credit difficulties during the year. The increase in the Other Commercial NPL portfolio was primarily driven by one obligor located in Puerto Rico that experienced business disruptions due to Hurricane Maria.consumer RICs.


8463





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The increase in RIC non-accrual loans as of December 31, 2017, was the result of the Company classifying $659.8 million of RIC TDR loans that were less than 60 days past due, but for which repayment was not reasonably assured, as non-accrual. Until repayment is reasonably assured, the Company is applying the cost recovery method to this RIC portfolio, which accelerated the reduction of the outstanding RIC balance and correspondingly reduces the required allowance and decreases the allowance for loan losses as a percentage of the NPL ratio. In addition, the purchased RIC ALLL/NPL portfolio decreased primarily due to a $1.6 billion or 47.1% decline in the portfolio as it is in run-off.

General

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

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

Commercial

Commercial NPLs increased $83.7decreased $91.1 million from December 31, 20162018 to December 31, 2017.2019. Commercial NPLs accounted for 1.2%0.7% and 0.9% of Commercialcommercial LHFI at December 31, 20172019 and December 31, 2016,2018, respectively. The increasedecrease in commercial NPLs was comprised of a $120.5decreases of $36.4 million increase in commercialC&I and industrial NPLs, offset by a $40.0$40.9 million decrease in the CREOther commercial portfolio.

Consumer Loans Not Secured by Real Estate

RICs and amortizing personal loans are classified as non-performing when they are greatermore than 60 days past dueDPD (i.e., 61 days past due)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 Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans onin non-accrual status, interest income is recognized on a cash basis,basis; however, the Company continues to assess the recognition of cash received on those loans in order to identify whether certain of thosethe loans should also be placed on a cost recovery basis. For TDR loans on non-accrual status, the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on a cost recovery basis, the Company returns to accrual status when a sustained period of repayment performance has been achieved. Based on deteriorating TDR vintage performance, beginning January 1, 2017, the Company believes repayment under the revised terms is not reasonably assured for a RIC that is already on non-accrual status (i.e., more than 60 days past due) and has received a modification or deferment that qualifies as a TDR event. In addition, any TDR that subsequently receives a third deferral is placed on non-accrual status. Further, the Company has determined that certain of these loans should also be placed on a cost recovery basis.

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



NPLs in the RIC and auto loan portfolio increased $742.8by $98.1 million from December 31, 20162018 to December 31, 2017. This increase was comprised of a $770.6 million increase in RICs and auto loans-originated offset by a $27.9 million decrease in RICs - purchased. At December 31, 2017, non-performing2019. Non-performing RICs and auto loans accounted for 8.3% of total RIC4.5% and auto LHFI, compared to 5.2%5.3% of total RICs and auto loans at December 31, 2016. NPLs in the unsecured and other consumer loan portfolio decreased $4.9 million from December 31, 2016 to December 31, 2017. At December 31, 20172019 and December 31, 2016, non-performing personal unsecured and other consumer loans accounted for 0.7% and 0.9% of total unsecured and other consumer loans,2018, respectively.

Consumer Loans Secured by Real Estate

The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of December 31, 20172019 and December 31, 2016,2018, respectively:
 December 31, 2017 December 31, 2016 December 31, 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 Residential mortgages Home equity loans and lines of credit Residential mortgages Home equity loans and lines of credit
NPLs $265,436
 $134,162
 $287,140
 $120,065
 $134,957
 $107,289
 $216,815
 $115,813
Total LHFI 8,846,765
 5,907,733
 7,775,272
 6,001,192
 8,835,702
 4,770,344
 9,884,462
 5,465,670
NPLs as a percentage of total LHFI 3.0% 2.3% 3.7% 2.0% 1.5% 2.2% 2.2% 2.1%
NPLs in foreclosure status 48.8% 52.2% 58.6% 38.4% 15.5% 84.2% 43.3% 56.7%

The NPL ratio is usually higher for the Company's residential mortgage loan portfolio compared to its consumer loans secured by real estate portfolio due to a number of factors, including the prolonged workout and foreclosure resolution processes for residential mortgage loans, differences in risk profiles, and mortgage loans located outside the Northeast and Mid-Atlantic United States.

Foreclosure Activity

The percentage As of NPLs in foreclosure status decreased from 58.6% at December 31, 20162019, the consumer loans secured by real estate portfolio has a higher NPL ratio compared to 48.8% at December 31, 2017 for residential mortgages and increased from 38.4% at December 31, 2016 to 52.2% at December 31, 2017 for home equity loans.

The dollar value ofthe residential mortgage NPLs in foreclosure status decreased from $168.2 million at December 31, 2016 to $129.4 million at December 31, 2017.

The value of home equity loans NPLs in foreclosure status increased from $46.2 million at December 31, 2016 to $70.0 million at December 31, 2017. This increase was mainlyportfolio, primarily due to home equity loans on propertiesthe NPL loan sale in Puerto Rico.

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

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

The following table represents the concentration of foreclosures by state and U.S. territory for the Company as a percentage of total foreclosures at December 31, 2017 and December 31, 2016, respectively:
  December 31, 2017 December 31, 2016
Puerto Rico 53.5% 60.0%
New Jersey 13.7% 9.1%
New York 6.4% 10.7%
Pennsylvania 10.9% 4.7%
Massachusetts 5.8% 7.0%
All other states(1)
 9.7% 8.5%
(1) States included in this category individually represent less than 10% of total foreclosures.2019.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The foreclosure closings issue has a greater impact on the residential mortgage portfolio than the consumer real estate secured portfolio due to the larger volume of loans in first lien position in that portfolio which have equity upon which to foreclose. Exclusive of Chapter 7 bankruptcy NPL accounts, approximately 97.2% of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only 52.8% of the 90+ day delinquent loan balances in the consumer real estate secured portfolio are secured by a first lien. Consumer real estate secured NPLs may get charged off more quickly due to the lack of equity to foreclose from a second lien position.

Alt-A LoansDelinquencies

The Alt-A segment consistsCompany generally considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of loans with limited documentation requirements and a portion of which were originated through independent parties ("Brokers") outside the Bank's geographic footprint. scheduled payment by the due date.    

At December 31, 20172019 and December 31, 2016,2018, the residential mortgage portfolio includedCompany's delinquencies consisted of the following Alt-A loans:following:
(dollars in thousands) December 31, 2017 December 31, 2016
Alt-A loans $386,412
 $476,229
Alt-A loans as a percentage of the residential mortgage portfolio(1)
 4.3% 5.8%
Alt-A loans in NPL status $33,534
 $48,189
Alt-A loans in NPL status as a percentage of residential mortgage NPLs 12.6% 16.8%
  December 31, 2019 December 31, 2018
(dollars in thousands) Consumer Loans Secured by Real EstateRICs and auto loansPersonal Unsecured and Other Consumer LoansCommercial LoansTotal Consumer Loans Secured by Real EstateRICs and auto loansPersonal Unsecured and Other Consumer LoansCommercial LoansTotal
Total delinquencies $404,945$4,768,833$206,703$339,844$5,720,325 $495,854$4,760,361$226,181$232,264$5,714,660
Total loans(1)
 $13,902,871$36,456,747$2,615,036$41,151,009$94,125,663 $15,564,653$29,335,220$3,047,515$40,381,758$88,329,146
Delinquencies as a % of loans 2.9%13.1%7.9%0.8%6.1% 3.2%16.2%7.4%0.6%6.5%
(1)Includes residential mortgage held for saleLHFS.

Overall, total delinquencies increased by $5.7 million, or 0.1%, from December 31, 2018 to December 31, 2019, primarily driven by commercial loans, which increased $107.6 million, offset by consumer loans secured by real estate, which decreased $90.9 million. The performance ofincrease in the Alt-A segment has remained poor, averaging an 8.7% NPL ratiocommercial portfolio was due to loans to two customers that became delinquent in 2017. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of 1.8% per month. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the firstfourth quarter of 2009, when2019, partially offset by the portfolio was placed in run-off, compared to 12.6% at December 31, 2017. As the Alt-A segment runs off and higher quality residential mortgages are addedmortgage decrease due to the portfolio, the shift in product mix is expected to lower NPL balances as a percentage of the residential mortgage portfolio.and FNMA sales.


Troubled Debt Restructurings ("TDRs")TDRs

TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of the customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal.

TDRs are generally placed in nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after demonstrating at least six consecutive monthsa sustained period of sustained payments following modification,repayment performance, as long as the Company believes the principal and interest of the restructured loan will be paid in full. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.

The following table summarizes TDRs at the dates indicated:
  As of December 31, 2019
(in thousands) Commercial% Consumer Loans Secured by Real Estate% RICs and Auto Loans% Other Consumer% Total TDRs
Performing $64,538
49.5% $182,105
67.8% $3,332,246
86.6% $67,465
91.7% $3,646,354
Non-performing 65,741
50.5% 86,335
32.2% 515,573
13.4% 6,128
8.3% 673,777
Total $130,279
100.0% $268,440
100.0% $3,847,819
100.0% $73,593
100.0% $4,320,131
               
% of loan portfolio 0.3%n/a
 2.0%n/a
 10.6%n/a
 4.6%n/a
 4.7%
(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% $141,605
79.6% $5,069,879
Non-performing 107,024
57.6% 100,543
27.7% 664,688
12.7% 36,235
20.4% 908,490
Total $185,768
100.0% $362,992
100.0% $5,251,769
100.0% $177,840
100.0% $5,978,369
               
% of loan portfolio 0.5%n/a
 2.3%n/a
 17.9%n/a
 9.0%n/a
 6.9%
(1) Excludes LHFS.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table summarizes TDRs at the dates indicated:
  Year Ended December 31, 2017
(in thousands) Commercial% Consumer loans secured by real estate% RICs and auto loans% Other consumer% Total TDRs
Performing $146,808
54.4% $292,634
70.8% $5,270,507
88.3% $114,355
74.7% $5,824,304
Non-performing 123,266
45.6% 120,458
29.2% 700,461
11.7% 38,683
25.3% 982,868
Total $270,074
100.0% $413,092
100.0% $5,970,968
100.0% $153,038
100.0% $6,807,172
               
% of loan portfolio 0.7%n/a
 2.8%n/a
 22.9%n/a
 5.2%n/a
 31.6%
(1) Includes LHFS            
               
  Year Ended December 31, 2016
(in thousands) Commercial% Consumer loans secured by real estate% RICs and auto loans% Other consumer% Total TDRs
Performing $214,474
59.2% $268,777
65.9% $4,556,770
88.3% $129,767
74.3% $5,169,788
Non-performing 148,038
40.8% 139,274
34.1% 604,864
11.7% 44,951
25.7% 937,127
Total $362,512
100.0% $408,051
100.0% $5,161,634
100.0% $174,718
100.0% $6,106,915
               
% of loan portfolio 0.8%n/a
 2.9%n/a
 19.5%n/a
 5.6%n/a
 28.8%
(1) Includes LHFS.

The following table provides a summary of TDR activity:
 Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2019 Year Ended December 31, 2018
(in thousands) RICs and auto loans All other loans RICs and auto loans 
All other loans(1)
 RICs and Auto Loans 
All Other Loans(1)
 RICs and Auto Loans 
All Other Loans(1)(2)
TDRs, beginning of period $5,161,634
 $945,281
 $3,866,236
 $833,308
 $5,251,769
 $726,600
 $6,037,695
 $805,292
New TDRs(1)
 4,115,154
 246,729
 3,483,890
 209,605
 1,153,160
 145,135
 1,877,058
 192,733
Charged-Off TDRs (2,211,027) (270,218) (1,599,828) (27,977) (1,389,044) (13,706) (1,706,788) (14,554)
Sold TDRs (3,141) (10,410) 
 (14,686) (1,139) (83,204) (2,884) (7,148)
Payments on TDRs (1,091,652) (75,178) (588,664) (54,969) (1,166,927) (302,513) (953,312) (249,723)
TDRs, end of period $5,970,968
 $836,204
 $5,161,634
 $945,281
 $3,847,819
 $472,312
 $5,251,769
 $726,600
(1)New TDRs includes drawdowns on lines of credit that have previously been classified as TDRs.
(2) Rollforward adjusted through the New TDRs line item to include RV/Marine TDRs in the amount of $56.0 million that were not identified at December 31, 2018.

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, resultingwhich may result in the classification of the loan as current and therefore not considered delinquent. However, there are instances when a delinquent account. Thereafter,deferral is granted but the accountloan 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. TDRsHistorically, the majority of deferrals are placed on nonaccrual status whenapproved 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 Company believes repayment underlife of the revised terms is not reasonably assured, and considered for returnloan, the loan will advance to accrual when a sustained period of repayment performance has been achieved.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.


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Item 7.    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.


Delinquencies

At December 31, 2017 and December 31, 2016, the Company's delinquencies consisted of the following:
  December 31, 2017 December 31, 2016
(dollars in thousands) Consumer Loans Secured by Real EstateRICs and auto loansPersonal unsecured and Other Consumer LoansCommercial LoansTotal Consumer Loans Secured by Real EstateRICs and auto loansPersonal unsecured and Other Consumer LoansCommercial LoansTotal
Total delinquencies $571,229$4,225,517$229,547$295,138$5,321,431 $568,517$4,261,192$245,588$257,153$5,332,450
Total loans(1)
 $14,964,668$26,017,340$2,965,442$39,315,888$83,263,338 $14,239,357$26,498,469$3,107,074$44,561,193$88,406,093
Delinquencies as a % of Loans 3.8%16.2%7.7%0.8%6.4% 4.0%16.1%7.9%0.6%6.0%
(1)Includes LHFS.

Overall, total delinquencies decreased by $11.0 million, or 0.2%, from December 31, 2016 to December 31, 2017. RICs and auto loan and other consumer loan delinquencies decreased $35.7 million. Delinquencies at December 31, 2016 were primarily a result of a decline in the credit quality of the 2015 vintage RICs, which have a higher percentage of loans with no FICO scores. Due to payments and charge-offs on 2015 vintage RICs during 2017, the 2015 vintage RICs had a lower impact on delinquencies at December 31, 2017 than December 31, 2016. Commercial loan delinquencies increased by $38.0 million from December 31, 2016 to December 31, 2017, primarily related to commercial and industrial loans located in Puerto Rico due to overall economic conditions on the island.


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 FICO scores and CLTV, internal risk ratings, economic conditions and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.

The following table presents the allocation of the ALLL and the percentage of each loan type to total LHFI at the dates indicated:
  December 31, 2017 December 31, 2016
(dollars in thousands) Amount 
% of Loans
to Total LHFI
 Amount % of Loans
to Total LHFI
Allocated allowance:        
Commercial loans $443,796
 48.4% $449,837
 51.8%
Consumer loans 3,420,756
 51.6% 3,317,604
 48.2%
Unallocated allowance 47,023
 n/a
 47,023
 n/a
Total ALLL 3,911,575
 100.0% 3,814,464
 100.0%
Reserve for unfunded lending commitments 109,111
   122,418
  
Total ACL $4,020,686
   $3,936,882
  

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table presents the allocation of the ALLL and the percentage of each loan type to total LHFI at the dates indicated:
  December 31, 2019 December 31, 2018
(dollars in thousands) Amount 
% of Loans
to Total LHFI
 Amount % of Loans
to Total LHFI
Allocated allowance:        
Commercial loans $399,829
 44.4% $441,083
 46.4%
Consumer loans 3,199,612
 55.6% 3,409,024
 53.6%
Unallocated allowance 46,748
 n/a
 47,023
 n/a
Total ALLL 3,646,189
 100.0% 3,897,130
 100.0%
Reserve for unfunded lending commitments 91,826
   95,500
  
Total ACL $3,738,015
   $3,992,630
  

General

The ACL increased $83.8decreased by $254.6 million from December 31, 20162018 to December 31, 2017. The increase2019. This change in the overall ACL was primarily attributable to the increaseddecreased amount of TDR'sTDRs 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.

Commercial

For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3.0$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.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

The portion of the ALLL related to the commercial portfolio was $443.8$399.8 million at December 31, 2017 (1.1%2019 (1.0% of commercial LHFI) and $449.8$441.1 million at December 31, 2016 (1.0%2018 (1.1% of commercial LHFI). The primary factor resulting in the decreased ACL allocated to the commercial portfolio is,was in part due to a decline in the overall balance of thecharge-off to three large commercial loan portfolio. During 2016, management recorded additional reserves for loans within the energy sector.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 life cycleslifecycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral. Management documents the collateral type, the date of the most recent valuation, and whether any liens exist to determine the value to compare against the committed loan amount.

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

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

The Company considers the delinquency status of its senior liens in cases in which the Company services the lien. The Company currently services the senior lien on 24.8%23.5% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.0%1.1% 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.


91





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

For RICs, 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 held-for-investmentHFI portfolio not classified as TDRs at a level estimated to be adequate to absorb credit losses of the recorded investment inherent in the portfolio, based on a holistic assessment, including both quantitative and qualitative considerations. For TDR loans, the allowance is comprised of impairment measured using a DCF model. RICs and personal unsecured loans are considered separately in assessing the required ALLL using product-specific allowance methodologies applied on a pooled basis.

The quantitative framework is supported by credit models that consider several credit quality indicators including, but not limited to, historical loss experience and current portfolio trends. The transition-based Markov model provides data on a granular and disaggregated/segment basis as it utilizes recently observed loan transition rates from various loan statuses to forecast future losses. Transition matrices in the Markov model are categorized based on account characteristics such as delinquency status, TDR type (e.g., deferment, modification, etc.), internal credit risk, origination channel, months on book,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 $3.4$3.2 billion and $3.3$3.4 billion at December 31, 20172019 and December 31, 2016,2018, respectively. The allowance as a percentage of held-for-investmentHFI consumer loans was 8.2%6.2% at December 31, 20172019 and 8.0%7.3% at December 31, 2016.2018. The increasedecrease in the allowance for consumer loans was primarily attributable to lower TDR volume and rate improvement in SC's RIC and auto loan portfolio growth.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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Unallocated

Additionally, theThe 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 orand 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 December 31, 20172019 and December 31, 2016.2018, 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 Consolidated Balance Sheets. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the ALLL.


92





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The reserve for unfunded lending commitments decreased $3.7 million from $122.4$95.5 million at December 31, 20162018 to $109.1$91.8 million at December 31, 2017. During2019. The decrease of the year ended December 31, 2016, SBNA transferred $6.4 billion of unfunded commitmentsreserve is primarily related to extend creditthe Company strategically reducing its exposure to an unconsolidated related party, which reduced the required reserve for unfunded commitments.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.FRB stock. MBS consist of pass-through, CMOs and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s Investor Service at the date of issuance. The Company’s AFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.

Total investment securities AFS decreased $2.6increased $2.7 billion to $14.4$14.3 billion at December 31, 2017,2019, compared to $17.0$11.6 billion at December 31, 2016.2018. During the year ended December 31, 2017,2019, the composition of the Company's investment portfolio changed due to an increase in U.S. Treasury securities and MBS, partially offset by a decrease in MBS,ABS. U.S. Treasuries and ABS. MBS decreasedincreased by $1.1$2.3 billionprimarily due to investment purchases of $4.5$3.8 billion as offset by $5.5$1.5 billion of principal paydowns and maturities. U.S. Treasuries decreasedsales. MBS increased by $858.7$739.4 million primarily due to investment purchases of $599.0 million,and a decrease in unrealized losses, partially offset by sales, and maturities of $1.4 billion. ABS decreased $703.6 million, primarily due to $461.1 million ofand principal paydowns. For additional information with respect to the Company’s investment securities, see Note 3 to the Consolidated Financial Statements.

Debt securities for which the Company has the positive intent and ability to hold the securities until maturity are classified as held-to-maturityHTM securities. Held-to-maturityHTM securities are reported at cost and adjusted for amortization of premium and accretion of discount. Total investment securities held-to-maturityHTM were $1.8$3.9 billion at December 31, 2017.2019. The Company had 2899 investment securities classified as held-to-maturityHTM as of December 31, 2017.

Total trading securities decreased by $1.6 million to $1,000 at December 31, 2017, compared to $1.6 million at December 31, 2016.2019.

Total gross unrealized losses increasedon investment securities AFS decreased by $0.8 million to $234.3$258.2 million during the year ended December 31, 2017. Refer2019. This decrease was primarily related to Note 3 to the Consolidated Financial Statements for additional details.

Other investments, which consists primarilya decrease in unrealized losses of FHLB stock and FRB stock, decreased from $730.8$246.1 million at December 31, 2016 to $658.9 million at December 31, 2017,on MBS, primarily due to the Company redeeming $327.6 million of FHLB stock at par, partially offset by the Company's purchase of $163.0 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the period ended December 31, 2017, the Company did not purchase any FRB stock.a decrease in interest rates.

The average life of the AFS investment portfolio (excluding certain ABS) at December 31, 20172019 was approximately 4.483.86 years. The average effective duration of the investment portfolio (excluding certain ABS) at December 31, 20172019 was approximately 3.032.85 years. The actual maturities of MBS AFS will differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties.


9370





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table presents the fair value of investment securities by obligor at the dates indicated:
(in thousands) December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
Investment securities AFS:        
U.S. Treasury securities and government agencies $7,042,828
 $8,163,027
 $9,735,337
 $5,485,392
FNMA and FHLMC securities 6,840,696
 7,639,823
 4,326,299
 5,550,628
State and municipal securities 23
 30
 9
 16
Other securities (1)
 529,636
 1,221,345
 278,113
 596,951
Total investment securities AFS 14,413,183
 17,024,225
 14,339,758
 11,632,987
Investment securities held-to-maturity:    
Investment securities HTM:    
U.S. government agencies 1,799,808
 1,658,644
 3,938,797
 2,750,680
Total investment securities held-to-maturity (2)
 1,799,808
 1,658,644
Trading securities 1
 1,630
Total investment securities HTM(2)
 3,938,797
 2,750,680
Other investments 658,863
 730,831
 995,680
 805,357
Total investment portfolio $16,871,855
 $19,415,330
 $19,274,235
 $15,189,024
(1)Other securities primarily include corporate debt securities and ABS.
(2)Held-to-maturityHTM 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 December 31, 2017:2019:
 December 31, 2017 December 31, 2019
(in thousands) Amortized Cost Fair Value Amortized Cost Fair Value
FNMA $3,751,476
 $3,684,371
 $2,467,867
 $2,463,166
FHLMC 3,229,960
 3,156,325
Government National Mortgage Association (1)
 7,923,255
 7,818,654
GNMA (1)
 9,581,198
 9,601,626
Government - Treasuries 4,086,733
 4,090,938
Total $14,904,691
 $14,659,350
 $16,135,798
 $16,155,730
(1)Includes U.S. government agency MBS.


GOODWILL

The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At December 31, 2017,2019, goodwill totaled $4.4 billion and represented 3.5%3.0% of total assets and 18.7%18.2% of total stockholder's equity. The following table shows goodwill by reporting units at December 31, 20172019:

(in thousands) Consumer and Business Banking CRE Commercial Banking GCB SC Santander BanCorp Total Consumer and Business Banking 
C&I(1)
 CRE and Vehicle Finance CIB SC Total
Goodwill at December 31, 2017 $1,880,304
 $870,411
 $542,584
 $131,130
 $1,019,960
 $
 $4,444,389
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 December 31, 2019 $1,880,304
 $317,924
 $1,095,071
 $131,130
 $1,019,960
 $4,444,389
(1) Formerly Commercial Banking

During the fourth quarter of 2017, theThe Company determined that the full amount ofmade a change in its reportable segments beginning January 1, 2019 and, accordingly, has re-allocated goodwill attributed to Santander BanCorp of $10.5 million was impaired and, as a result, it was written off, primarily due to the unfavorable economic environmentrelated 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 Puerto Ricothe October 1, 2018 goodwill impairment test, and noted that there was no impairment. See Note 23 to the Consolidated Financial Statements for additional adverse effect of Hurricane Maria. There were no other additions or re-allocations of goodwill fordetails on the year ended December 31, 2017. There were no additions, re-allocations, or impairments of goodwill for the year ended December 31, 2016.change in reportable segments.

The Company conducted its annual goodwill impairment tests as of October 1, 20172019 using generally accepted valuation methods.

The Company completes a quarterly review for impairment indicators over each of its reporting units, which includes consideration of economic and organizational factors that could impact the fair value of the Company's reporting units. At the completion of the 2019 fourth 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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



For the Consumer and Business Banking reporting unit's fair valuation analysis, an equal weighting of the market approach ("market approach") and income approach was applied. For the market approach, the Company selected a 35.0%25.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected tangible book value ("TBV")TBV of 1.6x1.4x was selected based on publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 9.9%9.1%, which was most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Consumer and Business Banking reporting unit by 45.2%10.3%, indicating the reporting unit was not considered to be impaired or at risk for impairment.impaired.

For the CREC&I reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 35.0%25.0% control premium based on the Company's review of transactions observable in the market-placemarketplace that were determined to be comparable. The projected TBV of 1.7x1.4x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 10.2%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Real Estate reporting unit by 39.7% indicating the Commercial Real Estate reporting unit was not considered to be impaired or at risk for impairment

For the Commercial Banking reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 35.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.8x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 10.5%12.7%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 63.1%18.0%, indicating the Commercial BankingC&I reporting unit was not considered to be impaired or at risk for impairment.impaired.

For the GCBCRE&VF reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 35.0%25.0% control premium based on the Company's review of transactions observable in the marketplace that were determined to be comparable. The projected TBV of 1.5x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 9.4%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 20.5%, indicating the CRE&VF reporting unit was not considered to be impaired or at risk for impairment.

For the CIB reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.6x1.3x was selected based on the selected publicly traded peers of the reporting unit.unit and was equally considered with the projected earnings multiples of 8.0x and 7.5x and 7.0x, which were
applied to the reporting unit's 2019, 2020, and 2021 projected earnings, respectively, due to the nature of the business, which operates outside of the traditional savings and loan bank model. For the income approach, the Company selected a discount rate of 11.3%10.3%, which is most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the GCBCIB reporting unit by 77.5%25.2%, indicating that the GCBCIB reporting unit was not considered to be impaired or at risk for impairment.

For the SC reporting unit's fair valuation analysis, the Company used only the market capitalization approach. For the market capitalization approach, SC's stock price from October 1, 20172019 of $15.37$25.53 was used and a 35.0%25.0% control premium was used based on the Company's review of transactions observable in the market-place that were determined to be comparable. The results of the fair value analyses exceeded the carrying value of the SC reporting unit by 34.1%67.9%, indicating that the SC reporting unit was not considered to be impaired. Management continues to monitor SC's stock price, along with changes in the financial position and results of operations that would impact the reporting unit's carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2017.2019.

Management continues to monitor changes in financial position and results of operations that would impact each of the reporting units estimated fair value or carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2019.


PREMISES AND EQUIPMENT

Total premises and equipment, net, was $849.1 million at December 31, 2017, compared to $996.5 million at December 31, 2016. The decrease in total premises and equipment was primarily due to accumulated depreciation which increased $217.1 million from December 31, 2016 to December 31, 2017. The increase in accumulated depreciation was offset by increases in computer software of $81.0 million related to software and license purchases and increased IT services as well as increases in leasehold improvements of $21.3 million.

During the year ended December 31, 2017 the Company sold and leased back ten properties owned by SBNA. The Company received net proceeds of $58.0 million in connection with these sales. The carrying value of the properties sold was $15.3 million. The Company accounted for the transactions as sale-leasebacks, resulting in recognition of $31.2 million in gains on the date of the transactions and deferral of the remaining $11.5 million that will be amortized over the period of the lease terms. Gain on sale of premises and equipment are included within Miscellaneous income in the Consolidated Statements of Operations.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



DEFERRED TAXES AND OTHER TAX ACTIVITY

The Company had a net deferred tax liability balance of $198.3 million$1.0 billion at December 31, 20172019 (consisting of a deferred tax asset balance of $771.7$503.7 million and a deferred tax liability balance of $970.0 million)$1.5 billion), compared to a net deferred tax liability balance of $430.5$587.5 million at December 31, 20162018 (consisting of a deferred tax asset balance of $989.8$625.1 million and a deferred tax liability balance of $1.4$1.2 billion). The $232.2$429.9 million decrease ofincrease in net deferred liabilities for the year ended December 31, 20172019 was primarily due to a decrease in the net deferred tax liability of $427.3 million as a result of the remeasurement of the Company’s deferred tax balances due to the TCJA which was partially offset by an increase in the net deferred tax liability of $195.1 million, primarilyliabilities related to accelerated depreciation onfrom leasing transactions.

The Company filed a lawsuit against the United States in 2009 in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions, the Company paid foreign taxes of $264.0 million during the years 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the IRS disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million. The Company has paid the taxes, penalties and interest associated with the IRS adjustments for all tax years, and the lawsuit will determine whether the Company is entitled to a refund of the amounts paid.

In November 2015, the Federal District Court granted the Company’s motions for summary judgment and later ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed and the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court, finding that the Company is not entitled to claim the foreign tax credits it claimed but will be allowed to exclude from income $132.0 million (representing half of the U.K. taxes the Company paid) and will be allowed to claim the interest expense deductions. The case has been remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off the deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.8 million tax reserve in relation to items that have not yet been determined by the courts, including potential penalties. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $36.8 million to no change.


OTHER ASSETS

Other assets at December 31, 2017 were $3.6 billion compared to $3.8 billion at December 31, 2016. The decrease in other assets was primarily due to a decrease in deferred tax assets of $218.1 million and equity method investments of $60.9 million from December 31, 2016 to December 31, 2017. These decreases were offset by an increase in activity in miscellaneous assets and receivables of $128.8 million.


DEPOSITS AND OTHER CUSTOMER ACCOUNTS

The Company's banking subsidiaries attract deposits within their primary market areas by offering a variety of deposit instruments, including demand and interest-bearing demand deposit accounts, money market accounts, savings accounts, customer repurchase agreements, CDs and retirement savings plans. In addition, the Bank issues wholesale deposit products such as brokered deposits and government depositsdepreciation on a periodic basis, which serve as an additional source of liquidity for the Company.

Total deposits and other customer accounts decreased $6.4 billion from December 31, 2016 to December 31, 2017. This decrease was primarily comprised of decreases in CDs of $3.8 billion due to the maturity of wholesale CDs, a product that is currently in run-off. Interest-bearing demand deposits decreased $2.5 billion, which is attributable to the withdrawal of several government and large commercial deposits. The Company continues to focus its effort on attracting and increasing lower-cost deposits.

The cost of deposits was 0.50% and 0.53% for the years ended December 31, 2017 and December 31, 2016, respectively.company owned assets.

9672





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



BORROWINGS AND OTHER DEBT OBLIGATIONS

The Company has term loans and lines of credit with Santander and other lenders. The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. In addition, SC has warehouse lines of credit and securitizes some of its RICs and operating leases, which are structured secured financings. Total borrowings and other debt obligations at December 31, 2017 were $39.0 billion, compared to $43.5 billion at December 31, 2016. Total borrowings decreased $4.5 billion, primarily due to a decrease of $4.0 billion in FHLB advances at the Bank and an overall decrease of $2.9 million in SC debt. This was offset by $2.6 billion of new debt issued by SHUSA. See further detail on borrowings activity in Note 11 to the Consolidated Financial Statements.

  Year Ended December 31,
(Dollars in thousands) 2017 2016
Parent Company & other IHC entities borrowings and other debt obligations    
Parent Company senior notes:    
Balance $7,995,462 $4,184,644
Weighted average interest rate at year-end 3.67% 3.35%
Maximum amount outstanding at any month-end during the year $7,995,462 $5,680,872
Average amount outstanding during the year $5,965,006 $4,215,926
Weighted average interest rate during the year 3.40% 3.40%
IHC entity subordinated notes:    
Balance $40,842 $40,457
Weighted average interest rate at year-end 2.02% 2.00%
Maximum amount outstanding at any month-end during the year $40,842 $40,457
Average amount outstanding during the year $40,650 $40,503
Weighted average interest rate during the year 2.02% 2.00%
Junior subordinated debentures to capital trusts:    
Balance $154,102 $233,871
Weighted average interest rate at year-end 3.14% 4.34%
Maximum amount outstanding at any month-end during the year $233,902 $233,871
Average amount outstanding during the year $203,502 $233,845
Weighted average interest rate during the year 4.27% 4.35%
Short-term borrowings:    
Balance $78,669 $279,004
Weighted average interest rate at year-end 1.97% 0.35%
Maximum amount outstanding at any month-end during the year $78,669 $701,930
Average amount outstanding during the year $178,836 $490,467
Weighted average interest rate during the year 1.97% 0.35%

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Year Ended December 31,
(Dollars in thousands) 2017 2016
Bank borrowings and other debt obligations    
REIT preferred:    
Balance $144,167 $156,457
Weighted average interest rate at year-end 13.35% 13.46%
Maximum amount outstanding at any month-end during the year $156,970 $156,457
Average amount outstanding during the year $148,808 $155,678
Weighted average interest rate during the year 13.35% 13.46%
Bank senior notes:    
Balance $0 $997,848
Weighted average interest rate at year-end % 2.18%
Maximum amount outstanding at any month-end during the year $998,192 $997,848
Average amount outstanding during the year $321,905 $996,769
Weighted average interest rate during the year 2.25% 2.12%
Bank subordinated notes:    
Balance $192,018 $498,882
Weighted average interest rate at year-end 8.92% 8.92%
Maximum amount outstanding at any month-end during the year $499,456 $498,882
Average amount outstanding during the year $436,043 $498,504
Weighted average interest rate during the year 8.94% 8.92%
Term loans:    
Balance $139,794 $151,515
Weighted average interest rate at year-end 7.47% 7.08%
Maximum amount outstanding at any month-end during the year $151,616 $161,352
Average amount outstanding during the year $143,838 $154,412
Weighted average interest rate during the year 6.03% 6.07%
Securities sold under repurchase agreements:    
Balance $150,000 $0
Weighted average interest rate at year-end 1.56% %
Maximum amount outstanding at any month-end during the year $150,000 $0
Average amount outstanding during the year $35,847 $0
Weighted average interest rate during the year 1.56% %
Federal funds purchased:    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $100,000
Average amount outstanding during the year $0 $273
Weighted average interest rate during the year % 0.36%
FHLB advances:    
Balance $1,950,000 $5,950,000
Weighted average interest rate at year-end 1.53% 0.85%
Maximum amount outstanding at any month-end during the year $5,550,000 $13,785,000
Average amount outstanding during the year $4,222,603 $9,465,970
Weighted average interest rate during the year 1.53% 1.34%

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Year Ended December 31,
(Dollars in thousands) 2017 2016
SC borrowings and other debt obligations    
Revolving credit facilities:    
Balance $5,598,316 $9,414,817
Weighted average interest rate at year-end 2.73% 2.36%
Maximum amount outstanding at any month-end during the year $6,449,441 $10,864,269
Average amount outstanding during the year $5,932,121 $9,920,858
Weighted average interest rate during the year 4.28% 2.36%
Public securitizations:    
Balance $14,995,304 $13,444,543
Weighted average interest rate range at year-end 0.89% - 2.80%
  0.89% - 2.46%
Maximum amount outstanding at any month-end during the year $15,222,575 $14,202,169
Average amount outstanding during the year $15,091,799 $13,146,712
Weighted average interest rate during the year 2.64% 2.53%
Privately issued amortizing notes:    
Balance $7,564,637 $8,172,407
Weighted average interest rate range at year-end 0.88% - 4.09%
  0.88% - 2.86%
Maximum amount outstanding at any month-end during the year $8,529,281 $8,786,543
Average amount outstanding during the year $8,238,435 $8,263,205
Weighted average interest rate during the year 2.39% 2.34%


ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued Expenses
(in thousands) December 31, 2017 December 31, 2016
Accrued interest $151,060
 $130,098
Accrued federal/foreign/state tax credits 144,850
 122,843
Deposits payable 117,259
 96,596
Expense accruals 651,300
 653,938
Payroll/tax benefits payable 379,011
 353,790
Accounts payable 113,930
 291,768
Miscellaneous payable 1,267,853
 1,172,679
    Total accrued expenses $2,825,263
 $2,821,712

Accrued expenses increased $3.6 million, or 0.1%, from December 31, 2016 to December 31, 2017. The increase in accrued expenses was primarily due to increases of $95.2 million in miscellaneous payables to customers, broker-dealers and financial institutions, a $25.2 million increase in payroll accruals and a $21.0 million increase in accrued interest expense. This was offset by a $177.8 million decrease in accounts payable and customer money payable accounts at December 31, 2017 compared to December 31, 2016.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Other Liabilities
(in thousands) December 31, 2017 December 31, 2016
Total derivative activity $471,780
 $348,941
Official checks and money orders in process 134,949
 140,607
Deferred gains/credits 69,328
 30,096
Reserve for unfunded commitments 109,111
 122,417
Nostro credit 1,088
 128,524
Miscellaneous liabilities 13,147
 40,287
    Total other liabilities $799,403

$810,872

Other liabilities decreased $11.5 million, or 1.4%, from December 31, 2016 to December 31, 2017. The decrease in other liabilities was primarily related to a decrease in Nostro credit, which is a clearing account for securities transactions entered into on behalf of customers of $127.4 million, and was partially offset by an increase in total derivative activity of $122.8 million.


OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 7 and Note 1920 to the Consolidated Financial Statements, and the Liquidity and Capital Resources section of this MD&A.


PREFERRED STOCK

SHUSA Series C Preferred Stock

In April 2006,For a discussion of the Company’s Boardstatus of Directors authorized 8,000 shares of Series C Preferred Stock, and grantedlitigation with which the Company authorityis involved with the IRS, please refer to issue fractional shares of the Series C Preferred Stock. Dividends on each share of Series C Preferred Stock are payable quarterly, on a non-cumulative basis, at an annual rate of 7.30%, when and if declared by the Company's Board of Directors. In May 2006, the Company issued 8,000,000 depository shares of Series C Preferred Stock for net proceeds of $195.4 million. Each depository share represents 1/1000th ownership interest in a share of Series C Preferred Stock. As a holder of depository shares, the depository shareholder is entitled to all proportional rights and preferences of the Series C Preferred Stock. The Company’s Board of Directors approved cash dividends to preferred stockholders totaling $14.6 million, $15.1 million and $21.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The shares of Series C Preferred Stock are redeemable in whole or in part for cash, at the Company’s option, at a redemption price of $25,000 per share (equivalent to $25 per depository share), subjectNote 15 to the prior approval of the FRB. As of December 31, 2017, no shares of the Series C Preferred Stock had been redeemed.

Santander BanCorp Series B Preferred Stock

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

On January 29, 2016, BSPR redeemed the outstanding $75.0 million of Series B preferred stock. In accordance with the notice of full redemption, each share of preferred stock was redeemed at the redemption price, corresponding to $25 per preference share, plus any unpaid dividends in respect of the most recent dividend period.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 continues to improve its capital levels and ratios through the retention of quarterly earnings and RWA optimization.

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The Company is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At December 31, 20172019 and December 31, 2016,2018, 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 December 31, 20172019 and December 31, 2016,2018, 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;years, (2) the Bank would not meet capital levels imposed by the OCC in connection with any order;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.

Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the year,years ended December 31, 2019 and 2018, the Company paid cash dividends of $10.0$400.0 million, and $410.0 million, respectively, to its common stock shareholder while no dividends were declared or paid to its common stock shareholder in 2016 or 2015. During the year, the Company also paidand cash dividends to preferred shareholders of $14.6 million. The Company paid cash dividends tozero and $10.95 million, respectively. On August 15, 2018, SHUSA redeemed all of its outstanding preferred shareholders of $15.1 million and $21.2 million in 2016 and 2015, respectively.stock.

The following schedule summarizes the actual capital balances of SHUSA and the Bank at December 31, 2017:

2019:
 SHUSA SHUSA
            
 December 31, 2017 
Well-capitalized Requirement(1)
 
Minimum Requirement(1)
 December 31, 2019 
Well-capitalized Requirement(1)
 
Minimum Requirement(1)
CET1 capital ratio 16.38% 6.50% 4.50% 14.63% 6.50% 4.50%
Tier 1 capital ratio 17.84% 8.00% 6.00% 15.80% 8.00% 6.00%
Total capital ratio 19.50% 10.00% 8.00% 17.23% 10.00% 8.00%
Leverage ratio 14.17% 5.00% 4.00% 13.13% 5.00% 4.00%
(1)As defined by Federal Reserve regulations. The Company's ratios are presented under a Basel III phasing inphasing-in basis.

 BANK Bank
            
 December 31, 2017 
Well-capitalized Requirement(2)
 
Minimum Requirement(2)
 December 31, 2019 
Well-capitalized Requirement(2)
 
Minimum Requirement(2)
CET1 capital ratio 18.17% 6.50% 4.50% 15.80% 6.50% 4.50%
Tier 1 capital ratio 18.17% 8.00% 6.00% 15.80% 8.00% 6.00%
Total capital ratio 19.36% 10.00% 8.00% 16.77% 10.00% 8.00%
Leverage ratio 13.86% 5.00% 4.00% 12.77% 5.00% 4.00%
(2)As defined by OCC regulations. The Bank's ratios are presented underon a Basel III phasing inphasing-in basis.

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

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 positions.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.

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, and limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the Economic"Economic and Business EnvironmentEnvironment" section of this MD&A.

Sources of Liquidity

Company and Bank

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

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

SC

SC requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. SC funds its operations through its lending relationships with 13 third-party banks, SHUSA, and Santander, as well as through securitizations in the ABS market and large flow agreements. SC seeks to issue debt that appropriately matches the cash flows of the assets that it originates.
SC has over $6.4more than $7.3 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the year ended December 31, 2017, SC completed on-balance sheet funding transactions totaling approximately $15.0 billion, including:

three securitizations on its Santander Drive Auto Receivables Trust ("SDART") platform for $3.1 billion;
issuance of two retained bonds on its SDART platform for $155.0 million;
five securitizations on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform for $5.0 billion;
issuance of one retained bond on its DRIVE platform for $339.0 million;
four private amortizing lease facilities for $1.6 billion;
ten top-ups and two re-levers of private amortizing loan and lease facilities for $3.5 billion; and
one lease securitization on our Santander Retail Auto Lease Trust ("SRT") platform for $1.0 billion.

SC also completed $3.0 billion in asset sales, which consisted of $300.0 million of recurring monthly sales with its third-party flow partners and $2.5 billion in sales to Santander and $100.0 million in sales to SBNA.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



During the year ended December 31, 2019, SC completed on-balance sheet funding transactions totaling approximately $18.2 billion, including:

securitizations on its SDART platform for approximately $3.2 billion;
securitizations on its DRIVE, deeper subprime platform, for approximately $4.5 billion;
lease securitizations on its SRT platform for approximately $3.7 billion;
lease securitization on its PSRT platform for approximately $1.2 billion;
private amortizing lease facilities for approximately $4.6 billion;
securitization on its SREV platform for approximately $0.9 billion;
issuance of retained bonds on its SDART platform for approximately $129.8 million; and
issuance of a retained bond on its SRT platform for approximately $60.4 million.

For information regarding SC's debt, see Note 11 to the Consolidated Financial Statements.

IHC

SIS entered into a two-year revolving subordinated loan agreement with Santander effective June 8, 2015, not to exceed $290.0 million in the aggregate, which matured on June 8, 2017. On June 6, 2017, SIS entered into a revolving subordinated loan agreement with SHUSA not to exceed $290.0 million for a two-year term to mature in 2019. On September 13, 2017,October 16, 2018, the revolving subordinated loan agreement with SHUSA was increased to $350.0 million and on October 6, 2017, it was increased to $495.0$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.loan described above. At December 31, 2017,2019, 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 brokerand/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. 

Available Liquidity

As of December 31, 2017,2019, the Bank had approximately $20.6$20.3 billion in committed liquidity from the FHLB and the FRB. Of this amount, $17.8$12.4 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At December 31, 20172019 and December 31, 2016,2018, liquid assets (cash and cash equivalents and LHFS), and securities AFS exclusive of securities pledged as collateral) totaled approximately $18.4$15.0 billion and $21.1$15.9 billion, respectively. These amounts represented 30.3%24.3% and 31.4%25.8% of total deposits at December 31, 20172019 and December 31, 2016,2018, respectively. As of December 31, 2017,2019, the Bank, BSI and BSPR had $1.1 billion, $1.9$1.3 billion, and $1.2 billion,$838.4 million, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.

BSPR has $836.0$647.6 million in committed liquidity from the FHLB, all of which was unused as of December 31, 2017,2019, as well as $308.6 million$2.2 billion in liquid assets aside from cash unused as of December 31, 2017.

Cash and cash equivalents
  Year Ended December 31,
(in thousands) 2017 2016 2015
Net cash flows from operating activities $4,826,346
 $5,289,994
 $5,082,953
Net cash flows from investing activities 2,620,917
 168,432
 (16,675,016)
Net cash flows from financing activities (10,963,155) (4,869,574) 14,148,948

Cash flows from operating activities

Net cash flow from operating activities was $4.8 billion for the year ended December 31, 2017, which was primarily comprised of net income of $972.8 million, $4.6 billion in proceeds from sales of LHFS, $1.6 billion in depreciation, amortization and accretion, and $2.7 billion of provision for credit losses, partially offset by $4.9 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $5.3 billion for the year ended December 31, 2016, which was comprised of net income of $640.8 million, $5.9 billion in proceeds from sales of LHFS, $1.3 billion in depreciation, amortization and accretion, and $3.0 billion of provisions for credit losses, partially offset by $6.2 billion of originations of LHFS, net of repayments.2019.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Cash, cash equivalents, and restricted cash

As of January 1, 2018, the classification of restricted cash within the Company's SCF changed. Refer to Note 1 to the Consolidated Financial Statements for additional details.
  Year Ended December 31,
(in thousands) 2019 2018 2017
Net cash flows from operating activities $6,849,157
 $7,015,061
 $4,964,060
Net cash flows from investing activities (17,242,333) (12,460,839) 3,281,179
Net cash flows from financing activities 11,197,124
 5,829,308
 (10,959,272)

Cash flows from operating activities

Net cash flow from operating activities was $5.1$6.8 billion for the year ended December 31, 2015,2019, which was primarily comprised of $4.1net income of $1.0 billion, of provisions for credit losses, $4.5 billion of impairment of goodwill, $6.9$1.6 billion in proceeds from sales of LHFS, $2.4 billion in depreciation, amortization and $1.7accretion, and $2.3 billion of provisions for credit losses, partially offset by $1.5 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $7.0 billion for the year ended December 31, 2018, which was primarily comprised of net income of $991.0 million, $4.3 billion in proceeds from sales of trading securities,LHFS, $1.9 billion in depreciation, amortization and accretion, and $2.3 billion of provision for credit losses, partially offset by a net loss of $3.1 billion, $1.2$3.0 billion of purchasesoriginations of trading securities,LHFS, net of repayments.

Net cash flow from operating activities was $5.0 billion for the year ended December 31, 2017, which was primarily comprised of net income of $958.0 million, $4.6 billion in proceeds from sales of LHFS, $1.6 billion in depreciation, amortization and $7.7accretion, and $2.8 billion of provision for credit losses, partially offset by $4.9 billion of originations of LHFS, net of repayments.

Cash flows from investing activities

For the year ended December 31, 2019, net cash flow from investing activities was $(17.2) billion, primarily due to $10.2 billion in normal loan activity, $10.5 billion of purchases of investment securities AFS, $8.6 billion in operating lease purchases and originations, and $1.6 billion of purchases of HTM investment securities, partially offset by $8.1 billion of AFS investment securities sales, maturities and prepayments, $2.6 billion in proceeds from sales of LHFI, and $3.5 billion in proceeds from sales and terminations of operating leases.

For the year ended December 31, 2018, net cash flow from investing activities was $(12.5) billion, primarily due to $8.5 billion in normal loan activity, $2.4 billion of purchases of investment securities AFS, and $9.9 billion in operating lease purchases and originations, partially offset by $3.9 billion of AFS investment securities sales, maturities and prepayments, $1.0 billion in proceeds from sales of LHFI, and $3.6 billion in proceeds from sales and terminations of operating leases.

For the year ended December 31, 2017, net cash flow from investing activities was $2.6$3.3 billion, primarily due to $2.8 billion in normal loan activity, $8.4 billion of AFS investment securities sales, maturities and prepayments, and$2.7 billion in normal loan activity, $3.1 billion in proceeds from sales and terminations of operating leases, and $1.2 billion in proceeds from sales of LHFI, partially offset by $6.2 billion of purchases of investment securities AFS and $6.0 billion in operating lease purchases and originations.

For the year ended December 31, 2016, net cash flow from investing activities was $168.4 million, primarily due to $17.0 billion of AFS investment securities sales, maturities and prepayments, $1.7 billion in proceeds from sales of LHFI, and $2.2 billion in proceeds from sales and terminations of operating leases, partially offset by $12.2 billion of purchases of investment securities AFS, $5.6 billion in operating lease purchases and originations, and $1.8 billion in normal loan activity.

For the year ended December 31, 2015, net cash flow from investing activities was $(16.7) billion, primarily due to $13.6 billion of purchases of investment securities AFS, $9.4 billion in normal loan activity, and $5.8 billion in originations and purchases of operating leases, partially offset by $8.8 billion of investment sales, maturities and prepayments and $2.0 billion in proceeds from the sales and termination of operating leases.

Cash flows from financing activities

For the year ended December 31, 2017,2019, net cash flow from financing activities was $11.2 billion, which was primarily due to an increase in net borrowing activity of $5.6 billion and a $6.3 billion increase in deposits, partially offset by $400.0 million in dividends paid on common stock and $338.0 million in stock repurchases attributable to NCI.

Net cash flow from financing activities for the year ended December 31, 2018 was $5.8 billion, which was primarily due to an increase in net borrowing activity of $5.9 billion, partially offset by $410.0 million in dividends paid on common stock and $200.0 million in redemption of preferred stock.

Net cash flow from financing activities for the year ended December 31, 2017 was $(11.0) billion, which was primarily due to a decrease in net borrowing activity of $4.7 billion and a $6.2 billion decrease in deposits.

Net cash flow from financing activities for the year ended December 31, 2016 was $(4.9) billion, which was primarily due to a decrease in net borrowing activity of $6.4 billion, partially offset by a $1.7 billion increase in deposits.

Net cash flow from financing activities for the year ended December 31, 2015 was $14.1 billion, which was primarily due to an increase in deposits of $3.4 billion and an increase in net borrowing activity of $10.6 billion.

See the Consolidated Statements of Cash Flows ("SCF")SCF for further details on the Company's sources and uses of cash.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Credit Facilities

Third-Party Revolving Credit Facilities

Warehouse FacilitiesLines

SC uses warehouse linesfacilities to fund its originations. Each linefacility specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. SC's warehouse linesfacilities generally are backed by auto RICs and, in some cases, leases or personal loans.auto leases. These credit linesfacilities 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 in order to balance the desire to minimize funding costs with its liquidity needs.

SC's warehouse linesfacilities generally have net spread, delinquency, and net loss ratio limits. Generally, these limits are calculated based on the portfolio collateralizing the respective line; however, for certain of SC's warehouse lines,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 linefacility 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 line.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations


facility.

SC has twoone credit facilitiesfacility with eight banks providing an aggregate commitment of $4.2$5.0 billion for the exclusive use of supplyingproviding short-term liquidity needs to support Chrysler Capital retailFinance lease financing. As of December 31, 2017 and December 31, 2016,2019, there werewas an outstanding balancesbalance of approximately $1.1 billion on these facilities of $2.0 billion and $3.7 billion, respectively. One ofthis facility in the facilities can be used exclusively for loan financing, and the other for lease financing. Both facilities requireaggregate. 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 eleven banks providing an aggregate commitment of $6.5 billion for the exclusive use of providing short-term liquidity needs to support core and Chrysler Capital loan financing. As of December 31, 2019, there was an outstanding balance of approximately $3.9 billion on these facilities in the aggregate. These facilities reduced advance rates in the event of delinquency, credit loss, as well as various other metrics exceeding specific thresholds.

Repurchase FacilitiesAgreements

SC also obtains financing through four investment management or repurchase agreements under which it pledges retained subordinatedsubordinate bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 365 days. As of December 31, 20172019 and December 31, 2016,2018, there were outstanding balances of $744.5$422.3 million and $743.3$298.9 million, respectively, under these repurchase facilities.agreements.

Santander Credit Facilities

Santander historically has provided, and continuesSHUSA Lending to provide, SC's business with significant funding support in the form of committed credit facilities. Through Santander’s New York branch ("Santander NY"), Santander provides SC with $1.8 billion of long-term committed revolving credit facilities.

The facilities offered through Santander NY are structured as three- and five-year floating rate facilities, with current maturity date of December 31, 2018. These facilities currently permit unsecured borrowing, but generally are collateralized by RICs as well as securitization notes payable and residuals owned by SC. Any secured balances outstanding under the facilities at the time of their maturity will amortize to match the maturities and expected cash flows of the corresponding collateral.

The Company also provides SC with $3.0$3.5 billion of committed revolving credit that can be drawn on an unsecured basis maturing in March 2019.basis. The Company also provides SC with $3.0$5.7 billion in variousof term loanspromissory notes with maturities ranging from March 2019May 2020 to December 2022.July 2024. These loans eliminate in the consolidation of SHUSA.

In August 2015, under a new agreement with Santander, SC agreed to begin paying Santander a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee will be paid against each month's ending balance. The guarantee fee will be applicable only for additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by an executed counter-guaranty agreement. SC recognized guarantee fee expense of $6.0 million and $6.4 million for the years ended December 31, 2017 and 2016, respectively.

Secured Structured Financings

SC's secured structured financings primarily consist of both public, SEC-registered securitizations. SC also executessecuritizations, 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 completed 12 securitizations in 2017, and currently has 33on-balance sheet securitizations outstanding in the market with a cumulative ABS balance of approximately $15.3$28.0 billion.

Flow Agreements

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

Loans and leases sold under these flow agreements are not on SC's balance sheet, but provide a stable stream of servicing fee income and may also provide a gain or loss on sale. SC continues to actively seek additional such flow agreements.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Off-Balance Sheet Financing

Beginning in March 2017, SC hashad the option to sell a contractually determined amount of eligible prime loans to Santander through the Santander Prime Auto Issuing Note securitization platform.platforms. As all of the notes and residual interests in the securitizationsecuritizations are acquired by Santander, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Consolidated Balance Sheets.

consolidated balance sheets. Beginning in 2018, this program was replaced with a new program with SBNA, whereby SC also continueshas agreed to periodically execute Chrysler Capital-branded securitizations under Rule 144Aprovide SBNA with origination support services in connection with the processing, underwriting, and purchasing of the Securities Act. Historically, asretail loans, primarily from FCA dealers, all of the notes and residual interests in these securitizations were issued to third parties, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Consolidated Balance Sheets.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 loan financing, maturing deposits, investment activities, fundfunds transfers, and payment of its operating expenses.

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

Dividends and Stock Issuancesrequests.

At December 31, 2017,2019, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.

During the year ended December 31, 2017, the Company paid dividends of $10.0 million to its sole shareholder, Santander.Dividends, Contributions and Stock Issuances

As of December 31, 2017,2019, the Company had 530,391,043 shares of common stock outstanding. During the year ended December 31, 2019, the Company paid dividends of $400.0 million to its sole shareholder, Santander. During the first quarter of 2020, the Company declared a cash dividend of $125.0 million on its common stock, which was paid on March 2, 2020.

During the year ended December 31, 20172019, Santander made cash contributions of $88.9 million to the Company paid dividends of $14.6 million, on its preferred stock.Company.

DuringSC paid a dividend of $0.20 per share in February and May 2019, and a dividend of $0.22 per share in August and November 2019. Further, SC declared a cash dividend of $0.22 per share, which was paid on February 20, 2020, to shareholders of record as of the 2017, SHUSA's subsidiaries had the following dividend activity which eliminated in consolidation:
The Bank declared andclose of business on February 10, 2020. SC has paid $100.0a total of $291.5 million in dividends through December 31, 2019, of which $85.2 million has been paid to SHUSA;NCI and $206.3 million has been paid to the Company, which eliminates in the consolidated results of the Company.
BSI declared and paid $35.0
The following table presents information regarding the shares of SC Common Stock repurchased during the year ended December 31, 2019 ($ in thousands, except per share amounts):
$200 Million Share Repurchase Program - January 2019 (1)
  
Total cost (including commissions paid) of shares repurchased $17,780
Average price per share $18.40
Number of shares repurchased 965,430
   
$400 Million Share Repurchase Program - May 2019 through June 2019  
Total cost (including commissions paid) of shares repurchased $86,864
Average price per share $23.16
Number of shares repurchased 3,749,692
   
$1.1 Billion Share Repurchase Program - July 2019 through June 2020  
Total cost (including commissions paid) of shares repurchased $233,350
Average price per share $25.47
Number of shares repurchased 9,155,288
(1) During the year ended December 31, 2018, SC purchased 9.5 million in dividends to SHUSA; and
Services and Promotions, LLC declared and paid $9.0 million in dividends to SHUSA.shares of SC Common Stock under its share repurchase program at a cost of approximately $182 million.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



In June 2018, the SC Board of Directors announced purchases of up to $200 million, excluding commissions, of outstanding SC Common Stock through June 2019.

In May 2019, the Company announced an amendment to its 2018 capital plan, which authorized SC to repurchase up to $400 million of outstanding SC 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 outstanding SC Common Stock through the end of the second quarter of 2020.

During the year ended December 31, 2019, SC purchased 13.9 million shares of SC Common Stock under its share repurchase program at a cost of approximately $338 million, excluding commissions.

On January 30, 2020, SC commenced a tender offer to purchase for cash up to $1 billion of shares of SC Common Stock, at a range of between $23 and $26 per share. The tender offer expired on February 27, 2020 and was closed on March 4, 2020. In connection with the completion of the tender offer, SC acquired approximately 17.5 million shares of SC Common Stock for approximately $455.4 million. After the completion of the tender offer, SHUSA's ownership in SC increased to approximately 76.3%.

During the year ended December 31, 2019, SHUSA's subsidiaries had the following capital activity which eliminated in consolidation:
The Bank declared and paid $250.0 million in dividends to SHUSA.
BSI declared and paid $25.0 million in dividends to SHUSA.
Santander BanCorp declared and paid $1.25 million in dividends to SHUSA.
SHUSA contributed $110.0 million to SSLLC.
SHUSA contributed $105.0 million to SFS.

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 Payments Due by Period
(in thousands) Total Less than
1 year
 Over 1 yr
to 3 yrs
 Over 3 yrs
to 5 yrs
 Over
5 yrs
 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)
 $1,982,138
 $1,427,205
 $554,933
 $
 $
 $7,136,454
 $5,830,669
 $1,305,785
 $
 $
Notes payable - revolving facilities 6,498,316
 3,428,233
 2,570,083
 500,000
 ��
 5,399,931
 1,864,182
 3,535,749
 
 
Notes payable - secured structured financings 22,608,549
 226,046
 6,772,458
 11,404,667
 4,205,378
 28,206,898
 203,114
 10,381,235
 11,461,822
 6,160,727
Other debt obligations (1) (2)
 12,049,532
 1,666,767
 4,759,528
 3,063,536
 2,559,701
 14,569,222
 2,728,846
 3,607,386
 4,580,226
 3,652,764
Junior subordinated debentures due to capital trust entities (1) (2)
 151,922
 151,710
 44
 45
 123
CDs (1)
 5,537,425
 2,621,743
 1,955,793
 952,490
 7,399
 9,493,234
 7,037,872
 2,354,465
 94,654
 6,243
Non-qualified pension and post-retirement benefits 131,197
 13,918
 26,123
 26,330
 64,826
 124,840
 13,376
 26,860
 26,996
 57,608
Operating leases(3)
 699,869
 127,692
 210,845
 155,121
 206,211
 794,537
 139,597
 250,416
 197,677
 206,847
Total contractual cash obligations $49,658,948
 $9,663,314
 $16,849,807
 $16,102,189
 $7,043,638
 $65,725,116
 $17,817,656
 $21,461,896
 $16,361,375
 $10,084,189
Other commitments:          
Commitments to extend credit $30,685,478
 $5,623,071
 $5,044,127
 $7,282,066
 $12,736,214
Letters of credit 1,592,726
 1,090,622
 238,958
 227,671
 35,475
Total Contractual Obligations and Other Commitments $98,003,320
 $24,531,349
 $26,744,981
 $23,871,112
 $22,855,878
(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 December 31, 2017.2019. 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.income or interest of $82.9 million.

Excluded from the above table are deposits of $55.4$58.0 billion that are due on demand by customers.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 14 and Note 1920 to the Consolidated Financial Statements.

Lending Arrangements

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

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

SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. The Bluestem portfolio is carried as held for sale in SC's Consolidated Financial Statements. Accordingly, SC has recorded $386.4 million in 2017 in lower of cost or market adjustments on this portfolio, and there may be further such adjustments required in future periods' financial statements. SC is currently evaluating alternatives for sale of the Bluestem portfolio, which had a carrying value of $1.1 billion at December 31, 2017.

Employment and Other Agreements

On July 2, 2015, the Company announced the departure of Mr. Dundon from his roles as Chairman of SC’s Board and CEO of SC, effective as of the close of business on July 2, 2015. On the date of Mr. Dundon's departure, among other things, he entered into a separation agreement with SC, DDFS LLC (“DDFS”), the Company, Santander Consumer USA Inc. and Santander (as subsequently amended, the “Separation Agreement”).


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The Separation Agreement provided for certain payments and benefits to Mr. Dundon, as well as the delivery by the Company of an irrevocable notice to exercise the call option with respect to the shares of SC Common Stock owned by DDFS and consummate the transactions contemplated by that call option notice, subject to required bank regulatory approvals and any other approvals required by law being obtained. On August 31, 2016, Santander exercised its option to assume the Company’s obligation to purchase the shares of SC Common Stock in respect of that call transaction.

On November 15, 2017, the parties to the Separation Agreement entered into a settlement and release that, among other things, altered certain of the economic arrangements in the Separation Agreement. Pursuant to the settlement agreement, (i) the amounts payable by SC to Mr. Dundon were reduced by $50.0 million to $66.1 million and (ii) Santander affirmed its prior commitment to complete the call transaction. The call transaction was consummated at the aggregate price of $941.9 million, representing the aggregate of the previously agreed price per share of SC Common Stock of $26.17, plus accrued interest. The settlement agreement included mutual releases. All transactions contemplated by the settlement agreement, including the call transaction, were completed on November 15, 2017.

Pursuant to the Separation Agreement, concurrently with the completion of the call transaction, $294.5 million of the net proceeds payable to DDFS in that transaction were used to pay off all outstanding principal, interest and fees under a loan agreement between Santander and DDFS.

On November 15, 2017, Santander contributed the 34,598,506 shares of SC Common Stock purchased from DDFS in the call transaction to the Company. As a result, the Company currently owns a total of 245,593,555 shares of SC Common Stock, representing approximately 68% of SC’s outstanding shares.


ASSET AND LIABILITY MANAGEMENT

Interest Rate Risk

Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing
net interest income and the net interest margin. To achieve these objectives, the Treasury group works closely with each business line in the Company. The Treasury group also uses various other tools to manage interest rate risk, including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitizations/sales, and financial derivatives.

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month London Interbank Offered Rate ("LIBOR").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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes at December 31, 20172019 and December 31, 2016:2018:
 
The following estimated percentage increase/(decrease) to
net interest income would result
 
The following estimated percentage increase/(decrease) to
net interest income would result
If interest rates changed in parallel by the amounts below December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
Down 100 basis points (3.33)% (2.14)% (1.12)% (3.07)%
Up 100 basis points 2.88 % 2.36 % 1.31 % 2.87 %
Up 200 basis points 5.48 % 4.36 % 2.56 % 5.58 %

Market Value of Equity ("MVE")MVE Analysis

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


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at December 31, 20172019 and December 31, 2016.2018.
 
The following estimated percentage
increase/(decrease) to MVE would result
 
The following estimated percentage
increase/(decrease) to MVE would result
If interest rates changed in parallel by the amounts below December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
Down 100 basis points (2.55)% (1.23)% (3.01)% (1.55)%
Up 100 basis points (0.04)% (0.76)% (0.49)% (1.25)%
Up 200 basis points (1.62)% (2.50)% (3.17)% (3.49)%

As of December 31, 2017,2019, the Company’s MVE profile showedreflected a decrease of 2.55%MVE of 3.01% for downward parallel interest rate shocks of 100 basis points and a decreasean increase of 0.04%0.49% 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"))NMDs).

In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates already close to zero,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.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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

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

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

The Company's derivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.

The Company typically retains the servicing rights related to residential mortgage loans that are sold. The majority of the Company's residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 916 to the Consolidated Financial Statements.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 14 to the Consolidated Financial Statements.

BORROWINGS AND OTHER DEBT OBLIGATIONS

The Company has term loans and lines of credit with Santander and other lenders. The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. In addition, SC has warehouse lines of credit and securitizes some of its RICs and operating leases, which are structured secured financings. Total borrowings and other debt obligations at December 31, 2019 were $50.7 billion, compared to $45.0 billion at December 31, 2018. Total borrowings increased $5.7 billion, primarily due to new debt issuances of $3.8 billion, an increase in FHLB advances at the Bank of $2.2 billion and an overall increase of $2.2 billion in SC debt, partially offset by $2.3 billion of debt maturities and calls. See further detail on borrowings activity in Note 11 to the Consolidated Financial Statements.

110
  Year Ended December 31,
(Dollars in thousands) 2019 2018
Parent Company & other subsidiary borrowings and other debt obligations    
Parent Company senior notes:    
Balance $9,949,214 $8,351,685
Weighted average interest rate at year-end 3.68% 3.79%
Maximum amount outstanding at any month-end during the year $9,949,214 $8,351,685
Average amount outstanding during the year $8,961,588 $7,626,199
Weighted average interest rate during the year 3.81% 3.66%
Junior subordinated debentures to capital trusts:(1)
    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $154,640
Average amount outstanding during the year $0 $118,650
Weighted average interest rate during the year % 3.92%
Subsidiary subordinated notes:    
Balance $602 $40,703
Weighted average interest rate at year-end 2.00% 2.00%
Maximum amount outstanding at any month-end during the year $41,026 $40,934
Average amount outstanding during the year $30,791 $40,784
Weighted average interest rate during the year 2.12% 2.03%
Subsidiary short-term and overnight borrowings:    
Balance $1,831 $59,900
Weighted average interest rate at year-end 0.38% 1.86%
Maximum amount outstanding at any month-end during the year $34,323 $132,827
Average amount outstanding during the year $19,162 $71,432
Weighted average interest rate during the year 3.42% 2.19%
(1) Includes related common securities.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Year Ended December 31,
(Dollars in thousands) 2019 2018
Bank borrowings and other debt obligations    
REIT preferred:    
Balance $125,943 $145,590
Weighted average interest rate at year-end 13.17% 13.22%
Maximum amount outstanding at any month-end during the year $146,066 $145,590
Average amount outstanding during the year $133,068 $144,827
Weighted average interest rate during the year 13.04% 13.22%
Bank subordinated notes:    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $192,125
Average amount outstanding during the year $0 $78,408
Weighted average interest rate during the year % 9.04%
Term loans:    
Balance $0 $126,172
Weighted average interest rate at year-end % 8.57%
Maximum amount outstanding at any month-end during the year $126,257 $139,888
Average amount outstanding during the year $21,023 $130,722
Weighted average interest rate during the year 5.86% 5.70%
Securities sold under repurchase agreements:    
Balance $0 $0
Weighted average interest rate at year-end % %
Maximum amount outstanding at any month-end during the year $0 $150,000
Average amount outstanding during the year $0 $41,096
Weighted average interest rate during the year % 1.90%
FHLB advances:    
Balance $7,035,000 $4,850,000
Weighted average interest rate at year-end 2.30% 2.74%
Maximum amount outstanding at any month-end during the year $7,035,000 $4,850,000
Average amount outstanding during the year $5,465,329 $2,025,479
Weighted average interest rate during the year 2.63% 2.61%

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



  Year Ended December 31,
(Dollars in thousands) 2019 2018
SC borrowings and other debt obligations    
Revolving credit facilities:    
Balance $5,399,931 $4,478,214
Weighted average interest rate at year-end 3.44% 3.92%
Maximum amount outstanding at any month-end during the year $6,753,790 $5,632,053
Average amount outstanding during the year $5,532,273 $5,043,462
Weighted average interest rate during the year 6.58% 5.60%
Public securitizations:    
Balance $18,807,773 $19,225,169
Weighted average interest rate range at year-end  1.35% - 3.42%
  1.16% - 3.53%
Maximum amount outstanding at any month-end during the year $19,656,531 $19,647,748
Average amount outstanding during the year $19,000,303 $18,353,127
Weighted average interest rate during the year 2.54% 2.52%
Privately issued amortizing notes:    
Balance $9,334,112 $7,676,351
Weighted average interest rate range at year-end  1.05% - 3.90%
  0.88% - 3.17%
Maximum amount outstanding at any month-end during the year $9,334,112 $7,676,351
Average amount outstanding during the year $7,983,672 $6,379,987
Weighted average interest rate during the year 3.48% 3.54%

NON-GAAP FINANCIAL MEASURES

The Company's non-GAAP information has limitations as an analytical tool and, therefore, should not be considered in isolation or as a substitute for analysis of our results or any performance measures under GAAP as set forth in the Company's financial statements. These limitations should be compensated for by relying primarily on the Company's GAAP results and using this non-GAAP information only as a supplement to evaluate the Company's performance.

The Company considers various measures when evaluating capital utilization and adequacy. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because GAAP does not include capital ratio measures, the Company believes that there are no comparable GAAP financial measures to these ratios. These ratios are not formally defined by GAAP and are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess the Company's capital adequacy using these ratios, the Company believes they are useful to provide investors the ability to assess its capital adequacy on the same basis. The Company believes these non-GAAP measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures may allow readers to compare certain aspects of the Company's capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Company's calculations may not be directly comparable with those of other organizations, and the usefulness of these measures to investors may be limited. As a result, the Company encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table includes the related GAAP measures included in our non-GAAP financial measures.
 Year Ended December 31,  
(Dollars in thousands)2019 2018 2017 2016 
2015(1)
  
Return on Average Assets:           
Net income/(loss)$1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)  
Average assets142,308,583
 131,232,021
 134,522,957
 141,921,781
 140,461,913
  
Return on average assets0.73% 0.76% 0.71% 0.45% (2.18)%  
            
Return on Average Equity:           
Net income/(loss)$1,041,817
 $991,035
 $957,975
 $640,763
 $(3,055,436)  
Average equity24,639,561
 24,103,584
 23,388,410
 22,232,729
 25,495,652
  
Return on average equity4.23% 4.11% 4.10% 2.88% (11.98)%  
            
Average Equity to Average Assets:           
Average equity$24,639,561
 $24,103,584
 $23,388,410
 $22,232,729
 $25,495,652
  
Average assets142,308,583
 131,232,021
 134,522,957
 141,921,781
 140,461,913
  
Average equity to average assets17.31% 18.37% 17.39% 15.67% 18.15%  
            
Efficiency Ratio:           
General, administrative, and other expenses
(numerator)
$6,365,852
 $5,832,325
 $5,764,324
 $5,386,194
 $9,381,892
  
            
Net interest income$6,442,768
 $6,344,850
 $6,423,950
 $6,564,692
 $6,901,406
  
Non-interest income3,729,117
 3,244,308
 2,901,253
 2,755,705
 2,905,035
  
   Total net interest income and non-interest income (denominator)10,171,885
 9,589,158
 9,325,203
 9,320,397
 9,806,441
  
            
Efficiency ratio62.58% 60.82% 61.81% 57.79% 95.67%  
(1) General, administrative, and other expenses includes $4.5 billion goodwill impairment charge on SC.  
            
            
 Transitional 
Fully Phased In(4)
 SBNA SHUSA SBNA SHUSA
 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2019
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1(1)
 
Common Equity
Tier 1
(1)
 
Common Equity
Tier 1
(1)
            
Total stockholder's equity (GAAP)$13,680,941
 $13,407,676
 $22,021,460
 $21,321,057
 $13,680,941
 $22,021,460
Goodwill(3,402,637) (3,402,637) (4,444,389) (4,444,389) (3,402,637) (4,444,389)
Intangible assets(1,802) (2,176) (416,204) (475,193) (1,802) (416,204)
Deferred taxes on goodwill and intangible assets242,333
 238,747
 397,485
 392,563
 242,333
 397,485
Other adjustments to CET1(3)
(238,923) (230,942) (39,362) (39,275) (238,923) (39,362)
Disallowed deferred tax assets(129,885) (167,701) (215,330) (317,667) (129,885) (215,330)
Accumulated other comprehensive loss69,792
 336,332
 88,207
 321,652
 69,792
 88,207
CET1 capital (numerator)$10,219,819
 $10,179,299
 $17,391,867
 $16,758,748
 $10,219,819
 $17,391,867
RWAs (denominator)(2)
64,677,883
 59,394,280
 118,898,213
 107,915,606
 66,140,440
 119,981,713
Ratio15.80% 17.14% 14.63% 15.53% 15.45% 14.50%
            
(1)CET1 is calculated under Basel III regulations required as of January 1, 2015.
(2)Under the banking agencies' risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together with the measure for market risk, resulting in the Company's and the Bank's total RWAs.
(3)Represents the impact of NCI, transitional and other intangible adjustments for regulatory capital.
(4)Represents non-GAAP measures

85





Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations




SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA

The following table presented selected quarterly consolidated financial data (unaudited):
 THREE MONTHS ENDED THREE MONTHS ENDED
(in thousands) December 31, 2017 September 30,
2017
 June 30,
2017
 March 31,
2017
 December 31, 2016 September 30,
2016
 June 30,
2016
 March 31,
2016
 December 31, 2019 September 30,
2019
 June 30,
2019
 March 31,
2019
 December 31, 2018 September 30,
2018
 June 30,
2018
 March 31,
2018
Total interest income $1,877,196
 $1,953,900
 $1,999,445
 $1,955,593
 $1,931,625
 $1,970,948
 $2,029,409
 $2,057,769
 $2,147,955
 $2,185,107
 $2,176,090
 $2,141,043
 $2,094,575
 $2,042,938
 $2,001,073
 $1,930,467
Total interest expense 361,564
 379,840
 357,696
 353,029
 348,738
 349,832
 364,522
 361,967
 548,907
 565,997
 554,365
 538,158
 490,925
 444,177
 408,987
 380,114
Net interest income 1,515,632
 1,574,060
 1,641,749
 1,602,564
 1,582,887
 1,621,116
 1,664,887
 1,695,802
 1,599,048
 1,619,110
 1,621,725
 1,602,885
 1,603,650
 1,598,761
 1,592,086
 1,550,353
Provision for credit losses 658,161
 652,120
 604,768
 735,445
 779,585
 687,913
 613,778
 898,449
 607,539
 603,635
 480,632
 600,211
 731,202
 621,014
 433,802
 553,880
Net interest income after provision for credit loss 857,471
 921,940
 1,036,981
 867,119
 803,302
 933,203
 1,051,109
 797,353
 991,509
 1,015,475
 1,141,093
 1,002,674
 872,448
 977,747
 1,158,284
 996,473
Total fees and other income 866,385
 998,865
 960,605
 897,446
 806,664
 823,744
 818,754
 801,863
Gain/(loss) on investment securities, net (18,719) 6,707
 9,049
 519
 (376) (179) 30,798
 27,260
 3,170
 2,267
 2,379
 (2,000) (4,785) (1,688) 419
 (663)
Total fees and other income 696,933
 788,772
 720,761
 725,554
 616,948
 726,507
 688,839
 665,908
General and administrative expenses 1,575,140
 1,343,545
 1,341,636
 1,309,838
 1,352,618
 1,279,340
 1,264,872
 1,225,381
Other expenses 92,971
 43,400
 45,408
 40,709
 64,258
 45,970
 77,169
 76,586
Total expenses 1,668,111
 1,386,945
 1,387,044
 1,350,547
 1,416,876
 1,325,310
 1,342,041
 1,301,967
Income/(loss) before income taxes (132,426) 330,474
 379,747
 242,645
 2,998
 334,221
 428,705
 188,554
Income tax provision/(benefit) (416,702) 93,448
 91,983
 78,937
 (26,977) 108,576
 153,256
 78,860
Net income before noncontrolling interest 284,276
 237,026
 287,764
 163,708
 29,975
 225,645
 275,449
 109,694
General, administrative and other expenses 1,647,808
 1,633,244
 1,542,386
 1,542,414
 1,490,829
 1,450,387
 1,449,749
 1,441,360
Income before income taxes 213,256
 383,363
 561,691
 355,706
 183,498
 349,416
 527,708
 356,313
Income tax provision 87,732
 112,927
 155,326
 116,214
 51,738
 109,949
 168,151
 96,062
Net income before NCI 125,524
 270,436
 406,365
 239,492
 131,760
 239,467
 359,557
 260,251
Less: Net income attributable to NCI 181,160
 75,195
 104,724
 50,628
 20,460
 77,672
 108,472
 71,275
 38,562
 66,831
 110,743
 72,512
 31,861
 72,491
 104,141
 75,138
Net income attributable to SHUSA $103,116
 $161,831
 $183,040
 $113,080
 $9,515
 $147,973
 $166,977
 $38,419
 $86,962
 $203,605
 $295,622
 $166,980
 $99,899
 $166,976
 $255,416
 $185,113

Operating Lease Cash Flow Classification

As discussed further in Note 1 to the Consolidated Financial Statements, beginning June 30, 2014 through September 30, 2017, cash flows from the sale of automobiles returned to the Company at the end of a lease term were incorrectly recorded in the Consolidated Statement of Cash Flows.

The interim period impacts of this error were overstatement of cash flows from investing activities (Proceeds from the sale and termination of operating leases) and understatement of cash flows from operating activities (Depreciation, amortization and accretion) in the amounts of $383.5 million, $288.0 million, $149.9 million, $129.8 million, $86.6 million, and $37.4 million for the year-to-date periods ended September 30, 2017, June 30, 2017, March 31, 2017, September 30, 2016, June 30, 2016, and March 31, 2016, respectively. There was no net impact to cash provided by financing activities, net change in cash and cash equivalents, or total cash and cash equivalents. There was no impact to the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Other Comprehensive Income, or Condensed Consolidated Statements of Equity for any period as a result of the error. Management has evaluated the errors and determined they are immaterial to previously issued financial statements. In future filings, the Company will correct the statement of cash flows disclosures for the comparative prior periods when presented.


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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations



20172019 FOURTH QUARTER RESULTS

SHUSA reported net income for the fourth quarter of 20172019 of $284.3$125.5 million compared to a net income of $237.0$270.4 million for the third quarter of 20172019. The most significant period-over-period variances were:
an increase in total fees and other income of $132.5 million, primarily comprised of the mark to market on the personal unsecured portfolio HFS included in miscellaneous income, net.
a decrease in the income tax provision of $25.2 million primarily due to lower income before taxes.

SHUSA reported net income for the fourth quarter of 2019 of $125.5 million, compared to net income of $30.0$131.8 million for the fourth quarter of 2016.2018. The most significant period over period variances were:
an increase in net income between the third and fourth quartersinterest expense of 2017 was primarily related to a tax benefit recorded in the fourth quarter as a result of re-measuring our net deferred tax liabilities$58.0 million, due to the federal rate reduction. The increase in net income between the fourth quarter of 2017higher deposit volume and the fourth quarter of 2016 is primarily the result of rates.
a decrease in the provision for credit losses of $123.6 million as a result of lower TDR balances and a tax benefit recorded in the fourth quarter 2017.better recovery rates

During the fourth quarter of 2017, the Company had a net loss on investment securities of $18.7 million, compared to a net gain of $6.7 million during the third quarter of 2017 and a net loss of $0.4 million during the fourth quarter of 2016. The net loss on investment securities for the fourth quarter of 2017 was primarily due to losses incurred on the sale of CMOs.

The provision for credit losses was $658.2 million during the fourth quarter of 2017, compared to $652.1 million during the third quarter of 2017 and $779.6 million during the fourth quarter of 2016. The increase in the provision for credit losses from the third quarter of 2017 to the fourth quarter of 2017 was primarily to replenish the allowance for charge-offs incurred during the fourth quarter, as the ALLL remained consistent quarter over quarter. The decrease in the provision from the fourth quarter of 2016 to the fourth quarter of 2017 was primarily due to a decrease in the outstanding loan portfolio.

Total fees and other income during the fourth quarter of 2017 were $696.9 million, compared to $788.8 million for the third quarter of 2017 and $616.9 million for the fourth quarter of 2016. The decrease from the third quarter of 2017 to the fourth quarter of 2017 was primarily due to subsequent markdowns to the fair value of the personal unsecured LHFS portfolio during the fourth quarter of 2017.

General and administrative expenses for the fourth quarter of 2017 were $1.6 billion, compared to $1.3 billion for the third quarter of 2017 and $1.4 billion for the fourth quarter of 2016. The increase in the fourth quarter of 2017 compared to the third quarter of 2017 and the fourth quarter of 2016, was primarily due to an increase in legalgeneral and administrative and other expenses and compensation and benefits expenses in the fourth quarter of 2017 compared to the third quarter of 2017 and the fourth quarter of 2016. In addition, there was$157.0 million, including an increase in lease expensesexpense of $78.0 million, resulting from the continued growth in the Company's leaseincreasing leased vehicle portfolio, over the year.

Other expenses for the fourth quarter of 2017 were $93.0 million, compared to $43.4 million for the third quarter of 2017 and $64.3 million for the fourth quarter of 2016. Thean increase in other expensescompensation and benefits expense of $45.7 million as a result of increased headcount.
an increase in the fourth quarter of 2017 compared to the third quarter of 2017 relates to a loss on debt extinguishment, an impairment on long-lived assets and an impairment of goodwill recorded in the fourth quarter 2017. The increase from the fourth quarter of 2016 to the fourth quarter of 2017 was primarily related to the impairments on long-lived assets and goodwill recorded in the fourth quarter of 2017.

Income tax benefit for the fourth quarter of 2017 was $416.7 million, compared to an income tax provision of $93.4$36.0 million in the third quarter of 2017 and an income tax benefit of $27.0 million in the fourth quarter of 2016. The variance between the income tax provision for the third quarter of 2017 and the fourth quarter of 2017 and the variance between the fourth quarter of 2017 and the fourth quarter of 2016 is primarily due to a reduction in our income tax provision as a result of remeasuring our net deferred tax liabilities due to the federal rate reduction.higher income before taxes.



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ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated by reference from Part I,II, Item 7, MD&A — "Asset and Liability Management" above.

112





ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS


113
87





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholder of
Santander Holdings USA, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Santander Holdings USA, Inc. and its subsidiaries (the "Company"“Company”) as of December 31, 20172019 and December 31, 2016,2018, and the related consolidated statements of operations, of comprehensive income stockholder’s(loss), of stockholder's equity and of cash flows for each of the twothree years in the period ended December 31, 2017,2019, including the related notes (collectively referred to as the “consolidatedfinancial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and December 31, 2016,2018, and the results of theirits operations and theirits cash flows for each of the twothree years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain,maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO becausematerial weaknesses in internal control over financial reporting existed as of that date related to the Company’s control environment, as well as material weaknesses related to the control environment, risk assessment, control activities and monitoring at the Company’s consolidated subsidiary Santander Consumer USA Holdings Inc. (“SC”);development, approval, and monitoring of models used to estimate the credit loss allowance at SC; and identification, governance, and monitoring of models used to estimate accretion at SC. In addition, a material weakness existed as of that date related to the Company’s management review of its statement of cash flows and footnotes.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2017 consolidatedfinancial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on these consolidatedfinancial statements.COSO.

Basis for Opinions

The Company's management is responsible for these consolidatedfinancial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above.Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based

114





on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


88





Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 19, 201811, 2020

We have served as the Company’s auditor since 2016.


115





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of
Santander Holdings USA, Inc.

We have audited the accompanying consolidated statements of operations, comprehensive income/(loss), stockholder’s equity, and cash flows of Santander Holdings USA, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Santander Holdings USA, Inc. and subsidiaries for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, in 2016 the Company recognized a change in reporting entity due to a merger of entities under common control and the 2015 consolidated financial statements reflect retrospective application for the change in reporting entity. As discussed in Note 24 to the consolidated financial statements, the accompanying 2015 consolidated financial statements have been restated to correct misstatements.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
April 14, 2016 (December 7, 2016 as to the effects of the restatement discussed in Note 24 and March 20, 2017 as to the effects of a change in reporting entity for a merger of entities under common control discussed in Note 1, a change in reportable segments, and the retrospective adoption of ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)


11689





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

December 31, 2017 December 31, 2016
(in thousands)December 31, 2019 December 31, 2018
ASSETS      
Cash and cash equivalents$6,519,967
 $10,035,859
$7,644,372
 $7,790,593
Investment securities:      
Available-for-sale ("AFS") at fair value14,413,183
 17,024,225
Trading securities1
 1,630
Held-to-maturity (fair value of $1,773,938 and $1,635,413 as of December 31, 2017 and December 31, 2016, respectively)1,799,808
 1,658,644
Other investments658,863
 730,831
Loans held-for-investment ("LHFI")(1) (5)
80,740,852
 85,819,785
Allowance for loan and lease losses ("ALLL") (5)
(3,911,575) (3,814,464)
AFS at fair value14,339,758
 11,632,987
HTM (fair value of $3,957,227 and $2,676,049 as of December 31, 2019 and December 31, 2018, respectively)3,938,797
 2,750,680
Other investments (includes trading securities of $1,097 and $10 as of December 31, 2019 and December 31, 2018, respectively)995,680
 805,357
LHFI(1) (5)
92,705,440
 87,045,868
ALLL (5)
(3,646,189) (3,897,130)
Net LHFI76,829,277
 82,005,321
89,059,251
 83,148,738
Loans held-for-sale ("LHFS") (2)
2,522,486
 2,586,308
LHFS (2)
1,420,223
 1,283,278
Premises and equipment, net (3)
849,061
 996,498
798,122
 805,940
Operating lease assets, net (5)(6)
10,474,308
 9,689,231
16,495,739
 14,078,793
Goodwill4,444,389
 4,454,925
4,444,389
 4,444,389
Intangible assets, net535,753
 597,244
416,204
 475,193
Bank-owned life insurance ("BOLI")1,795,700
 1,767,101
BOLI1,860,846
 1,833,290
Restricted cash (5)
3,818,807
 3,016,948
3,881,880
 2,931,711
Other assets (4) (5)
3,632,427
 3,795,525
4,204,216
 3,653,336
TOTAL ASSETS$128,294,030
 $138,360,290
$149,499,477
 $135,634,285
LIABILITIES      
Accrued expenses and payables$2,825,263
 $2,821,712
$4,476,072
 $3,035,848
Deposits and other customer accounts60,831,103
 67,240,690
67,326,706
 61,511,380
Borrowings and other debt obligations (5)
39,003,313
 43,524,445
50,654,406
 44,953,784
Advance payments by borrowers for taxes and insurance159,321
 163,498
153,420
 160,728
Deferred tax liabilities, net969,996
 1,420,315
1,521,034
 1,212,538
Other liabilities (5)
799,403
 810,872
969,009
 912,775
TOTAL LIABILITIES104,588,399
 115,981,532
125,100,647
 111,787,053
Commitments and contingencies (Note 20)
 
STOCKHOLDER'S EQUITY      
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at both December 31, 2017 and December 31, 2016)195,445
 195,445
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both December 31, 2017 and December 31, 2016)17,723,010
 16,599,497
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both December 31, 2019 and December 31, 2018)17,954,441
 17,859,304
Accumulated other comprehensive loss(198,431) (193,208)(88,207) (321,652)
Retained earnings3,462,674
 3,020,149
4,155,226
 3,783,405
TOTAL SHUSA STOCKHOLDER'S EQUITY21,182,698
 19,621,883
22,021,460
 21,321,057
Noncontrolling interest ("NCI")2,522,933
 2,756,875
NCI2,377,370
 2,526,175
TOTAL STOCKHOLDER'S EQUITY23,705,631
 22,378,758
24,398,830
 23,847,232
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY$128,294,030
 $138,360,290
$149,499,477
 $135,634,285
 
(1) LHFI includes $186.5$102.0 million and $217.2$126.3 million of loans recorded at fair value at December 31, 20172019 and December 31, 2016,2018, respectively.
(2) Includes $197.7$289.0 million and $453.3$209.5 million of loans recorded at the fair value option ("FVO")FVO at December 31, 20172019 and December 31, 2016.2018, respectively.
(3) Net of accumulated depreciation of $1.4$1.5 billion and $1.2$1.4 billion at December 31, 20172019 and December 31, 2016,2018, respectively.
(4) Includes mortgage servicing rights ("MSRs")MSRs of $146.0$130.9 million and $146.6$149.7 million at December 31, 20172019 and December 31, 2016,2018, respectively, for which the Company has elected the FVO. See Note 916 to these Consolidated Financial Statements for additional information.
(5) The Company has interests in certain securitization trusts ("Trusts")Trusts that are considered variable interest entities ("VIEs")VIEs for accounting purposes. The Company consolidatesAt December 31, 2019 and December 31, 2018, LHFI included $26.5 billion and $24.1 billion, Operating leases assets, net included $16.5 billion and $14.0 billion, restricted cash included $1.6 billion and $1.6 billion, other assets included $625.4 million and $685.4 million, Borrowings and other debt obligations included $34.2 billion and $31.9 billion, and Other liabilities included $188.1 million and $122.0 million of assets or liabilities that were included within VIEs, where it is deemed the primary beneficiary.respectively. See Note 7 to these Consolidated Financial Statements for additional information.
(6) Net of accumulated depreciation of $3.4$4.2 billion and $2.8$3.5 billion at December 31, 20172019 and December 31, 2016,2018, respectively.
See accompanying unaudited notes to Consolidated Financial Statements.

11790





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)
 Year Ended December 31,
 2017 2016 2015
 (in thousands)
INTEREST INCOME:     
Loans$7,287,400
 $7,611,347
 $7,732,022
Interest-earning deposits86,205
 57,361
 21,745
Investment securities:     
AFS352,601
 284,796
 331,379
Held-to-maturity38,609
 3,526
 
Other investments21,319
 32,721
 52,470
TOTAL INTEREST INCOME7,786,134
 7,989,751
 8,137,616
INTEREST EXPENSE:     
Deposits and other customer accounts241,044
 277,022
 289,145
Borrowings and other debt obligations1,211,085
 1,148,037
 947,065
TOTAL INTEREST EXPENSE1,452,129
 1,425,059
 1,236,210
NET INTEREST INCOME6,334,005
 6,564,692
 6,901,406
Provision for credit losses2,650,494
 2,979,725
 4,079,743
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES3,683,511
 3,584,967
 2,821,663
NON-INTEREST INCOME:     
Consumer and Commercial fees616,438
 689,839
 711,784
Mortgage banking income, net56,659
 63,790
 108,569
BOLI66,784
 57,796
 57,913
Capital market revenue195,906
 190,647
 141,667
Lease income2,017,775
 1,839,307
 1,482,850
Miscellaneous (loss)/income, net(1)
(21,542) (132,123) 383,425
TOTAL FEES AND OTHER INCOME2,932,020
 2,709,256
 2,886,208
Other-than-temporary impairment ("OTTI") recognized in earnings
 (44) (1,092)
Net (losses)/gains on sale of investment securities(2,444) 57,547
 19,919
Net (losses)/gains recognized in earnings(2,444) 57,503
 18,827
TOTAL NON-INTEREST INCOME2,929,576
 2,766,759
 2,905,035
GENERAL AND ADMINISTRATIVE EXPENSES:     
Compensation and benefits1,895,326
 1,719,645
 1,598,497
Occupancy and equipment expenses669,113
 618,597
 591,569
Technology, outside service, and marketing expense581,164
 644,079
 601,865
Loan expense386,468
 415,267
 384,051
Lease expense1,553,096
 1,305,712
 1,121,531
Other administrative expenses484,992
 418,911
 426,887
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES5,570,159
 5,122,211
 4,724,400
OTHER EXPENSES:     
Amortization of intangibles61,491
 70,034
 79,921
Deposit insurance premiums and other expenses70,661
 77,976
 61,503
Loss on debt extinguishment30,349
 114,232
 
Other miscellaneous expenses33,911
 12,795
 8,973
Impairment of goodwill10,536
 
 4,507,095
Impairment of long lived assets15,540
 
 
TOTAL OTHER EXPENSES222,488
 275,037
 4,657,492
INCOME/(LOSS) BEFORE INCOME TAX PROVISION820,440
 954,478
 (3,655,194)
Income tax (benefit) / provision(152,334) 313,715
 (599,758)
NET INCOME / (LOSS) INCLUDING NCI972,774
 640,763
 (3,055,436)
LESS: NET INCOME / (LOSS) ATTRIBUTABLE TO NCI411,707
 277,879
 (1,653,719)
NET INCOME /(LOSS) ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC.$561,067
 $362,884
 $(1,401,717)
 Year Ended December 31,
 2019 2018 2017
INTEREST INCOME:     
Loans$8,098,482
 $7,546,376
 $7,377,345
Interest-earning deposits174,189
 137,753
 86,205
Investment securities:     
AFS280,927
 297,557
 352,601
HTM70,815
 68,525
 38,609
Other investments25,782
 18,842
 21,319
TOTAL INTEREST INCOME8,650,195
 8,069,053
 7,876,079
INTEREST EXPENSE:     
Deposits and other customer accounts574,471
 389,128
 241,044
Borrowings and other debt obligations1,632,956
 1,335,075
 1,211,085
TOTAL INTEREST EXPENSE2,207,427
 1,724,203
 1,452,129
NET INTEREST INCOME6,442,768
 6,344,850
 6,423,950
Provision for credit losses2,292,017
 2,339,898
 2,759,944
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES4,150,751
 4,004,952
 3,664,006
NON-INTEREST INCOME:     
Consumer and commercial fees548,846
 568,147
 616,438
Lease income2,872,857
 2,375,596
 2,017,775
Miscellaneous income, net(1) (2)
301,598
 307,282
 269,484
TOTAL FEES AND OTHER INCOME3,723,301
 3,251,025
 2,903,697
Net gain/(loss) on sale of investment securities5,816
 (6,717) (2,444)
TOTAL NON-INTEREST INCOME3,729,117
 3,244,308
 2,901,253
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES:     
Compensation and benefits1,945,047
 1,799,369
 1,895,326
Occupancy and equipment expenses603,716
 659,789
 669,113
Technology, outside service, and marketing expense656,681
 590,249
 581,164
Loan expense405,367
 384,899
 386,468
Lease expense2,067,611
 1,789,030
 1,553,096
Other expenses687,430
 608,989
 679,157
TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES6,365,852
 5,832,325
 5,764,324
INCOME BEFORE INCOME TAX PROVISION/(BENEFIT)1,514,016
 1,416,935
 800,935
Income tax provision/(benefit)472,199
 425,900
 (157,040)
NET INCOME INCLUDING NCI1,041,817
 991,035
 957,975
LESS: NET INCOME ATTRIBUTABLE TO NCI288,648
 283,631
 405,625
NET INCOME ATTRIBUTABLE TO SHUSA$753,169
 $707,404
 $552,350
1- Includes(1) Netted down by impact of$404.6 million, $382.3 million, and $386.4 million $424.1 million,for the years ended December 31, 2019, 2018 and $243.0 million in 2017 2016, and 2015 of lower of cost or market adjustments on a portion of the Company's loans held for saleLHFS portfolio.
(2) Includes equity investment income/(expense), net.

See accompanying unaudited notes to Consolidated Financial Statements.

11891





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)

 Year Ended December 31,
 2017 2016 2015
 (in thousands)
NET INCOME /(LOSS) INCLUDING NCI$972,774
 $640,763
 $(3,055,436)
OTHER COMPREHENSIVE INCOME, NET OF TAX     
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments, net of tax (1)
337
 9,856
 (2,321)
Net unrealized losses on available-for-sale investment securities, net of tax(9,744) (34,812) (44,102)
Pension and post-retirement actuarial gains, net of tax4,184
 2,278
 4,160
TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAX(5,223) (22,678) (42,263)
COMPREHENSIVE INCOME / (LOSS)967,551
 618,085
 (3,097,699)
NET INCOME / (LOSS) ATTRIBUTABLE TO NCI411,707
 277,879
 (1,653,719)
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO SHUSA$555,844
 $340,206
 $(1,443,980)
 Year Ended December 31,
 2019 2018 2017
NET INCOME INCLUDING NCI$1,041,817
 $991,035
 $957,975
OCI, NET OF TAX     
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments, net of tax (1) (2)
(301) (3,796) 337
Net unrealized gains/(losses) on AFS and HTM investment securities, net of tax (2)
222,887
 (80,891) (9,744)
Pension and post-retirement actuarial gains, net of tax (2)
10,859
 560
 4,184
TOTAL OTHER COMPREHENSIVE GAIN / (LOSS), NET OF TAX233,445
 (84,127) (5,223)
COMPREHENSIVE INCOME1,275,262
 906,908
 952,752
NET INCOME ATTRIBUTABLE TO NCI288,648
 283,631
 405,625
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA$986,614
 $623,277
 $547,127

(1) Excludes $(18.3) million, $(3.1) million, and $6.0 million and $10.8 million of other comprehensive incomeOCI attributable to NCI for the years ended December 31, 2019, 2018 and 2017, respectively.
(2) Excludes $39.1 million impact of OCI reclassified to Retained earnings as a result of the adoption of ASU 2018-02 for the year ended December 31, 2017 and 2016, respectively. There was no material other comprehensive income attributable to NCI for 2015.2018.

See accompanying unaudited notes to Consolidated Financial Statements.


11992





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015 (in (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, 2015530,391
 $270,445
 $16,629,878
 $(128,267) $4,095,258
 $4,052,395
 $24,919,709
Comprehensive loss attributable to SHUSA
 
 
 (42,263) (1,401,717) 
 (1,443,980)
Net loss attributable to NCI
 
 
 
 
 (1,653,719) (1,653,719)
Impact of Santander Consumer USA Holdings Inc. ("SC") stock option activity
 
 (67) 
 
 46,294
 46,227
Issuance of common stock
 
 (14) 
 14
 
 
Stock issued in connection with employees benefit and incentive compensation plans
 
 25
 
 
 
 25
Dividends paid on preferred stock
 
 
 
 (21,162) 
 (21,162)
Balance, December 31, 2015530,391
 $270,445
 $16,629,822
 $(170,530) $2,672,393
 $2,444,970
 $21,847,100
Comprehensive (loss)/income attributable to SHUSA
 
 
 (22,678) 362,884
 
 340,206
Other comprehensive income attributable to NCI
 
 
 
 
 10,807
 10,807
Net income attributable to NCI
 
 
 
 
 277,879
 277,879
Impact of SC stock option activity
 
 69
 
 
 23,219
 23,288
Redemption of preferred stock

 (75,000) 
 
 
 
 (75,000)
Capital distribution to shareholder
 
 (30,789) 
 
 
 (30,789)
Stock issued in connection with employee benefit and incentive compensation plans
 
 395
 
 
 
 395
Dividends paid on preferred stock
 
 
 
 (15,128) 
 (15,128)
Balance, December 31, 2016530,391
 $195,445
 $16,599,497
 $(193,208) $3,020,149
 $2,756,875
 $22,378,758
Cumulative-effect adjustment upon adoption of new accounting standards (Note 1)
 
 (26,457) 
 14,763
 37,401
 25,707
Comprehensive income attributable to SHUSA
 
 
 (5,223) 561,067
 
 555,844
Other comprehensive income attributable to NCI
 
 
 
 
 6,048
 6,048
Net income attributable to NCI
 
 
 
 
 411,707
 411,707
Impact of SC stock option activity
 

 
 

 

 22,116
 22,116
Contribution of Santander Financial Services, Inc. (“SFS”)
from shareholder 

 

 430,783
 

 (108,705) 

 322,078
Net contribution from shareholder (Note 12)
 

 11,747
 

 

 

 11,747
Contribution of incremental SC shares from shareholder (Note 12)
 

 707,589
 

 

 (707,589) 
Stock issued in connection with employee benefit and incentive compensation plans
 

 (149) 

 

 850
 701
Dividends paid on common stock
 

 

 

 (10,000) 

 (10,000)
Dividends paid to NCI
 

 

 

 

 (4,475) (4,475)
Dividends paid on preferred stock
 

 

 

 (14,600) 

 (14,600)
Balance, December 31, 2017530,391

$195,445

$17,723,010

$(198,431)
$3,462,674

$2,522,933

$23,705,631
 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, 2017530,391
 $195,445
 $16,599,497
 $(193,208) $3,020,149
 $2,756,875
 $22,378,758
Cumulative effect adjustment upon adoption of ASU 2016-09
 
 (26,457) 
 14,763
 37,401
 25,707
Comprehensive (loss)/income Attributable to SHUSA
 
 
 (5,223) 552,350
 
 547,127
Other comprehensive income attributable to NCI
 
 
 
 
 6,048
 6,048
Net income attributable to NCI
 
 
 
 
 405,625
 405,625
Impact of SC Stock Option Activity
 
 
 
 
 22,116
 22,116
Contribution of SFS from Shareholder (Note 1)  
 430,783
 
 (108,705) 
 322,078
Capital contribution from shareholder (Note 13)
 
 11,747
 
 
 
 11,747
Contribution of incremental SC shares from shareholder
 
 707,589
 
 
 (707,589) 
Dividends paid to NCI
 
 
 
 
 (4,475) (4,475)
Stock issued in connection with employee benefit and incentive compensation plans
 
 (149) 
 
 850
 701
Dividends declared and paid on common stock
 
 
 
 (10,000) 
 (10,000)
Dividends declared and paid on preferred stock
 
 
 
 (14,600) 
 (14,600)
Balance, December 31, 2017530,391
 $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) 47,549
 
 8,455
Comprehensive (loss)/income attributable to SHUSA
 
 
 (84,127) 707,404
 
 623,277
Other comprehensive loss attributable to NCI
 
 
 
 
 (3,130) (3,130)
Net income attributable to NCI
 
 
 
 
 283,631
 283,631
Impact of SC stock option activity
 
 
 
 
 12,411
 12,411
Contribution from shareholder and related tax impact (Note 13)
 
 88,468
 
 
 
 88,468
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
 
 
 
 (410,000) 
 (410,000)
Dividends paid to NCI
 
 
 
 
 (57,511) (57,511)
Stock repurchase attributable to NCI
 
 43,430
 
 
 (226,077) (182,647)
Dividends paid on preferred stock
 
 
 
 (10,950) 
 (10,950)
Balance, December 31, 2018530,391
 $
 $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
 
 
 233,445
 753,169
 
 986,614
Other comprehensive loss attributable to NCI
 
 
 
 
 (18,265) (18,265)
Net income attributable to NCI
 
 
 
 
 288,648
 288,648
Impact of SC stock option activity
 
 
 
 
 10,176
 10,176
Contribution from shareholder (Note 13)
 
 88,927
 
 
 
 88,927
Dividends declared and paid on common stock
 
 
 
 (400,000) 
 (400,000)
Dividends paid to NCI
 
 
 
 
 (85,160) (85,160)
Stock repurchase attributable to NCI
 
 6,210
 
 
 (344,204) (337,994)
Balance, December 31, 2019530,391
 $
 $17,954,441
 $(88,207) $4,155,226
 $2,377,370
 $24,398,830
See accompanying unaudited notes to Consolidated Financial Statements.

12093




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)






Year Ended December 31,
2017
2016 2015
     Year Ended December 31,
(in thousands)2019
2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income/(loss) including NCI$972,774
 $640,763
 $(3,055,436)
Net income including NCI$1,041,817
 $991,035
 $957,975
Adjustments to reconcile net income to net cash provided by operating activities:          
Impairment of goodwill10,536
 
 4,507,095

 
 10,536
Provision for credit losses2,650,494
 2,979,725
 4,079,743
2,292,017
 2,339,898
 2,759,944
Deferred tax (benefit)/expense(191,908) 213,949
 (830,619)
Depreciation, amortization and accretion(2)
1,606,862
 1,272,415
 518,207
Deferred tax expense/(benefit)339,152
 416,875
 (196,614)
Depreciation, amortization and accretion2,402,611
 1,913,225
 1,606,862
Net loss on sale of loans373,532
 455,330
 77,219
397,037
 379,181
 373,532
Net loss/(gain) on sale of investment securities2,444
 (57,547) (18,827)
Gain on residential loan securitizations
 
 (21,570)
Net gain on sale of operating leases(401) (473) (22,636)
OTTI recognized in earnings
 44
 1,092
Net (gain)/loss on sale of investment securities(5,816) 6,717
 2,444
Loss on debt extinguishment30,349
 114,232
 
2,735
 3,470
 30,349
Net (gain)/loss on real estate owned and premises and equipment(9,567) 10,644
 (5,250)
Net (gain)/loss on real estate owned, premises and equipment, and other assets(19,637) 10,610
 (9,567)
Stock-based compensation4,674
 17,677
 (7,261)317
 913
 4,674
Equity loss on equity method investments28,323
 11,054
 8,818
Equity (income)/loss on equity method investments(1,584) (4,324) 28,323
Originations of LHFS, net of repayments(4,920,570) (6,215,770) (7,699,805)(1,462,963) (2,982,366) (4,920,570)
Purchases of LHFS(4,280) (4,730) (5,906)(387) (1,381) (4,280)
Proceeds from sales of LHFS4,601,777
 5,883,608
 6,876,079
1,563,206
 4,264,959
 4,601,777
Purchases of trading securities(3,015) (629,947) (1,219,268)
Proceeds from sales of trading securities18,347
 657,494
 1,683,719
Net change in:          
Revolving personal loans(329,168) (317,506) (107,947)(360,922) (371,716) (329,168)
Other assets and BOLI (1)
(162,006) 117,256
 439,766
Other liabilities (1)
147,149
 141,776
 (114,260)
Other assets, BOLI and trading securities(152,520) (200,380) (99,306)
Other liabilities814,094
 248,345
 147,149
NET CASH PROVIDED BY OPERATING ACTIVITIES4,826,346
 5,289,994
 5,082,953
6,849,157
 7,015,061
 4,964,060
          
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from sales of AFS investment securities3,216,595
 6,755,299
 2,809,779
1,423,579
 1,262,409
 3,216,595
Proceeds from prepayments and maturities of AFS investment securities5,231,910
 10,209,477
 5,994,381
6,688,603
 2,616,417
 5,231,910
Purchases of AFS investment securities(6,248,059) (12,205,062) (13,551,027)(10,534,918) (2,421,286) (6,248,059)
Proceeds from prepayments and maturities of held to maturity investment securities200,085
 11,784
 
Purchases of held to maturity investment securities(352,786) (1,671,285) 
Proceeds from prepayments and maturities of HTM investment securities392,971
 338,932
 200,085
Purchases of HTM investment securities(1,595,777) (135,898) (352,786)
Proceeds from sales of other investments327,029
 492,761
 325,594
264,364
 153,294
 327,029
Proceeds from maturities of other investments560
 45
 170
13,673
 45
 560
Purchases of other investments(217,007) (172,292) (506,476)(369,361) (214,427) (217,007)
Net change in restricted cash(696,092) (390,902) (287,516)
Proceeds from sales of LHFI1,227,052
 1,737,780
 2,710,078
2,583,563
 1,016,652
 1,227,052
Proceeds from the sales of equity method investments25,145
 
 14,988

 
 25,145
Distributions from equity method investments10,522
 4,819
 11,881
4,539
 9,889
 10,522
Contributions to equity method and other investments(87,267) (42,798) (101,018)(228,275) (122,816) (87,267)
Proceeds from settlements of BOLI policies34,941
 20,931
 37,028
Purchases of LHFI(723,793) (278,810) (1,978,145)(897,907) (1,243,574) (723,793)
Net change in loans other than purchases and sales2,797,347
 (1,843,299) (9,448,772)(10,184,035) (8,462,103) 2,724,489
Purchases and originations of operating leases(6,036,193) (5,642,120) (5,769,802)(8,597,560) (9,859,861) (6,036,193)
Proceeds from the sale and termination of operating leases(2)
3,119,264
 2,163,497
 2,020,686
Proceeds from the sale and termination of operating leases3,502,677
 3,588,820
 3,119,264
Manufacturer incentives878,219
 1,205,911
 1,192,235
794,237
 1,098,055
 878,219
Proceeds from sales of real estate owned and premises and equipment112,497
 67,702
 96,349
68,491
 53,569
 112,497
Purchases of premises and equipment(164,111) (234,075) (314,401)(216,810) (159,887) (164,111)
Confirming receivable
 
 106,000
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES2,620,917
 168,432
 (16,675,016)
Net cash paid for branch disposition(329,328) 
 
Upfront fee paid to FCA(60,000) 
 
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES(17,242,333) (12,460,839) 3,281,179
          
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net change in deposits and other customer accounts(6,218,010) 1,657,262
 3,435,426
6,286,153
 680,277
 (6,218,010)
Net change in short-term borrowings(50,331) (522,927) (5,209,395)191,931
 (168,769) (50,331)
Net proceeds from long-term borrowings43,325,311
 46,598,213
 51,840,502
48,043,664
 46,461,404
 43,325,311
Repayments of long-term borrowings(44,009,525) (44,563,102) (45,669,188)(44,522,618) (43,277,142) (44,005,642)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)1,000,000
 5,850,000
 16,350,000
Proceeds from FHLB advances (with terms greater than 3 months)4,435,000
 4,900,000
 1,000,000
Repayments of FHLB advances (with terms greater than 3 months)(5,000,000) (13,799,232) (6,670,000)(2,500,000) (2,000,000) (5,000,000)
Net change in advance payments by borrowers for taxes and insurance(4,177) (7,639) 4,993
(7,308) 1,407
 (4,177)
Cash dividends paid to preferred stockholders(14,600) (15,128) (21,162)
 (10,950) (14,600)
Dividends paid on common stock(10,000) 
 
(400,000) (410,000) (10,000)
Dividends paid to noncontrolling interest(4,475) 
 
Dividends paid to NCI(85,160) (57,511) (4,475)
Stock repurchase attributable to NCI(337,994) (182,647) 
Proceeds from the issuance of common stock13,652
 7,979
 87,772
4,529
 8,204
 13,652
Capital contribution from shareholder9,000
 
 
88,927
 85,035
 9,000
Redemption of preferred stock
 (75,000) 

 (200,000) 
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES(10,963,155) (4,869,574) 14,148,948
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES11,197,124
 5,829,308
 (10,959,272)
          
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS(3,515,892) 588,852
 2,556,885
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD10,035,859
 9,447,007
 6,890,122
CASH AND CASH EQUIVALENTS, END OF PERIOD$6,519,967
 $10,035,859
 $9,447,007
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH803,948
 383,530
 (2,714,033)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD10,722,304
 10,338,774
 13,052,807
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (1)
$11,526,252
 $10,722,304
 $10,338,774
          
SUPPLEMENTAL DISCLOSURES          
Income taxes paid/(received), net$3,954
 $(146,132) $(168,529)
Income taxes paid, net$35,355
 $26,261
 $3,954
Interest paid1,442,484
 1,439,126
 1,270,060
2,210,838
 1,694,850
 1,442,484
          
NON-CASH TRANSACTIONS          
Loans transferred to other real estate owned44,650
 83,364
 108,767
Loans transferred from held-for-investment to ("HFS") held-for-sale, net202,760
 143,825
 2,886,766
Unsettled purchases of investment securities
 230,052
 697,057
Loans transferred to/(from) other real estate owned(1,423) 86,467
 44,650
Loans transferred from/(to) HFI (from)/to HFS, net2,727,067
 731,944
 202,760
Unsettled sales of investment securities39,783
 
 

 
 39,783
Residential loan securitizations18,214
 26,736
 421,455
Contribution of SFS from shareholder (3)
322,078
 
 
Capital distribution to shareholder
 30,789
 
Contribution of SFS from shareholder (2)

 
 322,078
Contribution of incremental SC shares from shareholder707,589
 
 

 
 707,589
Contribution of SAM from shareholder (2)

 4,396
 
AFS investment securities transferred to HTM investment securities
 1,167,189
 
Adoption of lease accounting standard:     
ROU assets664,057
 
 
Accrued expenses and payables705,650
 
 

(1) The years ended December 31, 20162019, 2018, and 2017 include cash flow activity has been updated for the deferred tax classification correction. Refer to Note 1 - Basisand cash equivalents balances of Presentation$7.6 billion, $7.8 billion, and Accounting Policies for additional information.$6.5 billion, respectively, and restricted cash balances of $3.9 billion, $2.9 billion, and $3.8 billion, respectively.
(2) December 31, 2016 cash flow activity has been updated for the operating lease cash flow classification correction. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.
(3) The contributioncontributions of SFS to SHUSA wasand SAM were accounted for as a non-cash transaction.transactions. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

See accompanying unaudited notes to Consolidated Financial Statements.

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NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Introduction

Santander Holdings USA, Inc. ("SHUSA" or "the Company")SHUSA is the parent company (the "Parent Company")Parent Company of Santander Bank, National Association, (the "Bank" or "SBNA"),SBNA, a national banking association; Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"),SC, a consumer finance company focused on vehicle 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; Santander Securities, LLC ("SSLLC"),BSPR; SSLLC, a broker-dealer headquartered in Boston, Massachusetts; Banco Santander International ("BSI"), an Edge Act corporation locatedBSI, a financial services company headquartered 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"),SIS, a registered broker-dealer locatedheadquartered 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, SAM, are registered investment advisers with 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").Santander. The Parent Company's two largest subsidiaries by asset size and revenue are the Bank and SC.

The Bank’s primary business consists of attracting deposits and providing other retail banking services through its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multifamily loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States, focused throughout Pennsylvania, New Jersey, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island, and Delaware. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios.

SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC's primary business is the indirect origination and securitizationservicing of retail installment contracts ("RICs")RICs and leases, principally, through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime 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 withSAF is SC’s primary vehicle brand, and is available as a ten-year private label financingfinance option for automotive dealers across the United States. Since May 2013, under its agreement with Fiat Chrysler Automobiles US LLC ("FCA") that became effective May 1, 2013 (the "Chrysler Agreement"),FCA, SC offers a full spectrum of auto financing productshas operated as FCA's preferred provider for consumer loans, leases, and dealer loans and provides 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 1920 for additional details. On June 28, 2019, SC entered into an amendment to its agreement with FCA, which modified that agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions.

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. However, in 2015, SC announced its exit from personal lending and, accordingly, all of its personal lending assets are classified as HFS at December 31, 2019.

As of December 31, 2017,2019, SC was owned approximately 68.1%72.4% by SHUSA and 31.9%27.6% by other shareholders. During 2017, SHUSA increased its ownership in SC; refer to additional details in Note 21. Common shares of SC ("SC Common Stock") areStock is listed on the New York Stock Exchange (the "NYSE")NYSE under the trading symbol "SC."

Intermediate Holding Company ("IHC")During 2019, SBNA completed the sale of 14 bank branches and four 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. 

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

IHC

The enhanced prudential standardsEPS mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA")(the “Final Rule")DFA Final Rule were enacted by the Board of Governors of the Federal Reserve System (the "Federal Reserve")
to strengthen regulatory oversight of foreign banking organizations ("FBOs").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. As these entities were solely owned and controlled by Santander prior to July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at the historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control.


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

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 SFSSAM to the Company transferred approximately $679$5.4 million of assets, which were primarily comprised of cash and cash equivalents and LHFS, approximately $357$1.0 million of liabilities, and approximately $322$4.4 million of equity to the Company. Moreover, the Company is in the process of dissolving the business assets.

SFSAlthough SAM is an entity under common control, of Santander; however, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company has determined that it willelected to report the results of SFSSAM on a prospective basis beginning July 1,2, 2018. SFS’s results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company and the Company also elected to report its results prospectively. As a result of the 2017 rather than, as required by generally accepted accounting principles ("GAAP"), retrospectively restate its financial statements for the contribution of SFS. As a result,SFS in 2017 and SAM in 2018, SHUSA's net income is understated by $1.0 million and $6.0 million for the yearyears ended December 31, 2018 and 2017, by $3.3 million and overstated for the year ended December 31, 2016 by $13.5 million. The Company’s net loss for the year ended December 31, 2015 is understated by $99.9 million. SFS incurred a goodwill impairment charge of $98.3 million during the year ended December 31, 2015.respectively. In addition, a contribution to stockholder's equity of $322$4.4 million and $322.1 million was recorded on July 2, 2018, and July 1, 2017.2017, respectively. These amounts are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.

On October 21, 2019, the Company entered into an agreement to sell the stock of Santander BanCorp (the holding company that owns BSPR) for a total consideration of approximately $1.1 billion, subject to adjustment based on the consolidated Santander BanCorp balance sheet at closing. At December 31, 2019, BSPR had 27 branches, approximately 1,000 employees, and total assets of approximately $6.0 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 a third party 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. Once it becomes apparent that this transaction is more likely than not to receive regulatory approval, the Company will recognize a deferred tax liability of approximately $50 million for the unremitted earnings of Santander BanCorp. Consummation of the transaction is not expected to result in any material gain or loss.

Basis of Presentation

These Consolidated Financial Statements include the assets, liabilities, revenues and expenses accounts of the Company and its consolidated subsidiaries, including the Bank, SC, and certain special purpose financing trusts utilized in financing transactions that are considered VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and generally consolidates voting interest entities ("VOEs")VOEs in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. These Consolidated Financial Statements have been prepared by the Companyin accordance with GAAP and pursuant to Securities and Exchange Commission ("SEC")SEC regulations. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and Statements of Cash Flows ("SCF")SCF for the periods indicated, and contain adequate disclosure of this interim financial information to make the information presented not misleading.

CorrectionsCertain prior-year amounts have been reclassified to Previously Reported Amountsconform to the current year presentation. These reclassifications did not have a material impact on the Company's consolidated financial condition or results of operations.

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

Deferred Tax Classification

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

The Company has determinedpreparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the impact of the misclassification of deferred tax balancesamounts reported in the Consolidated Balance Sheetsfinancial statements and accompanying notes. Actual results could differ from those estimates, and those differences may be material. The most significant estimates pertain to fair value measurements, the ALLL and reserve for unfunded lending commitments, accretion of discounts and subvention on RICs, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, and income taxes. Actual results may differ from the periods ended March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016, and March 31, 2016estimates, and the corresponding impact of an overstatement of previously disclosed capital ratios ranging from 8 bps to 17 bps are immaterial for all periods.

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

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

Financial Statements.

12396




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

Operating Lease Cash Flow Classification

Beginning June 30, 2014 through September 30, 2017, cash flows from the sale of automobiles returned to the Company at the end of a lease term were incorrectly recorded in the Consolidated Statements of Cash Flows, resulting in an overstatement of cash flows from investing activities (Proceeds from the sale and termination of operating leases) and an understatement of cash flows from operating activities (Depreciation, amortization and accretion) in the amount of $188.3 million for the year ended December 31, 2016. There was no net impact to cash provided by financing activities. The misclassfication errors did not impact the net change in cash and cash equivalents, total cash and cash equivalents, net income, or any other operating measure. There was no impact to the Company's Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Other Comprehensive Income, or Consolidated Statements of Equity for any period as a result of the Consolidated Statement of Cash Flows error. Management has evaluated the errors and determined they are immaterial to previously issued financial statements. The Company has corrected the balance described above for the year ended December 31, 2016 in its Consolidated Statements of Cash Flows included herein. In future filings, the Company will correct the Consolidated Statement of Cash Flows disclosures for the comparative periods when presented.

Recently Adopted Accounting Standards

Since January 1, 2017,2019, the Company adopted the following Financial Accounting Standards Board ("FASB")FASB ASUs:
ASU 2016-09,2016-02, Compensation - Stock CompensationLeases (Topic 718)842). This new guidance simplifies certain aspects related to income taxes, the SCF, and forfeitures when accounting for share-based payment transactions. ASU 2016-09 eliminates the requirement to recognize excess tax benefits in accumulated paid-in capital pools, and instead requires companies to record all excess tax benefits and deficiencies at settlement, vesting or expirationThe Company adopted this standard as of January 1, 2019, resulting in the income statement as provision for income taxes. At adoptionrecognition of ASU 2016-09 on January 1, 2017, the cumulative effect of previously unrecognized excess tax benefits totaled $27.1 million net of tax,a ROU asset ($664.1 million) and was recognized through an increase of $14.8 million to beginning retained earnings and $37.4 million to NCI, offset by a decrease of $26.5 million to common stock and paid-in capital. The Company recorded excess tax deficiency, net of tax, of $796 thousandlease liability ($705.7 million) in the provisionConsolidated Balance Sheet for income taxes ratherall operating leases with a term greater than as a decrease to additional paid-in capital for the year ended December 31, 2017, on a prospective basis. All excess tax benefits along with other income tax cash flows will now be classified as an operating activity rather than financing activities in the SCF on a prospective basis. In addition, the Company voluntarily changed its accounting policy on forfeitures from previously recognizing forfeitures based on estimating the number of awards expected to be forfeited to electing to recognize forfeiture of awards as they occur to simplify the accounting for forfeitures.
In January 2017, the FASB also issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. It removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. The guidance provides that a goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The same one-step impairment test is applied to goodwill at all reporting units.12 months. The Company early adopted this ASU onusing the modified retrospective approach, with application at the adoption date and a cumulative-effect adjustment to the opening balance of its annual impairment test, October 1, 2017. The adoptionretained earnings. Under this approach, comparative periods were not adjusted. We elected the package of this ASUpractical 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 haveelect (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 material impact onmanner that effectively yields a straight-line lease expense over the Company’s financial position, resultslease 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 operationsOperations or cash flows.SCF.
The adoption of the following ASUs did not have ana material impact on the Company's financial position or results of operations.operations:
ASU 2016-05,2017-08, 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): Effect(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of Derivative Contract Novations on Existing Hedge Accounting Relationships.the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
ASU 2016-06,2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
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.
ASU 2018-16, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.
ASU 2016-07,, Investments-Equity Method and Joint Ventures (Topic 323), SimplifyingInclusion of the Transition to the Equity Method of Accounting.
ASU 2016-17, Consolidation (Topic 810),Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Held Through Related Parties That Are Under Common Control.Rate for Hedge Accounting Purposes.

ConsolidationSignificant Accounting Policies

The purpose of consolidated financial statements is to present the results of operations and the financial position of the Company and its subsidiaries as if the consolidated group were a single economic entity. There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities.


124




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

In accordance with the applicable accounting guidance for consolidations, the Consolidated Financial Statements include any VOEs in which the Company has a controlling financial interest and any VIEs for which the Company is deemed to be the primary beneficiary. The Company consolidates its VIEs if the Company has (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity's economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., the Company is considered to be the primary beneficiary). The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the noncontrolling shareholders do not hold any substantive participating or controlling rights. Interests in VIEs and VOEs can include equity interests in corporations, partnerships and similar legal entities, subordinated debt, securitizations, derivatives contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments.


97




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

Upon the occurrence of certain significant events, as required by the VIE model, the Company reassesses whether a legal entity in which the Company is involved is a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Company has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the entities with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively, with assets and liabilities of a newly consolidated VIE initially recorded at fair value. A gain or loss may be recognized upon deconsolidation of a VIE, depending on the carrying amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.

The Company uses the equity method to account for unconsolidated investments in VOEs if the Company has significant influence over the entity's operating and financing decisions but does not maintain a controlling financial interest. Unconsolidated investments in VOEs or VIEs in which the Company has a voting or economic interest of less than 20% generally are carried at cost.cost less any impairment. These investments are included in Other assets on the Consolidated Balance Sheets, and the Company's proportionate share of income or loss is included in Other miscellaneous expensesMiscellaneous income, net within the Consolidated Statements of Operations.

Sales of RICs and Leases

The Company, through SC, transfers RICs into newly formed Trusts which then issue one or more classes of notes payable backed by the RICs. The Company’s continuing involvement with the credit facilities and Trusts are in the form of servicing loans held by the SPEs and, generally, through holding a residual interest in the SPE. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and are consolidated when the Company has: (a) power over the significant activities of the entity and (b) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company has power over the significant activities of those Trusts as servicer of the financial assets held in the Trust. Servicing fees are not considered significant variable interests in the Trusts; however, when the Company also retains a residual interest in the Trust, either in the form of a debt security or equity interest, the Company has an obligation to absorb losses or the right to receive benefits that are potentially significant to the SPE. Accordingly, these Trusts are consolidated within the Consolidated Financial Statements, and the associated RICs, borrowings under credit facilities and securitization notes payable remain on the Consolidated Balance Sheets. Securitizations involving Trusts in which the Company does not retain a residual interest or any other debt or equity interest are treated as sales of the associated RICs. While these Trusts are included in our Consolidated Financial Statements, they are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by the Trusts, are available only to satisfy the notes payable related to the securitized RICs, and are not available to the Company's creditors or other subsidiaries.

The Company also sells RICs and leases to VIEs or directly to third parties. The Company may determine that these transactions meet sale accounting treatment in accordance with applicable guidance. Due to the nature, purpose, and activity of these transactions, the Company either does not hold potentially significant variable interests or is not the primary beneficiary as a result of the Company's limited further involvement with the financial assets. The transferred financial assets are removed from the Company's Consolidated Balance Sheets at the time the sale is completed. The Company generally remains the servicer of the financial assets and receives servicing fees. The Company also recognizes a gain or loss for the difference between the fair value, as measured based on sales proceeds plus (or minus) the value of any servicing asset (or liability) retained and the carrying value of the assets sold.

See further discussion on the Company's securitizations in Note 7 to these Consolidated Financial Statements.

Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash and amounts due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. Cash and cash equivalents have original maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits.


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

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

Investment Securities and Other Investments

Investment in debt securities are classified as either AFS, HTM, trading, or other investments. Investments in equity securities are generally recorded at fair value with changes recorded in earnings. Management determines the appropriate classification at the time of purchase.

Debt securities expected to be held for an indefinite period of time are classified as AFS and are carried at fair value, with temporary unrealized gains and losses reported as a component of accumulated other comprehensive income within stockholder's equity, net of estimated income taxes.

Debt securities purchased which the Company has the positive intent and ability to hold until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for payments, amortization of premium and accretion of discount. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in OCI and in the carrying value of the HTM securities. Such amounts are amortized over the remaining lives of the securities.

The Company conducts a comprehensive security-level impairment assessment quarterly on all securities with a fair value that is less than their amortized cost basis to determine whether the loss represents OTTI. The quarterly OTTI assessment takes into consideration whether (i) the Company has the intent to sell or, (ii) it is more likely than not that it will be required to sell the security before the expected recovery of its amortized cost. The Company also considers whether or not it would expect to receive all of the contractual cash flows from the investment based on its assessment of the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. The Company also considers the severity of the impairment in its assessment. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item, and the non-credit component is recorded within accumulated OCI.

Realized gains and losses on sales of investment securities are recognized on the trade date and included in earnings within Net (losses)/gains on sale of investment securities, which is a component of non-interest income. Unamortized premiums and discounts are recognized in interest income over the estimated life of the security using the interest method.

Debt securities held for trading purposes and equity securities are carried at fair value, with changes in fair value recorded in non-interest income. Investments that are purchased principally for the purpose of economically hedging the MSR in the near term are classified as trading securities and carried at fair value, with changes in fair value recorded as a component of the Miscellaneous income, net line of the Consolidated Statements of Operations.

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB. Although FHLB and FRB stock are equity interests in the FHLB and FRB, respectively, neither has a readily determinable fair value, because ownership is restricted and they are not readily marketable. FHLB stock can be sold back only at its par value of $100 per share and only to FHLBs or to another member institution. Accordingly, FHLB stock and FRB stock are carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

See Note 3 to the Consolidated Financial Statements for details on the Company's investments.

LHFI

LHFI include commercial and consumer loans (including RICs) originated by the Company as well as loans acquired by the Company, which the Company intends to hold for the foreseeable future or until maturity. RICs consist largely of nonprime automobile finance receivables that are acquired individually from dealers at a nonrefundable discount from the contractual principal amount. RICs also include receivables originated through a direct lending program and loan portfolios purchased from other lenders.

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

Originated LHFI

Originated LHFI are reported net of cumulative charge offs, unamortized loan origination fees and costs, and unamortized discounts and premiums. Interest on loans is credited to income as it is earned. For most of the Company's originated LHFI, loan origination fees and certain direct loan origination costs and premiums and discounts are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the effective interest method. For RICs, loan origination fees and costs, premiums and discounts are deferred and amortized over their estimated lives as adjustments to interest income utilizing the effective interest method using estimated prepayment speeds, which are updated on a monthly basis. The Company estimates future principal prepayments specific to pools of homogeneous loans, which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. Our estimated weighted average prepayment rates ranged from 5.1% to 11.0% at December 31, 2019 and 5.7% to 10.8% at December 31, 2018.

The Company’s LHFI are carried at amortized cost, net of the ALLL. When a RIC is originated, certain cost basis adjustments (the net discounts) to the principal balance of the loan are recognized in accordance with the accounting guidance for loan origination fees and costs in ASC 310-20. These cost basis adjustments generally include the following:

Origination costs.
Dealer discounts - dealer discounts to the principal balance of the loan generally occur in circumstances in which the contractual interest rate on the loan is not sufficient to compensate for the credit risk of the borrower.
Participation - participation fees, or premiums, paid to the dealer as a form of profit-sharing, rewarding the dealer for originating loans that perform.
Subvention - payments received from the vehicle manufacturer as compensation (yield enhancement) for the cost of below-market interest rates offered to consumers.

Originated loans are initially recorded at the proceeds paid to fund the loan. Loan origination fees and costs and any discount at origination for loans is considered by the Company to reflect yield enhancements and is accreted to income using the effective interest method.

See LHFS subsection below for accounting treatment when an HFI loan is re-designated as LHFS.

Purchased LHFI

Purchased loans are generally loans acquired in a bulk purchase or business combination. RICs acquired directly from a dealer are considered to be originated loans, not purchased loans.

Purchase discounts and premiums on purchased loans that are deemed performing are accreted over the remaining expected lives of the loans to their par values, generally using the retrospective effective interest method, which considers the impact of estimated prepayments that is updated on a quarterly basis. The purchase discount on personal unsecured loans (given their revolving nature) are amortized on a straight-line basis in accordance with ASC 310-20.

Purchased loans with evidence of credit quality deterioration as of the purchase date for which it is probable that the Company will not receive all contractually required payments receivable are accounted for as PCI loans. At acquisition, PCI loans are recorded at fair value with no allowance for credit losses, and accounted for individually or aggregated in pools based on similar risk characteristics. The Company estimates the amount and timing of expected cash flows for each loan or pool of loans. The expected cash flows in excess of the amount paid for the loans is referred to as the accretable yield and is recorded as interest income over the remaining estimated life of the loan or pool of loans.

The Company may irrevocably elect to account for certain loans acquired with evidence of credit deterioration at fair value in accordance with ASC 825. Accordingly, the Company does not recognize interest income for these loans and recognizes the fair value adjustments on these loans as part of other non-interest income in the Company’s Consolidated Statements of Operations. For certain loans which the Company has elected to account for at fair value that are not considered non-accrual, the Company separately recognizes interest income from the total fair value adjustment. No ALLL is recognized for loans that the Company has elected to account for at fair value.

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

ALLL for Loan Losses and Reserve for Unfunded Lending Commitments

The ALLL and reserve for unfunded lending commitments (together, the ACL) are maintained at levels that management considers adequate to provide for losses on the recorded investment of the loan portfolio, based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, 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 ALLL consists of two elements: (i) an allocated allowance, which is comprised of allowances established on loans specifically evaluated for impairment, and loans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends and both general economic conditions and other risk factors in the Company's loan portfolios, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

The ALLL includes the estimate of credit losses that management expects will be realized during the loss emergence period, including the amount of net discounts that is included in the loans' recorded investment 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.

Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover probable credit losses incurred in the Company’s HFI loan portfolios. The Company uses the incurred loss approach in providing an ACL on the recorded investment of its existing loans. This approach requires that loan loss provisions are recognized and the corresponding allowance recorded when, based on all available information, it is probable that a credit loss has been incurred. The estimate for credit losses for loans that are individually evaluated for impairment is generally determined through an analysis of the present value of the loan’s expected future cash flows, except for those that are deemed to be collateral dependent.  For those loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. In addition, when establishing the collective ACL for originated loans, the Company’s estimate of losses on recorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or when established delinquency thresholds have been met. Additional discussions related to the Company’s charge-off policies are provided in the “Charge-offs of Uncollectible Loans” section below.

When a loan in any portfolio or class has been determined to be impaired (e.g., TDRs and non-accrual commercial loans in excess of $1 million) as of the balance sheet date, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate. However, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. A specific reserve is established as a component of ACL for these impaired loans. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows (including the fair value of the collateral for collateral dependent loans) the Company recalculates the impairment and adjusts the specific reserve. Some impaired loans have risk characteristics similar to other impaired loans and may be aggregated for the measurement of impairment. For those impaired loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

The Company's allocated reserves are principally based on its various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's internal audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.


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

The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions 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.

The unallocated allowance is also established in consideration of several factors such as inherent delays in obtaining information regarding a customer's financial condition or changes in its unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, the Company has the ability to revise the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.

Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.

For the commercial loan portfolio segment, the Company has specialized credit officers 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 additional analysis is needed. For the commercial loan portfolio segment, risk ratings are assigned to each loan to differentiate risk within the portfolio, and are 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 positions. 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 no less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Risk Review group to ensure consistency and accuracy in risk ratings as well as appropriate frequency of risk rating review by the Company's credit officers. The Company's Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings.

When a loan's risk rating is downgraded beyond 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.

The consumer loan portfolio segment and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. 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.

Within the consumer loan portfolio segment, for both residential and home equity 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 for six LTV bands within the portfolios. LTV ratios are updated based on movements in the state-level Federal Housing Finance Agency house pricing indices.

For non-TDR RICs and personal unsecured loans, the Company estimates the ALLL at a level considered adequate to cover probable credit losses in the recorded investment of the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company’s judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan and lease losses.

In addition to the ALLL, management estimates probable losses related to unfunded lending commitments. Unfunded lending commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. 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 Consolidated Balance Sheets.


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

Risk factors are continuously reviewed and revised by management when conditions warrant. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis.

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

Interest Recognition and Non-accrual loans

Interest from loans is accrued when earned in accordance with the terms of the loan agreement. The accrual of interest is discontinued and uncollected interest is reversed once a loan is placed in non-accrual status. A loan is determined to be non-accrual when it is probable that scheduled payments of principal and interest will not be received when due according to the contractual terms of the loan agreement. The Company generally places commercial loans and consumer loans on non-accrual status when they become 90 days or more past due. Additionally, loans may be placed on nonaccrual status based on other circumstances, such as receipt of notification of a customer’s bankruptcy filing. When the collectability of the recorded loan balance of a nonaccrual loan is in doubt, any cash payments received from the borrower are applied first to reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Generally, a nonaccrual loan is returned to accrual status when, based on the Company’s judgment, the borrower’s ability to make the required principal and interest payments has resumed and collectability of remaining principal and interest is no longer doubtful. Interest income recognition resumes for nonaccrual loans that were accounted for on a cash basis method when they return to accrual status, while interest income that was previously recorded as a reduction in the carrying value of the loan would be recognized as interest income based on the effective yield to maturity on the loan. Collateral- dependent loans are generally not returned to accrual status. Please refer to the TDRs section below for discussion related to TDR loans placed on non-accrual status. Credit cards continue to accrue interest until they become 180 days past due, at which point they are charged-off.

For RICs, the accrual of interest is discontinued and accrued, but uncollected interest is reversed once a RIC becomes more than 60 days past due (i.e. 61 or more days past due), and is resumed if a delinquent account subsequently becomes 60 days or less past due. The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time. Loans accounted for using the FVO are not placed on nonaccrual.

Charge-off of Uncollectible Loans

Any loan may be charged-off if a loss confirming event has occurred. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include bankruptcy (unsecured), foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when that collateral asset is the sole source of repayment. The Company generally charges off commercial loans when it is determined that the specific loan or a portion thereof is uncollectible. This determination is based on facts and circumstances of the individual loans and normally includes considering the viability of the related business, the value of any collateral, the ability and willingness of any guarantors to perform and the overall financial condition of the borrower. Partially charged-off loans continue to be evaluated on not less than 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 Company generally charges off consumer loans, or a portion thereof, as follows: residential mortgage loans and home equity loans are charged-off to the estimated fair value of their collateral (net of selling costs) when they become 180 days past due, and other loans (closed-end) are charged-off when they become 120 days past due. Loans with respect to which a bankruptcy notice is received or for which fraud is discovered are written down to the collateral value less costs to sell within 60 days of such notice or discovery. Revolving personal unsecured loans are charged off when they become 180 days past due. Credit cards are charged off when they are 180 days delinquent or within 60 days after the receipt of notification of the cardholder’s death or bankruptcy. Charge-offs are not required when it can be clearly demonstrated that repayment will occur regardless of delinquency status. Factors that would demonstrate repayment 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.

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

RICs and auto loans are charged off against the allowance in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. A net charge off represents the difference between the estimated net sales proceeds and the Company's recorded investment in the related contract. Accounts in repossession that have been charged off and are pending liquidation are removed from loans and the related repossessed automobiles are included in Other assets in the Company's Consolidated Balance Sheets.

TDRs

TDRs are loans that have been modified for which the Company has agreed to make certain concessions to customers to both meet the needs of the customers and maximize the ultimate recovery of the loan. TDRs occur when a borrower is experiencing financial difficulties and the loan is modified to provide a concession 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 on non-accrual status at the time of modification, unless the loan was performing immediately prior to modification and returned to accrual after a sustained period of repayment performance. Collateral dependent TDRs are generally not returned to accrual status. All costs incurred by the Company in connection with a TDR are expensed as incurred. The TDR classification remains on the loan until it is paid in full or liquidated.

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions and interest rate reductions. Commercial loan TDRs are generally restructured to allow for an upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically 12 months for monthly payment schedules). As TDRs, they will be 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.

Consumer Loan TDRs

The majority of the Company's TDR balance is comprised of RICs and auto loans. The terms of the modifications for the RIC and auto loan portfolio generally include one or a combination of: a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

In accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICs under which the consumer is allowed to defer a maximum of three payments per event to the end of the loan. More than 90% of deferrals granted are for two payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the life of the loan for all automobile RICs is eight, while some marine and RV contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs.

RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans on nonaccrual status, interest income is recognized on a cash basis. For TDR loans on nonaccrual status, the accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due.

At the time a deferral is granted on a RIC, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.

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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the ALLL 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 ALLL and related provision for loan and lease losses.

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.

Consumer TDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status at the time of modification, and returned to accrual when they have made six consecutive on-time payments. In addition to those identified as TDRs above, loans discharged under Chapter 7 bankruptcy are considered TDRs and collateral-dependent, regardless of delinquency status. These loans are written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

TDR Impact to ALLL

The ALLL is established to recognize losses in funded loans that are probable and can be reasonably estimated. Prior to loans being placed in TDR status, the Company generally measures its allowance under a loss contingency methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.

Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence using the effective interest rate or fair value of collateral (less costs to sell). The amount of the required valuation allowance 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 subsequently defaulted loans 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 the fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

Impaired loans

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 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

The Company considers all of its TDRs and all of its non-accrual commercial loans in excess of $1 million to be impaired as of the balance sheet date. The Company may perform an impairment analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant.

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

The Company measures impairment on impaired loans based on the present value of expected future cash flows discounted at the loan's original effective interest rate, except that, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral, less the costs to sell, if the loan is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment and the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

LHFS

LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Generally, residential loans are valued on an aggregate portfolio basis, and commercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Miscellaneous income, net. For residential mortgages for which the FVO is selected, direct loan origination fees are recorded in Miscellaneous income, net at origination.

All other LHFS which the Company does not have the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the lower of cost or fair value. When loans are transferred from HFI, the Company will recognize a charge-off to the ALLL, if warranted under the Company’s charge off policies. Any excess ALLL for the transferred loans is reversed through provision expense. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneous income, net as lower of cost or market adjustments.

Leases (as Lessor)

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease.

Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired in a business combination are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.

Lease payments due from customers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed if a delinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.

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

Under the accounting for impairment or disposal of long-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and the proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of leased assets are included in Miscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. No impairment for leased assets was recognized during the years ended December 31, 2019, 2018, or 2017.

Leases (as Lessee)

Operating lease ROU assets and lease liabilities are recognized upon lease commencement based on the present value of lease payments over the lease term, discounted at the Company's estimated rate of interest for a collateralized borrowing for a similar term. The lease term includes options to extend or terminate a lease when the Company considers it reasonably certain that such options will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Premises and Equipment

Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the straight-line method. Estimated useful lives are as follows:
Office buildings10 to 50 years
Leasehold improvements(1)
10 to 30 years
Software(2)
3 to 7 years
Furniture, fixtures and equipment3 to 10 years
Automobiles5 years
(1) Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the remaining term of the leases.
(2) The standard depreciable period for software is three years. However, for certain software implementation projects, a seven-year period is utilized.

Expenditures for maintenance and repairs are charged to Occupancy and equipment expense in the Consolidated Statements of Operations as incurred.

Equity Method Investments

The Company uses the equity method for general and limited partnership interests, limited liability companies and other unconsolidated equity investments in which the Company is considered to have significant influence over the operations of the investee. Under the equity method, the Company records its equity ownership share of net income or loss of the investee in "Other miscellaneous expenses." Investments accounted for under the equity method of accounting above are included in the caption "Other Assets" on the Consolidated Balance Sheets.

Goodwill and Intangible Assets

Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the acquisition method. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis at October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. A reporting unit is an operating segment or one level below.

An entity's goodwill impairment quantitative analysis is required to be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, in which case no further analysis is required. An entity has an unconditional option to bypass the preceding qualitative assessment (often referred to as step 0) for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test.

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

The quantitative test includes a comparison of the fair value of each reporting unit to its respective carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as the excess of carrying value over fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit and cannot subsequently be reversed even if the fair value of the reporting unit recovers.

The Company's intangible assets consist of assets purchased or acquired through business combinations, including trade names and dealer networks. Certain intangible assets are amortized over their useful lives. The Company evaluates identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.

MSRs

The Company has elected to measure most of its residential MSRs at fair value to be consistent with the risk management strategy to hedge changes in the fair value of these assets. The fair value of residential MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions. Assumptions incorporated into the residential MSRs valuation model reflect management's best estimate of factors that a market participant would use in valuing the residential MSRs. Although sales of residential MSRs do occur, residential MSRs do not trade in an active market with readily observable prices. Those MSRs not accounted for at fair value are accounted for at amortized cost, less impairment.

As a benchmark for the reasonableness of the residential MSRs' fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own discounted cash flow DCF calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. Management compares the internally-developed residential MSR values to the ranges of values received from Brokers. If the residential MSRs fair value falls outside the Brokers' ranges, management will assess whether a valuation adjustment is warranted. Residential MSRs value is considered to represent a reasonable estimate of fair value.

See Note 16 to these Consolidated Financial Statements for detail on MSRs.

BOLI

BOLI represents the cash surrender value of life insurance policies for certain current and former employees who have provided positive consent to allow the Bank to be the beneficiary of such policies. Increases in the net cash surrender value of the policies, as well as insurance proceeds received, are recorded in non-interest income, and are not subject to income taxes.

OREO and Other Repossessed Assets

OREO and other repossessed assets consist of properties, vehicles, and other assets acquired by, or in lieu of, foreclosure or repossession in partial or total satisfaction of NPLs, including RICs and leases. Assets obtained in satisfaction of a loan are recorded at the estimated fair value minus estimated costs to sell based upon the asset's appraisal value at the date of transfer. The excess of the carrying value of the loan over the fair value of the asset minus estimated costs to sell are charged to the ALLL at the initial measurement date. Subsequent to the acquisition date, OREO and repossessed assets are carried at the lower of cost or estimated fair value, net of estimated cost to sell. Any declines in the fair value of OREO and repossessed assets below the initial cost basis are recorded through a valuation allowance with a charge to non-interest income. Increases in the fair value of OREO and repossessed assets net of estimated selling costs will reverse the valuation allowance, but only up to the cost basis which was established at the initial measurement date. Costs of holding the assets are recorded as operating expenses, except for significant property improvements, which are capitalized to the extent that the carrying value does not exceed the estimated fair value. The Company generally begins vehicle repossession activity once a customer's account becomes 60 days past due. The customer has an opportunity to redeem the repossessed vehicle by paying all outstanding balances, including finance changes and fees. Any vehicles not redeemed are sold at auction. OREO and other repossessed assets are recorded within Other assets on the Consolidated Balance Sheets.

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

Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity, and credit risk. Derivative financial instruments are also used to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities, and often sells derivative products to commercial loan customers to hedge interest rate risk associated with loans made by the Company. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes for its own account. Derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of each derivative financial instrument depends on whether it has been designated and qualifies as a hedge for accounting purposes, as well as the type of hedging relationship identified.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk such as interest rate risk are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The Company formally documents the relationships of qualifying hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.

Fair value hedges that are highly effective are accounted for by recording the change in the fair value of the derivative instrument and the related hedged asset, liability or firm commitment on the Consolidated Balance Sheets, with the corresponding income or expense recorded in the Consolidated Statements of Operations. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as an other asset or other liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense associated with the hedged asset or liability.

Cash flow hedges that are highly effective are accounted for by recording the fair value of the derivative instrument on the Consolidated Balance Sheets as an asset or liability, with a corresponding charge or credit for the change in the fair value of the derivative, net of tax, recorded in accumulated OCI within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated OCI to the Consolidated Statements of Operations in the period or periods the hedged transaction affects earnings. In the case in which certain cash flow hedging relationships have been terminated, the Company continues to defer the net gain or loss in accumulated OCI and reclassifies it into interest expense as the future cash flows occur, unless it becomes probable that the future cash flows will not occur.

We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; the derivative is de-designated as a fair value or cash flow hedge; or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If we determine that the derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value, with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

Changes in the fair value of derivatives not designated in hedging relationships are recognized immediately in the Consolidated Statements of Operations. Derivatives are classified in the Consolidated Balance Sheets as "Other assets" or "Other liabilities," as applicable. See Note 14 to the Consolidated Financial Statements for further discussion.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. On December 22, 2017, the TCJA was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets.

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

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws of the U.S., its states and municipalities, and abroad. 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. Interest and penalties on income tax payments are included within Income tax provision on the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. See Note 15 to the Consolidated Financial Statements for details on the Company's income taxes.

Stock-Based Compensation

The Company, through Santander, sponsors stock plans under which incentive and non-qualified stock options and non-vested stock may be granted periodically to certain employees. The Company recognizes compensation expense related to stock options and non-vested stock awards based upon the fair value of the awards on the date of the grant, which is charged to earnings over the requisite service period (i.e., the vesting period). The impact of the forfeiture of awards is recognized as forfeitures occur. Amounts in the Consolidated Statements of Operations associated with the Company's stock compensation plan were negligible in all years presented.

Guarantees

Certain off-balance sheet financial instruments of the Company meet the definition of a guarantee that require the Company to perform and make future payments in the event specified triggering events or conditions were to occur over the term of the guarantee. In accordance with the applicable accounting rules, it is the Company’s accounting policy to recognize a liability at inception associated with such a guarantee at the greater of the fair value of the guarantee or the Company's estimate of the contingent liability arising from the guarantee. Subsequent to initial recognition, the liability is adjusted based on the passage of time to perform under the guarantee and the changes to the probabilities of occurrence related to the specified triggering events or conditions that would require the Company to perform on the guarantee.

Business CombinationsOriginated LHFI

The Company accounts for business combinations using the acquisition methodOriginated LHFI are reported net of accounting,cumulative charge offs, unamortized loan origination fees and records the identifiable assets, liabilitiescosts, and any NCIunamortized discounts and premiums. Interest on loans is credited to income as it is earned. For most of the acquired business at their acquisition date fair values. The excess of the purchase price over the estimated fair value of the net assets acquired is recordedCompany's originated LHFI, loan origination fees and certain direct loan origination costs and premiums and discounts are deferred and recognized as goodwill. Any changes in the estimated acquisition date fair values of the net assets recorded prioradjustments to the finalization of a more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to the Company’s Consolidated Financial Statements will be adjusted retrospectively. All acquisition related costs are expensed as incurred.

The results of operations of the acquired companies are recordedinterest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the effective interest method. For RICs, loan origination fees and costs, premiums and discounts are deferred and amortized over their estimated lives as adjustments to interest income utilizing the effective interest method using estimated prepayment speeds, which are updated on a monthly basis. The Company estimates future principal prepayments specific to pools of homogeneous loans, which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. Our estimated weighted average prepayment rates ranged from 5.1% to 11.0% at December 31, 2019 and 5.7% to 10.8% at December 31, 2018.

The Company’s LHFI are carried at amortized cost, net of the ALLL. When a RIC is originated, certain cost basis adjustments (the net discounts) to the principal balance of the loan are recognized in accordance with the accounting guidance for loan origination fees and costs in ASC 310-20. These cost basis adjustments generally include the following:

Origination costs.
Dealer discounts - dealer discounts to the principal balance of the loan generally occur in circumstances in which the contractual interest rate on the loan is not sufficient to compensate for the credit risk of the borrower.
Participation - participation fees, or premiums, paid to the dealer as a form of profit-sharing, rewarding the dealer for originating loans that perform.
Subvention - payments received from the vehicle manufacturer as compensation (yield enhancement) for the cost of below-market interest rates offered to consumers.

Originated loans are initially recorded at the proceeds paid to fund the loan. Loan origination fees and costs and any discount at origination for loans is considered by the Company to reflect yield enhancements and is accreted to income using the effective interest method.

See LHFS subsection below for accounting treatment when an HFI loan is re-designated as LHFS.

Purchased LHFI

Purchased loans are generally loans acquired in a bulk purchase or business combination. RICs acquired directly from a dealer are considered to be originated loans, not purchased loans.

Purchase discounts and premiums on purchased loans that are deemed performing are accreted over the remaining expected lives of the loans to their par values, generally using the retrospective effective interest method, which considers the impact of estimated prepayments that is updated on a quarterly basis. The purchase discount on personal unsecured loans (given their revolving nature) are amortized on a straight-line basis in accordance with ASC 310-20.

Purchased loans with evidence of credit quality deterioration as of the purchase date for which it is probable that the Company will not receive all contractually required payments receivable are accounted for as PCI loans. At acquisition, PCI loans are recorded at fair value with no allowance for credit losses, and accounted for individually or aggregated in pools based on similar risk characteristics. The Company estimates the amount and timing of acquisition.expected cash flows for each loan or pool of loans. The applicationexpected cash flows in excess of business combination principles including the determinationamount paid for the loans is referred to as the accretable yield and is recorded as interest income over the remaining estimated life of the loan or pool of loans.

The Company may irrevocably elect to account for certain loans acquired with evidence of credit deterioration at fair value in accordance with ASC 825. Accordingly, the Company does not recognize interest income for these loans and recognizes the fair value adjustments on these loans as part of the net assets acquired, requires the use of significant estimates and assumptions. Please see the related discussion under the caption "Goodwill and Intangible Assets" below.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reportedother non-interest income in the financial statements and accompanying notes. The most significant estimates pertainCompany’s Consolidated Statements of Operations. For certain loans which the Company has elected to account for at fair value measurements,that are not considered non-accrual, the ALLL and reserve for unfunded lending commitments, accretion of discounts and subvention on RICs, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, andCompany separately recognizes interest income taxes. Actual results may differ from the estimates, andtotal fair value adjustment. No ALLL is recognized for loans that the differences may be materialCompany has elected to the Consolidated Financial Statements.

account for at fair value.

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

Revenue RecognitionALLL for Loan Losses and Reserve for Unfunded Lending Commitments

The Company primarily earns interestALLL and non-interest incomereserve for unfunded lending commitments (together, the ACL) are maintained at levels that management considers adequate to provide for losses on the recorded investment of the loan portfolio, based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, 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 various sources, including:

Lending.
Investment securities.
Customer deposit and loan fees.
BOLI.
Loan sales and servicing.
Leases.the assumptions used in making the evaluations.

The principal sourceALLL consists of revenuetwo elements: (i) an allocated allowance, which is interest income fromcomprised of allowances established on loans specifically evaluated for impairment, and loans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends and both general economic conditions and other risk factors in the Company's loan portfolios, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

The ALLL includes the estimate of credit losses that management expects will be realized during the loss emergence period, including the amount of net discounts that is included in the loans' recorded investment securities. Interest incomeat 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 recognizedconsidered 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.

Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover probable credit losses incurred in the Company’s HFI loan portfolios. The Company uses the incurred loss approach in providing an ACL on an accrual basis primarily according to non-discretionary formulas in written contracts, such asthe recorded investment of its existing loans. This approach requires that loan agreements or securities contracts. Revenue earned on interest-earning assets, including unearned incomeloss provisions are recognized and the accretioncorresponding allowance recorded when, based on all available information, it is probable that a credit loss has been incurred. The estimate for credit losses for loans that are individually evaluated for impairment is generally determined through an analysis of discounts recognizedthe present value of the loan’s expected future cash flows, except for those that are deemed to be collateral dependent.  For those loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. In addition, when establishing the collective ACL for originated loans, the Company’s estimate of losses on acquiredrecorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or purchasedwhen established delinquency thresholds have been met. Additional discussions related to the Company’s charge-off policies are provided in the “Charge-offs of Uncollectible Loans” section below.

When a loan in any portfolio or class has been determined to be impaired (e.g., TDRs and non-accrual commercial loans is recognizedin excess of $1 million) as of the balance sheet date, the Company measures impairment based on the constantpresent value of expected future cash flows discounted at the loan's original effective yield of such interest-earning assets. Unearned income pertains tointerest rate. However, as a practical expedient, the net of fees collected and certain costs incurred from loan originations.

Gains or losses on sales of investment securities are recognized on the trade date.

The Company recognizes revenue from servicing commercial mortgages and consumer loans as earned. Mortgage banking income, net includes fees associated with servicing loans for third partiesmay measure impairment based on the specific contractual terms and changes ina loan's observable market price, or the fair value of MSRs. Gains or losses on sales of residential mortgage, multifamily and home equity loans are included within mortgage banking revenues and are recognized when the salecollateral less costs to sell if the loan is complete.

Service charges on deposit accounts are recognized when earned.

Income from BOLI represents increases in the cash surrender value of the policies, as well as insurance proceeds and interest.

Income from finance leasesa collateral-dependent loan. A specific reserve is recognized as part of interest income over the term of the lease using the constant effective yield method, while income arising from operating leases is recognized as part of other non-interest income over the term of the lease on a straight-line basis.

Fair Value Measurements

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, 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 measuredestablished as a group, withcomponent of ACL for these impaired loans. Subsequent to the exceptioninitial measurement of certain financial instruments held and managed onimpairment, if there is a net portfolio basis. In measuringsignificant change to the impaired loan’s expected future cash flows (including the fair value of a nonfinancial asset,the collateral for collateral dependent loans) the Company assumesrecalculates the highestimpairment and best useadjusts the specific reserve. Some impaired loans have risk characteristics similar to other impaired loans and may be aggregated for the measurement of impairment. For those impaired loans that are collectively assessed for impairment, the asset by a market participant, not justCompany utilizes historical loan loss experience information as part of its evaluation. When the intended use, to maximizeCompany determines that the present value of the asset. estimated cash flows 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.

The Company also considers whether any credit valuation adjustmentsCompany's allocated reserves are necessaryprincipally based on its various models subject to the counterparty's credit quality.

When measuringCompany's model risk management framework. New models are approved by the fair value of a liability,Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's internal audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company assumes that the transfer will not affect the nonperformance risk associated with the liability. The Company considers the effectcompletes a detailed variance analysis of the credit riskhistorical model projections against actual observed results on the fair value for any period in which fair value is measured. There are three valuation approaches for measuring fair value: the market approach, the income approach and the cost approach. Selecting the appropriate technique for valuing a particular asset or liability should consider the exit market for the asset or liability, the nature of the asset or liability being measured, and how a market participant would value the same asset or liability. Ultimately, selecting the appropriate valuation method requires significant judgment.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtainedquarterly basis. Required actions resulting from an independent source. Unobservable inputs are assumptions based on the Company's own information or assessment of assumptions usedanalysis, if necessary, are governed by other market participants in pricing the asset or liability. The unobservable inputs are based on the bestits Allowance for Loan and most current information available on the measurement date.Lease Losses Committee.


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

CashThe Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and Cash Equivalentslease portfolio. Imprecisions 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.

CashThe unallocated allowance is also established in consideration of several factors such as inherent delays in obtaining information regarding a customer's financial condition or changes in its unique business conditions and cash equivalents include cash and amounts due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. Cash and cash equivalents have original maturitiesthe interpretation of three months or less and, accordingly, the carrying amount of these instrumentseconomic trends. While this analysis is deemed to be a reasonable estimate of fair value. As of December 31, 2017,conducted at least quarterly, the Company has maintained balancesthe ability to revise the allowance factors whenever necessary in various operating and money market accounts in excess of federally insured limits.order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.

Cash depositedRegardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.

For the commercial loan portfolio segment, the Company has specialized credit officers 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 additional analysis is needed. For the commercial loan portfolio segment, risk ratings are assigned to each loan to differentiate risk within the portfolio, and are 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 positions. 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 no less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Risk Review group to ensure consistency and accuracy in risk ratings as well as appropriate frequency of risk rating review by the Company's credit officers. The Company's Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings.

When a loan's risk rating is downgraded beyond 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 securitization transactions, lockbox collections,the risk rating and management's strategies for the customer relationship going forward.

The consumer loan portfolio segment and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. 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.

Within the consumer loan portfolio segment, for both residential and home equity 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 for six LTV bands within the portfolios. LTV ratios are updated based on movements in the state-level Federal Housing Finance Agency house pricing indices.

For non-TDR RICs and personal unsecured loans, the Company estimates the ALLL at a level considered adequate to cover probable credit losses in the recorded investment of the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company’s judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan and lease losses.

In addition to the ALLL, management estimates probable losses related requiredto unfunded lending commitments. Unfunded lending commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve accountsfor unfunded lending commitments. Additions to the reserve for unfunded lending commitments are recorded inmade by charges to the provision for credit losses, and this reserve is classified within Other liabilities on the Company's Consolidated Balance Sheet as of December 31, 2017 as restricted cash. Excess cash flows generated by securitization trusts ("Trusts") are added to the restricted cash reserve account, creating additional over-collateralization until the contractual securitization requirement has been reached. Once the targeted reserve requirement is satisfied, additional excess cash flows generated by the Trusts are released to the Company as distributions from the Trusts. Lockbox collections are added to restricted cash and released when transferred to the appropriate warehouse line of credit or Trust. The Company also maintains restricted cash primarily related to cash posted as collateral related to derivative agreements and cash restricted for investment purposes.

Investment Securities and Other Investments

Investment securities are classified as either AFS, held to maturity ("HTM"), trading, or other investments. Management determines the appropriate classification at the time of purchase.

Securities expected to be held for an indefinite period of time are classified as AFS and are carried at fair value, with temporary unrealized gains and losses reported as a component of accumulated other comprehensive income within stockholder's equity, net of estimated income taxes.

Debt securities purchased which the Company has the positive intent and ability to hold until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for amortization of premium and accretion of discount. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income (“OCI”) and in the carrying value of the HTM securities. Such amounts are amortized over the remaining lives of the securities. There were no transfers from AFS to HTM during the year ended December 31, 2017 or 2016.

The Company conducts a comprehensive security-level impairment assessment quarterly on all securities with a fair value that is less than their amortized cost basis to determine whether the loss represents other-than-temporary impairment (“OTTI”). The quarterly OTTI assessment takes into consideration whether (i) the Company has the intent to sell or, (ii) it is more likely than not that it will be required to sell the security before the expected recovery of its amortized cost. The Company also considers whether or not it would expect to receive all of the contractual cash flows from the investment based on its assessment of the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. The Company also considers the severity of the impairment in its assessment. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item, and the non-credit component is recorded within accumulated other comprehensive income.

Realized gains and losses on sales of investment securities are recognized on the trade date and included in earnings within Net gain on sale of investment securities, which is a component of non-interest income. Unamortized premiums and discounts are recognized in interest income over the estimated life of the security using the interest method.

Trading securities are carried at fair value, with changes in fair value recorded in non-interest income. Investments that are purchased principally for the purpose of economically hedging the MSR in the near term are classified as trading securities and carried at fair value, with changes in fair value recorded as a component of the Mortgage banking income, net, line of the Consolidated Statements of Operations.Sheets.


127102




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

Other investments primarilyRisk factors are continuously reviewed and revised by management when conditions warrant. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis.

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

Interest Recognition and Non-accrual loans

Interest from loans is accrued when earned in accordance with the terms of the loan agreement. The accrual of interest is discontinued and uncollected interest is reversed once a loan is placed in non-accrual status. A loan is determined to be non-accrual when it is probable that scheduled payments of principal and interest will not be received when due according to the contractual terms of the loan agreement. The Company generally places commercial loans and consumer loans on non-accrual status when they become 90 days or more past due. Additionally, loans may be placed on nonaccrual status based on other circumstances, such as receipt of notification of a customer’s bankruptcy filing. When the collectability of the recorded loan balance of a nonaccrual loan is in doubt, any cash payments received from the borrower are applied first to reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Generally, a nonaccrual loan is returned to accrual status when, based on the Company’s judgment, the borrower’s ability to make the required principal and interest payments has resumed and collectability of remaining principal and interest is no longer doubtful. Interest income recognition resumes for nonaccrual loans that were accounted for on a cash basis method when they return to accrual status, while interest income that was previously recorded as a reduction in the carrying value of the loan would be recognized as interest income based on the effective yield to maturity on the loan. Collateral- dependent loans are generally not returned to accrual status. Please refer to the TDRs section below for discussion related to TDR loans placed on non-accrual status. Credit cards continue to accrue interest until they become 180 days past due, at which point they are charged-off.

For RICs, the accrual of interest is discontinued and accrued, but uncollected interest is reversed once a RIC becomes more than 60 days past due (i.e. 61 or more days past due), and is resumed if a delinquent account subsequently becomes 60 days or less past due. The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time. Loans accounted for using the FVO are not placed on nonaccrual.

Charge-off of Uncollectible Loans

Any loan may be charged-off if a loss confirming event has occurred. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include bankruptcy (unsecured), foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when that collateral asset is the sole source of repayment. The Company generally charges off commercial loans when it is determined that the specific loan or a portion thereof is uncollectible. This determination is based on facts and circumstances of the individual loans and normally includes considering the viability of the related business, the value of any collateral, the ability and willingness of any guarantors to perform and the overall financial condition of the borrower. Partially charged-off loans continue to be evaluated on not less than 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 Company generally charges off consumer loans, or a portion thereof, as follows: residential mortgage loans and home equity loans are charged-off to the estimated fair value of their collateral (net of selling costs) when they become 180 days past due, and other loans (closed-end) are charged-off when they become 120 days past due. Loans with respect to which a bankruptcy notice is received or for which fraud is discovered are written down to the collateral value less costs to sell within 60 days of such notice or discovery. Revolving personal unsecured loans are charged off when they become 180 days past due. Credit cards are charged off when they are 180 days delinquent or within 60 days after the receipt of notification of the cardholder’s death or bankruptcy. Charge-offs are not required when it can be clearly demonstrated that repayment will occur regardless of delinquency status. Factors that would demonstrate repayment 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.

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

RICs and auto loans are charged off against the allowance in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. A net charge off represents the difference between the estimated net sales proceeds and the Company's recorded investment in the stockrelated contract. Accounts in repossession that have been charged off and are pending liquidation are removed from loans and the related repossessed automobiles are included in Other assets in the Company's Consolidated Balance Sheets.

TDRs

TDRs are loans that have been modified for which the Company has agreed to make certain concessions to customers to both meet the needs of the FHLBcustomers and maximize the ultimate recovery of Pittsburghthe loan. TDRs occur when a borrower is experiencing financial difficulties and the Federal Reserve Bank ("FRB")loan is modified to provide a concession 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 on non-accrual status at the time of modification, unless the loan was performing immediately prior to modification and returned to accrual after a sustained period of repayment performance. Collateral dependent TDRs are generally not returned to accrual status. All costs incurred by the Company in connection with a TDR are expensed as incurred. The TDR classification remains on the loan until it is paid in full or liquidated.

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions and interest rate reductions. Commercial loan TDRs are generally restructured to allow for an upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically 12 months for monthly payment schedules). Although FHLBAs TDRs, they will be 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.

Consumer Loan TDRs

The majority of the Company's TDR balance is comprised of RICs and FRB stockauto loans. The terms of the modifications for the RIC and auto loan portfolio generally include one or a combination of: a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

In accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICs under which the consumer is allowed to defer a maximum of three payments per event to the end of the loan. More than 90% of deferrals granted are equity interestsfor two payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the life of the loan for all automobile RICs is eight, while some marine and RV contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs.

RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans on nonaccrual status, interest income is recognized on a cash basis. For TDR loans on nonaccrual status, the accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due.

At the time a deferral is granted on a RIC, all delinquent amounts may be deferred or paid, resulting in the FHLBclassification of the loan as current and FRB, respectively,therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.

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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the ALLL 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 ALLL and related provision for loan and lease losses.

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.

Consumer TDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status at the time of modification, and returned to accrual when they have made six consecutive on-time payments. In addition to those identified as TDRs above, loans discharged under Chapter 7 bankruptcy are considered TDRs and collateral-dependent, regardless of delinquency status. These loans are written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

TDR Impact to ALLL

The ALLL is established to recognize losses in funded loans that are probable and can be reasonably estimated. Prior to loans being placed in TDR status, the Company generally measures its allowance under a loss contingency methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.

Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence using the effective interest rate or fair value of collateral (less costs to sell). The amount of the required valuation allowance 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 subsequently defaulted loans 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 the fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

Impaired loans

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 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

The Company considers all of its TDRs and all of its non-accrual commercial loans in excess of $1 million to be impaired as of the balance sheet date. The Company may perform an impairment analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant.

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

The Company measures impairment on impaired loans based on the present value of expected future cash flows discounted at the loan's original effective interest rate, except that, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral, less the costs to sell, if the loan is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment and the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

LHFS

LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Generally, residential loans are valued on an aggregate portfolio basis, and commercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Miscellaneous income, net. For residential mortgages for which the FVO is selected, direct loan origination fees are recorded in Miscellaneous income, net at origination.

All other LHFS which the Company does not have a readily determinable fair value, because its ownership is restrictedthe intent and it is not readily marketable. FHLB stock can be sold back only at its par value of $100 per share and only to FHLBs or to another member institution. Accordingly, FHLB stock is carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

See Note 3 to the Consolidated Financial Statements for detail on the Company's investments.

LHFI

LHFI include commercial and consumer loans (including RICs) originated by the Company as well as loans acquired by the Company which the Company intendsability to hold for the foreseeable future or until maturity. RICs consist largelymaturity or payoff are carried at the lower of nonprime automobile finance receivablescost or fair value. When loans are transferred from HFI, the Company will recognize a charge-off to the ALLL, if warranted under the Company’s charge off policies. Any excess ALLL for the transferred loans is reversed through provision expense. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneous income, net as lower of cost or market adjustments.

Leases (as Lessor)

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease.

Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired individuallyin a business combination are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.

Lease payments due from dealerscustomers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed if a nonrefundable discountdelinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual principal amount.term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.

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

Under the accounting for impairment or disposal of long-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and the proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of leased assets are included in Miscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. No impairment for leased assets was recognized during the years ended December 31, 2019, 2018, or 2017.

Leases (as Lessee)

Operating lease ROU assets and lease liabilities are recognized upon lease commencement based on the present value of lease payments over the lease term, discounted at the Company's estimated rate of interest for a collateralized borrowing for a similar term. The lease term includes options to extend or terminate a lease when the Company considers it reasonably certain that such options will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Premises and Equipment

Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the straight-line method. Estimated useful lives are as follows:
Office buildings10 to 50 years
Leasehold improvements(1)
10 to 30 years
Software(2)
3 to 7 years
Furniture, fixtures and equipment3 to 10 years
Automobiles5 years
(1) Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the remaining term of the leases.
(2) The standard depreciable period for software is three years. However, for certain software implementation projects, a seven-year period is utilized.

Expenditures for maintenance and repairs are charged to Occupancy and equipment expense in the Consolidated Statements of Operations as incurred.

Equity Method Investments

The Company uses the equity method for general and limited partnership interests, limited liability companies and other unconsolidated equity investments in which the Company is considered to have significant influence over the operations of the investee. Under the equity method, the Company records its equity ownership share of net income or loss of the investee in "Other miscellaneous expenses." Investments accounted for under the equity method of accounting above are included in the caption "Other Assets" on the Consolidated Balance Sheets.

Goodwill and Intangible Assets

Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the acquisition method. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis at October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. A reporting unit is an operating segment or one level below.

An entity's goodwill impairment quantitative analysis is required to be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, in which case no further analysis is required. An entity has an unconditional option to bypass the preceding qualitative assessment (often referred to as step 0) for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test.

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

The quantitative test includes a comparison of the fair value of each reporting unit to its respective carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as the excess of carrying value over fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit and cannot subsequently be reversed even if the fair value of the reporting unit recovers.

The Company's intangible assets consist of assets purchased or acquired through business combinations, including trade names and dealer networks. Certain intangible assets are amortized over their useful lives. The Company evaluates identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.

MSRs

The Company has elected to measure most of its residential MSRs at fair value to be consistent with the risk management strategy to hedge changes in the fair value of these assets. The fair value of residential MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions. Assumptions incorporated into the residential MSRs valuation model reflect management's best estimate of factors that a market participant would use in valuing the residential MSRs. Although sales of residential MSRs do occur, residential MSRs do not trade in an active market with readily observable prices. Those MSRs not accounted for at fair value are accounted for at amortized cost, less impairment.

As a benchmark for the reasonableness of the residential MSRs' fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own discounted cash flow DCF calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. Management compares the internally-developed residential MSR values to the ranges of values received from Brokers. If the residential MSRs fair value falls outside the Brokers' ranges, management will assess whether a valuation adjustment is warranted. Residential MSRs value is considered to represent a reasonable estimate of fair value.

See Note 16 to these Consolidated Financial Statements for detail on MSRs.

BOLI

BOLI represents the cash surrender value of life insurance policies for certain current and former employees who have provided positive consent to allow the Bank to be the beneficiary of such policies. Increases in the net cash surrender value of the policies, as well as insurance proceeds received, are recorded in non-interest income, and are not subject to income taxes.

OREO and Other Repossessed Assets

OREO and other repossessed assets consist of properties, vehicles, and other assets acquired by, or in lieu of, foreclosure or repossession in partial or total satisfaction of NPLs, including RICs also include receivables originatedand leases. Assets obtained in satisfaction of a loan are recorded at the estimated fair value minus estimated costs to sell based upon the asset's appraisal value at the date of transfer. The excess of the carrying value of the loan over the fair value of the asset minus estimated costs to sell are charged to the ALLL at the initial measurement date. Subsequent to the acquisition date, OREO and repossessed assets are carried at the lower of cost or estimated fair value, net of estimated cost to sell. Any declines in the fair value of OREO and repossessed assets below the initial cost basis are recorded through a direct lending programvaluation allowance with a charge to non-interest income. Increases in the fair value of OREO and loan portfolios purchased fromrepossessed assets net of estimated selling costs will reverse the valuation allowance, but only up to the cost basis which was established at the initial measurement date. Costs of holding the assets are recorded as operating expenses, except for significant property improvements, which are capitalized to the extent that the carrying value does not exceed the estimated fair value. The Company generally begins vehicle repossession activity once a customer's account becomes 60 days past due. The customer has an opportunity to redeem the repossessed vehicle by paying all outstanding balances, including finance changes and fees. Any vehicles not redeemed are sold at auction. OREO and other lenders.repossessed assets are recorded within Other assets on the Consolidated Balance Sheets.

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

Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity, and credit risk. Derivative financial instruments are also used to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities, and often sells derivative products to commercial loan customers to hedge interest rate risk associated with loans made by the Company. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes for its own account. Derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of each derivative financial instrument depends on whether it has been designated and qualifies as a hedge for accounting purposes, as well as the type of hedging relationship identified.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk such as interest rate risk are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The Company formally documents the relationships of qualifying hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.

Fair value hedges that are highly effective are accounted for by recording the change in the fair value of the derivative instrument and the related hedged asset, liability or firm commitment on the Consolidated Balance Sheets, with the corresponding income or expense recorded in the Consolidated Statements of Operations. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as an other asset or other liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense associated with the hedged asset or liability.

Cash flow hedges that are highly effective are accounted for by recording the fair value of the derivative instrument on the Consolidated Balance Sheets as an asset or liability, with a corresponding charge or credit for the change in the fair value of the derivative, net of tax, recorded in accumulated OCI within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated OCI to the Consolidated Statements of Operations in the period or periods the hedged transaction affects earnings. In the case in which certain cash flow hedging relationships have been terminated, the Company continues to defer the net gain or loss in accumulated OCI and reclassifies it into interest expense as the future cash flows occur, unless it becomes probable that the future cash flows will not occur.

We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; the derivative is de-designated as a fair value or cash flow hedge; or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If we determine that the derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value, with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

Changes in the fair value of derivatives not designated in hedging relationships are recognized immediately in the Consolidated Statements of Operations. Derivatives are classified in the Consolidated Balance Sheets as "Other assets" or "Other liabilities," as applicable. See Note 14 to the Consolidated Financial Statements for further discussion.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. On December 22, 2017, the TCJA was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets.

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

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws of the U.S., its states and municipalities, and abroad. 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. Interest and penalties on income tax payments are included within Income tax provision on the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. See Note 15 to the Consolidated Financial Statements for details on the Company's income taxes.

Stock-Based Compensation

The Company, through Santander, sponsors stock plans under which incentive and non-qualified stock options and non-vested stock may be granted periodically to certain employees. The Company recognizes compensation expense related to stock options and non-vested stock awards based upon the fair value of the awards on the date of the grant, which is charged to earnings over the requisite service period (i.e., the vesting period). The impact of the forfeiture of awards is recognized as forfeitures occur. Amounts in the Consolidated Statements of Operations associated with the Company's stock compensation plan were negligible in all years presented.

Guarantees

Certain off-balance sheet financial instruments of the Company meet the definition of a guarantee that require the Company to perform and make future payments in the event specified triggering events or conditions were to occur over the term of the guarantee. In accordance with the applicable accounting rules, it is the Company’s accounting policy to recognize a liability at inception associated with such a guarantee at the greater of the fair value of the guarantee or the Company's estimate of the contingent liability arising from the guarantee. Subsequent to initial recognition, the liability is adjusted based on the passage of time to perform under the guarantee and the changes to the probabilities of occurrence related to the specified triggering events or conditions that would require the Company to perform on the guarantee.

Originated LHFI

Originated LHFI are reported net of cumulative charge offs, unamortized loan origination fees and costs, and unamortized discounts and premiums. Interest on loans is credited to income as it is earned. For most of the Company's originated LHFI, loan origination fees and certain direct loan origination costs and premiums and discounts are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the effective interest method. For RICs, loan origination fees and costs, premiums and discounts are deferred and amortized over their estimated lives as adjustments to interest income utilizing the effective interest method using estimated prepayment speeds, which are updated on a monthly basis. The Company estimates future principal prepayments specific to pools of homogeneous loans, which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. Our estimated weighted average prepayment rates ranged from 6.1%5.1% to 10.4%11.0% at December 31, 20172019 and 6.0%5.7% to 10.5%10.8% at December 31, 2016.2018.

The Company’s LHFI including RICs and personal unsecured loans originated by SC since the change in control of SC in the first quarter of 2014 (the "Change in Control"), are carried at amortized cost, net of the ALLL. When a RIC is originated, certain cost basis adjustments (the net discounts) to the principal balance of the loan are recognized in accordance with the accounting guidance for loan origination fees and costs in ASC 310-20. These cost basis adjustments generally include the following:

Origination costs.
Dealer discounts - dealer discounts to the principal balance of the loan generally occur in circumstances in which the contractual interest rate on the loan is not sufficient to compensate for the credit risk of the borrower.
Participation - participation fees, or premiums, paid to the dealer as a form of profit-sharing, rewarding the dealer for originating loans that perform.
Subvention - payments received from the vehicle manufacturer as compensation (yield enhancement) for the cost of below-market interest rates offered to consumers.

Originated loans are initially recorded at the proceeds paid to fund the loan. AnyLoan origination fees and costs and any discount at origination for loans is considered by the Company to reflect yield enhancements and is accreted to income using the effective interest method.

When loans heldSee LHFS subsection below for investment ("HFI") areaccounting treatment when an HFI loan is re-designated as LHFS, any specific and allocated allowance for credit losses ("ACL") is charged-off to reduce the basis of the loans to the extent the estimated fair value is lower than the loan's recorded investment.


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

Purchased LHFI

Purchased loans are generally loans acquired in a bulk purchase or business combination. RICs acquired directly from a dealer are considered to be originated loans, not purchased loans. The Company has accounted for its January 2014 consolidation of SC as a business combination. The RIC

Purchase discounts and personal unsecured loanspremiums on purchased in the Change in Control were initially recognized at fair value, and no ALLL was recognized at the Change in Control date pursuant to business combination accounting. The purchased portfolio acquired included performing loans as well as those loans acquired with evidence of credit deterioration (defined as those on non-accrual status at the time of the acquisition). All of SC’s performing RICs and personal unsecured loans that were HFI were recorded by the Company at a discount.

Subsequent to the Change in Control, the purchase discounts on the retail installment loansare deemed performing are accreted over the remaining expected lives of the loans to their par values, generally using the retrospective effective interest method, which considers the impact of estimated prepayments that is updated on a quarterly basis. The purchase discount on personal unsecured loans (given their revolving nature) are amortized on a straight-line basis in accordance with ASC 310-20.

Purchased loans with evidence of credit quality deterioration as of the purchase date for which it is probable that the Company will not receive all contractually required payments receivable are accounted for as PCI loans. At acquisition, PCI loans are recorded at fair value with no allowance for credit losses, and accounted for individually or aggregated in pools based on similar risk characteristics. The Company estimates the amount and timing of expected cash flows for each loan or pool of loans. The expected cash flows in excess of the amount paid for the loans is referred to as the accretable yield and is recorded as interest income over the remaining estimated life of the loan or pool of loans.

The Company may irrevocably electedelect to account for RICscertain loans acquired with evidence of credit deterioration at the Change in Control date at fair value in accordance with ASC 825. Accordingly, the Company does not recognize interest income for these RICsloans and recognizes the fair value adjustments on these loans as part of other non-interest income in the Company’s Consolidated Statements of Operations. For certain of the RICsloans which the Company has elected to account for at fair value butthat are not considered non-accrual, the Company separately recognizes interest income from the total fair value adjustment. No ALLL is recognized for loans that the Company has elected to account for at fair value.

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

ALLL for Originated LoansLoan Losses and Reserve for Unfunded Lending Commitments

The ALLL and reserve for unfunded lending commitments (together, the ACL) are maintained at levels that management considers adequate to provide for losses on the recorded investment of the loan portfolio, based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, 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 ALLL consists of two elements: (i) an allocated allowance, which is comprised of allowances established on loans specifically evaluated for impairment, and loans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends and both general economic conditions and other risk factors in the Company's loan portfolios, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

The ALLL includes the estimate of credit losses that management expects will be realized during the loss emergence period, including the amount of net discounts that is included in the loans' recorded investment 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.

Management regularly monitorsProvisions for credit losses are charged to provision expense in amounts sufficient to maintain the conditionACL at levels considered adequate to cover probable credit losses incurred in the Company’s HFI loan portfolios. The Company uses the incurred loss approach in providing an ACL on the recorded investment of borrowersits existing loans. This approach requires that loan loss provisions are recognized and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such asthe corresponding allowance recorded when, based on all available information, it is probable that a credit loss has been incurred. The estimate for credit losses for loans that are individually evaluated for impairment is generally determined through an analysis of the present value of the loan’s expected future cash flows, except for those that are deemed to be collateral dependent.  For those loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience trendsinformation as part of its evaluation. In addition, when establishing the collective ACL for originated loans, the Company’s estimate of losses on recorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or when established delinquency thresholds have been met. Additional discussions related to the Company’s charge-off policies are provided in delinquencythe “Charge-offs of Uncollectible Loans” section below.

When a loan in any portfolio or class has been determined to be impaired (e.g., TDRs and non-performingnon-accrual commercial loans ("NPLs"), changes in excess of $1 million) as of the balance sheet date, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate. However, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. A specific reserve is established as a component of ACL for these impaired loans. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows (including the fair value of the collateral for collateral dependent loans) the Company recalculates the impairment and adjusts the specific reserve. Some impaired loans have risk compositioncharacteristics similar to other impaired loans and underwriting standards,may be aggregated for the measurement of impairment. For those impaired loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience and abilityinformation as part of staff and regional and national economic conditions and trends.its evaluation. When the Company determines that the present value of the estimated cash flows 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.

The Company's allocated reserves are principally based on its various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's internal audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.


129101




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

The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions 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 Company reserves for certain incurred, but undetected, losses within the loan portfolio. Thisunallocated allowance is due toalso established in consideration of several factors such as inherent delays in obtaining information regarding a customer's financial condition or changes in its unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, the Company has the ability to revise the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.

Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.

For the commercial loan portfolio segment, the Company has specialized credit officers 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 additional analysis is needed. For the commercial loan portfolio segment, risk ratings are assigned to each loan to differentiate risk within the portfolio, and are 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 positions. 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 no less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Risk Review group to ensure consistency and accuracy in risk ratings as well as appropriate frequency of risk rating review by the Company's credit officers. The Company's Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings.

When a loan's risk rating is downgraded beyond 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.

The consumer loan portfolio segment and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, loan-to-value ("LTV")LTV ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. 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.

Within the consumer loan portfolio segment, for both residential and home equity 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 for six LTV bands within the portfolios. LTV ratios are updated based on movements in the state-level Federal Housing Finance Agency house pricing indices.

For non-troubled debt restructuring ("TDR")non-TDR RICs and personal unsecured loans, the Company estimates the ALLL at a level considered adequate to cover probable credit losses in the recorded investment of the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company’s judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan and lease losses.


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

In addition to the ALLL, management estimates probable losses related to unfunded lending commitments. Unfunded lending commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. 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 Consolidated Balance Sheets.


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

Risk factors are continuously reviewed and revised by management when conditions warrant. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis.

The factors supporting the ACL do not diminish the fact that the entire ACL is available to absorb losses in the loan and lease portfolio and related commitment portfolio, respectively. The Company's principal focus, therefore, is on the adequacy of the total ACL.

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

Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover probable credit losses incurred in the Company’s HFI loan portfolios. The Company uses the incurred loss approach in providing an ACL on the recorded investment of its existing loans. This approach requires that loan loss provisions are recognized and the corresponding allowance recorded when, based on all available information, it is probable that a credit loss has been incurred. The estimate for credit losses for loans that are individually evaluated for impairment is generally determined through an analysis of the present value of the loan’s expected future cash flows, except for those that are deemed to be collateral dependent.  For those loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. In addition, when establishing the collective ACL for originated loans, the Company’s estimate of losses on recorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or when established delinquency thresholds have been met. Additional discussions related to the Company’s charge-off and credit loss provision policies are provided in the “Charge-offs of Uncollectible Loans” and “Allowance for Loan and Lease Losses for Originated Loans and Reserve for Unfunded Lending Commitments” sections below. The Company applies different accounting policies to the treatment of discounts in the ACL specific to loans purchased in a bulk purchase or a business combination versus originated loans. See the “Allowance for Loan and Lease Losses for Purchased Loans” section below.

When a loan in any portfolio or class has been determined to be impaired (e.g., TDRs and non-accrual commercial loans in excess of $1 million) as of the balance sheet date, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate. However, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. A specific reserve is established as a component of ACL for these impaired loans. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows, the Company recalculates the impairment and appropriately adjusts the specific reserve. This is also the case if there was a significant change in the initial estimate for impaired loans that are measured based on a loan's observable market price or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. Some impaired loans have risk characteristics similar to other impaired loans and may be aggregated for the measurement of impairment. For those impaired loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present 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.

ALLL for Purchased Loans

The Company assesses the collectability of the recorded investment in RICs and personal unsecured loans on a collective basis quarterly and determines the ALLL at levels considered adequate to cover probable credit losses incurred in the portfolio. Purchased loans, including the loans acquired at the Change in Control, were initially recognized at fair value with no allowance. The Company only recognizes an allowance for loan losses on purchased loans through a provision expense when incurred losses in the portfolio exceed the unaccreted purchase discount on the portfolio.


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

Loans purchased in a bulk purchase or business combination are expected to have greater uncertainty in cash flows, which generally results in larger discounts compared to newly originated loans. Purchase discounts on purchased loans are accreted over the remaining expected lives of the loans using the retrospective effective interest method. The unamortized portion of the purchase discount is a reduction to the loans’ recorded investment and therefore reduces allowance requirements. Because the loans purchased in a bulk purchase or in a business combination are initially recognized at fair value with no allowance, the Company considers the entire discount on the purchased portfolio as available to absorb the credit losses in the purchased portfolio when determining the ACL. Except for purchased loan portfolios acquired with evidence of credit deterioration (on which we elected to apply the FVO), this accounting policy is applicable to all loan purchases, including loan portfolio acquisitions or business combinations. Currently, the portfolio acquired in the Change of Control is the only purchased loan portfolio meeting this criteria.

Interest Recognition and Non-accrual loans

Interest from loans is accrued when earned in accordance with the terms of the loan agreement. The accrual of interest is discontinued and accrued but uncollected interest is reversed once a loan is placed in non-accrual status. A loan is determined to be non-accrual when it is probable that scheduled payments of principal and interest will not be received when due according to the contractual terms of the loan agreement. The Company generally places commercial loans and consumer loans on non-accrual status when they become 90 days or more past due. Additionally, loans may be placed on nonaccrual status based on other circumstances, such as receipt of notification of a customer’s bankruptcy filing. When the collectability of the recorded loan balance of a nonaccrual loan is in doubt, any cash payments received from the borrower are applied first to reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Generally, a nonaccrual loan is returned to accrual status when, based on the Company’s judgment, the borrower’s ability to make the required principal and interest payments has resumed and collectability of remaining principal and interest is no longer doubtful. Interest income recognition resumes for nonaccrual loans that were accounted for on a cash basis method when they return to accrual status, while interest income that was previously recorded as a reduction in the carrying value of the loan would be recognized as interest income based on the effective yield to maturity on the loan. Collateral- dependent loans are generally not returned to accrual status. Please refer to the TDRs section below for discussion related to TDR loans placed on non-accrual status. Credit cards continue to accrue interest until they become 180 days past due, at which point they are charged-off.

For RICs, the accrual of interest is discontinued and accrued, but uncollected interest is reversed once a RIC becomes more than 60 days past due (i.e. 61 or more days past due), and is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. The servicing practices for RICs originated after January 1, 2017 changed such that there is an increase in the minimum payment requirements. For reporting of past due loans, a payment of 90% or more of the amount due is considered to meet the contractual requirements. While this change does impact the measurement of customer delinquencies, we concluded that it does not have a significant impact on the amount or timing of the recognition of credit losses and allowance for loan losses. For certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficientan account delinquent when an obligor fails to qualifypay substantially all (defined as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90%) of the scheduled payment regardless of through which origination channelby the receivable was originated.due date. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time. For non-TDR RICs, payments generallyLoans accounted for using the FVO are applied to fees first, then interest, then principal, regardless of a contract's accrual status.not placed on nonaccrual.

Charge-off of Uncollectible Loans

Any loan may be charged-off if a loss confirming event has occurred. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include bankruptcy (unsecured), foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when that collateral asset is the sole source of repayment. The Company generally charges off commercial loans when it is determined that the specific loan or a portion thereof is uncollectible. This determination is based on facts and circumstances of the individual loans and normally includes considering the viability of the related business, the value of any collateral, the ability and willingness of any guarantors to perform and the overall financial condition of the borrower. Partially charged-off loans continue to be evaluated on not less than 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.


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

The Company generally charges off consumer loans, or a portion thereof, as follows: residential mortgage loans and home equity loans are charged-off to the estimated fair value of their collateral (net of selling costs) when they become 180 days past due, and other loans (closed-end) are charged-off when they become 120 days past due. Auto loans are charged-offLoans with respect to the estimated net recovery value in the month an account becomes greater than 120 days delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession to estimated net recovery value when the automobile is repossessed and legally available for disposition. Loans receivingwhich a bankruptcy notice is received or infor which fraud is discovered are written down to the collateral value less costs to sell within 60 days of such notice or discovery. Revolving personal unsecured loans are charged off when they become 180 days past due. Credit cards are charged off when they are 180 days delinquent or within 60 days after the receipt of notification of the cardholder’s death or bankruptcy. Charge-offs are not required when it can be clearly demonstrated that repayment will occur regardless of delinquency status. Factors that would demonstrate repayment 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.

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

RICs and auto loans are charged off against the allowance in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. A net charge off represents the difference between the estimated net sales proceeds and the Company's recorded investment in the related contract. Accounts in repossession that have been charged off and are pending liquidation are removed from RIC statusloans and the related repossessed automobiles are included in Other assets in the Company's Consolidated Balance Sheets.

TDRs

TDRs are loans that have been modified for which the Company has agreed to make certain concessions to customers to both meet the needs of the customers and maximize the ultimate recovery of the loan. TDRs occur when a borrower is experiencing financial difficulties and the loan is modified involvingto provide a concession 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 on non-accrual status untilat the Company believes repayment undertime of modification, unless the revised terms is reasonably assuredloan was performing immediately prior to modification and returned to accrual after a sustained period of repayment performance has been achieved (typically defined as six months for a monthly amortizing loan).performance. Collateral dependent TDRs are generally not returned to accrual status. All costs incurred by the Company in connection with a TDR are expensed as incurred. The TDR classification remains on the loan until it is paid in full or liquidated.

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions and interest rate reductions. Modifications for commercialCommercial loan TDRs are generally although not always, result in bifurcation of the original loan into A and B notes. The A note is restructured to allow for an upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically six12 months for monthly payment schedules). The B note, if any, is structured as a deficiency note and the balance is charged off but the debt is usually not forgiven. As TDRs, they will be 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 majority of the Company's TDR balance is comprised of RICs and auto loans. The terms of the modifications for the RIC and auto loan portfolio generally include one or a combination of the following:of: a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

In accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICs under which the consumer is allowed to defer a maximum of three payments per event to the end of the loan. More than 90% of deferrals granted are for two payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the life of the loan for all automobile RICs is eight, while some marine and recreational vehicle ("RV")RV contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs.

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NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued) Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs.

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

At the time a deferral is granted on a RIC, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.

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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the ALLL 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 ALLL and related provision for loan and lease losses.

The primary modification program for the Company’s residential mortgage and home equity portfolios is a proprietary program designed to keep customers in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income ("DTI")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.

Consumer TDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status untilat the Company believes repayment under the revised terms is reasonably assuredtime of modification, and a sustained period of repayment performance has been achieved (typicallyreturned to accrual when they have made 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. The TDR classification will remain on the loan until it is paid in full or liquidated.consecutive on-time payments. In addition to those identified as TDRs above, accounting guidance also requires loans discharged under Chapter 7 bankruptcy to beare considered TDRs and collateral-dependent, regardless of delinquency status. These loans are written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

TDR Impact to ALLL

The ALLL is established to recognize losses 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 using the effective interest rate or fair value of collateral.collateral (less costs to sell). The amount of the required valuation allowance 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 subsequently defaulted loans is generally measured based on the fair value of the collateral, if applicable, less its estimated cost to sell.


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

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 the fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

Impaired loans

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 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

The Company considers all of its loans TDRs and all of its non-accrual commercial loans in excess of $1 million to be impaired as of the balance sheet date. The Company may perform an impairment analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs.

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

The Company measures impairment on impaired loans based on the present value of expected future cash flows discounted at the loan's original effective interest rate, except that, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral, less the costs to sell, if the loan is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment and the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

Additional discussions related to the Company’s loan and lease loss provisions is included in the “ALLL Losses and Reserve for Unfunded Lending Commitments” section above.

LHFS

LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Generally, residential loans are valued on an aggregate portfolio basis, and commercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Mortgage bankingMiscellaneous income, net. For residential mortgages for which the FVO is selected, direct loan origination costs and fees are recorded in Mortgage bankingMiscellaneous income, net at origination. The fair value of LHFS is based on what secondary markets are currently offering for portfolios with similar characteristics, and related gains and losses are recorded in Mortgage banking income, net.

All other LHFS which the Company does not have the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the lower of cost or fair value. When loans are transferred from HFI, if the recorded investment of the loan exceeds its market value at the time of initial designation as held for sale, the Company will recognize a direct write-down of the excess of the recorded investment over market through a charge-off to the ALLL.ALLL, if warranted under the Company’s charge off policies. Any excess ALLL for the transferred loans is reversed through provision expense. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneous income, net as lower of cost or market adjustments.

Leases (as Lessor)

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the effective interest method, which provides a constant effective yield method.


135




NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)periodic rate of return on the outstanding investment on the lease.

Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired in a business combination such as the Change in Control are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.

Lease payments due from customers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.

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

Under the accounting for impairment or disposal of long-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and the proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of leased assets are included in Miscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. No impairment for leased assets was recognized during the years ended December 31, 2017, 2016,2019, 2018, or 2015.2017.

Leases (as Lessee)

Operating lease ROU assets and lease liabilities are recognized upon lease commencement based on the present value of lease payments over the lease term, discounted at the Company's estimated rate of interest for a collateralized borrowing for a similar term. The lease term includes options to extend or terminate a lease when the Company considers it reasonably certain that such options will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Premises and Equipment

Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the straight-line method. Estimated useful lives are as follows:
Office buildings 10 to 50 years
Leasehold improvements(1)
 10 to 30 years
Software(2)
 3 to 57 years
Furniture, fixtures and equipment 3 to 10 years
Automobiles 5 years
(1) Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the remaining term of the leases. The useful life of the leasehold improvements may be extended beyond the base term of the lease contract when the lease contract includes renewal option period(s) that are reasonably assured of being exercised at the date the leasehold improvements are purchased. At no point does the depreciable life exceed the economic useful life of the leasehold improvement or the expected term of the lease contract.
(2) The standard depreciable period for software is three years. However, for certain software implementation projects, a five-yearseven-year period is utilized.

Expenditures for maintenance and repairs are charged to Occupancy and equipment expense in the Consolidated Statements of Operations as incurred.


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

Cost and Equity Method Investments

For investments in limited partnerships, limited liability companies and other investments that are not required to be consolidated, the Company uses either the equity method or the cost method of accounting. The Company uses the equity method for general and limited partnership interests, limited liability companies and other unconsolidated equity investments in which the Company is considered to have significant influence over the operations of the investee. Under the equity method, the Company records its equity ownership share of net income or loss of the investee in "Other miscellaneous expenses." The Company uses the cost method for all other investments. Under the cost method, there is no change to the cost basis unless there is an other-than-temporary decline in value or dividends are received. If the decline is determined to be other-than-temporary, the Company writes down the cost basis of the investment to a new cost basis that represents realizable value. The amount of the write-down is accounted for as a loss included in "Other miscellaneous expenses." Distributions received from the income of an investee on cost method investments are included in "Other miscellaneous expenses." Investments accounted for under the equity method or cost method of accounting above are included in the caption "Other Assets" on the Consolidated Balance Sheets.

See Note 7 to the Consolidated Financial Statements for a related discussion of the Company's equity investments in Trusts and entities.

Goodwill and Intangible Assets

Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the acquisition method.

Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. 

The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis at October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. A reporting unit is an operating segment or one level below.

An entity's goodwill impairment quantitative analysis is required to be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, in which case no further analysis is required. An entity has an unconditional option to bypass the preceding qualitative assessment (often referred to as step 0) for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test.

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

The quantitative test includes a comparison of the fair value of each reporting unit to its respective carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as the excess of carrying value over fair value.

A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit and cannot subsequently be reversed even if the fair value of the reporting unit recovers.

The Company's intangible assets consist of assets purchased or acquired through business combinations, including trade names and dealer networks. Certain intangible assets are amortized over their useful lives. The Company evaluates identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.


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

MSRs

The Company has elected to measure most of its residential MSRs at fair value to be consistent with the risk management strategy to hedge changes in the fair value of these assets. The fair value of residential MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions. Assumptions incorporated into the residential MSRs valuation model reflect management's best estimate of factors that a market participant would use in valuing the residential MSRs. Although sales of residential MSRs do occur, residential MSRs do not trade in an active market with readily observable prices. Those MSRs not accounted for at fair value are accounted for at amortized cost, less impairment.

As a benchmark for the reasonableness of the residential MSRs' fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own discounted cash flow DCF calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. Management compares the internally-developed residential MSR values to the ranges of values received from Brokers. If the residential MSRs fair value falls outside the Brokers' ranges, management will assess whether a valuation adjustment is warranted. Residential MSRs value is considered to represent a reasonable estimate of fair value.

See Note 916 to thethese Consolidated Financial Statements for detail on MSRs.

BOLI

BOLI represents the cash surrender value of life insurance policies for certain current and former employees who have provided positive consent to allow the Bank to be the beneficiary of such policies. Increases in the net cash surrender value of the policies, as well as insurance proceeds received, are recorded in non-interest income, and are not subject to income taxes.

OREO and Other Repossessed Assets

OREO and other repossessed assets consist of properties, vehicles, and other assets acquired by, or in lieu of, foreclosure or repossession in partial or total satisfaction of NPLs, including RICs and leases. Assets obtained in satisfaction of a loan are recorded at the estimated fair value minus estimated costs to sell based upon the asset's appraisal value at the date of transfer. The excess of the carrying value of the loan over the fair value of the asset minus estimated costs to sell are charged to the ALLL at the initial measurement date. Subsequent to the acquisition date, OREO and repossessed assets are carried at the lower of cost or estimated fair value, net of estimated cost to sell. Any declines in the fair value of OREO and repossessed assets below the initial cost basis are recorded through a valuation allowance with a charge to non-interest income. Increases in the fair value of OREO and repossessed assets net of estimated selling costs will reverse the valuation allowance, but only up to the cost basis which was established at the initial measurement date. Costs of holding the assets are recorded as operating expenses, except for significant property improvements, which are capitalized to the extent that the carrying value does not exceed the estimated fair value. The Company generally begins vehicle repossession activity once a customer's account becomes 60 days past due. The customer has an opportunity to redeem the repossessed vehicle by paying all outstanding balances, including finance changes and fees. Any vehicles not redeemed are sold at auction. OREO and other repossessed assets are recorded within Other assets on the Consolidated Balance Sheets.

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

Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity, and credit risk. Derivative financial instruments are also used to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with commercial banking customers to facilitate their risk management activities.activities, and often sells derivative products to commercial loan customers to hedge interest rate risk associated with loans made by the Company. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes for its own account. Derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of each derivative financial instrument depends on whether it has been designated and qualifies as a hedge for accounting purposes, as well as the type of hedging relationship identified.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk such as interest rate risk are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The Company formally documents the relationships of qualifying hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.


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

Fair value hedges that are highly effective are accounted for by recording the change in the fair value of the derivative instrument and the related hedged asset, liability or firm commitment on the Consolidated Balance Sheets, with the corresponding income or expense recorded in the Consolidated Statements of Operations. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as an other asset or other liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense associated with the hedged asset or liability.

Cash flow hedges that are highly effective are accounted for by recording the fair value of the derivative instrument on the Consolidated Balance Sheets as an asset or liability, with a corresponding charge or credit for the effective portion of the change in the fair value of the derivative, net of tax, recorded in accumulated OCI within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated other comprehensive incomeOCI to the Consolidated Statements of Operations in the period or periods the hedged transaction affects earnings. In the case in which certain cash flow hedging relationships have been terminated, the Company continues to defer the net gain or loss in accumulated OCI and reclassifies it into interest expense as the future cash flows occur, unless it becomes probable that the future cash flows will not occur.

We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; the derivative is de-designated as a fair value or cash flow hedge; or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If we determine that the derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value, with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

The portion of gains and losses on derivative instruments not considered highly effectiveChanges in hedging the change in fair value or expected cash flows of the hedged item, or derivatives not designated in hedging relationships are recognized immediately in the Consolidated Statements of Operations. Derivatives are classified in the Consolidated Balance Sheets as "Other assets" or "Other liabilities," as applicable. See Note 14 to the Consolidated Financial Statements for further discussion.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act (the "TCJA")TCJA was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. As a result of the TCJA's enactment, the effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets.

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

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws of the U.S., its states and municipalities, and abroad. 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. Interest and penalties on income tax payments are included within Income tax provision on the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. See Note 15 to the Consolidated Financial Statements for details on the Company's income taxes.


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

Sales of RICs and Leases

The Company, through SC, transfers RICs into newly formed Trusts which then issue one or more classes of notes payable backed by the RICs. The Company’s continuing involvement with the credit facilities and Trusts are in the form of servicing loans held by the special purpose entities ("SPEs") and, generally, through holding a residual interest in the SPE. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and are consolidated when the Company has: (a) power over the significant activities of the entity and (b) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company has power over the significant activities of those Trusts as servicer of the financial assets held in the Trust. Servicing fees are not considered significant variable interests in the Trusts; however, when the Company also retains a residual interest in the Trust, either in the form of a debt security or equity interest, the Company has an obligation to absorb losses or the right to receive benefits that are potentially significant to the SPE. Accordingly, these Trusts are consolidated within the Consolidated Financial Statements, and the associated RICs, borrowings under credit facilities and securitization notes payable remain on the Consolidated Balance Sheets. Securitizations involving Trusts in which the Company does not retain a residual interest or any other debt or equity interests are treated as sales of the associated RICs. While these Trusts are included in our Consolidated Financial Statements, they are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by the Trusts, are available only to satisfy the notes payable related to the securitized RICs, and are not available to our creditors or our other subsidiaries.

The Company also sells RICs and leases to VIEs or directly to third parties, which the Company may determine meet sale accounting treatment in accordance with applicable guidance. Due to the nature, purpose, and activity of these transactions, the Company either does not hold potentially significant variable interests or is not the primary beneficiary as a result of the Company's limited further involvement with the financial assets. The transferred financial assets are removed from the Company's Consolidated Balance Sheets at the time the sale is completed. The Company generally remains the servicer of the financial assets and receives servicing fees. The Company also recognizes a gain or loss for the difference between the fair value, as measured based on sales proceeds plus (or minus) the value of any servicing asset (or liability) retained and the carrying value of the assets sold.

See further discussion on the Company's securitizations in Note 7 to these Consolidated Financial Statements.

Stock-Based Compensation

The Company, through Santander, sponsors stock plans under which incentive and non-qualified stock options and non-vested stock may be granted periodically to certain employees. The Company recognizes compensation expense related to stock options and non-vested stock awards based upon the fair value of the awards on the date of the grant, which is charged to earnings over the requisite service period (i.e., the vesting period). The impact of the forfeiture of awards is recognized as forfeitures occur. Amounts in the Consolidated Statements of Operations associated with the Company's stock compensation plan were negligible in all years presented.

The Company assumed stock-based arrangements in connection with the Change in Control. The Company was required to recognize stock option awards that were outstanding as of the Change in Control date at fair value. The portion of the fair value measurement of the share-based payments that is attributable to pre-business combination service is recognized as NCI and the portion relating to any remaining post-business combination service is recognized as stock compensation expense over the remaining vesting period of the awards in the Company’s post-business combination financial statements.

Guarantees

Certain off-balance sheet financial instruments of the Company meet the definition of a guarantee that require the Company to perform and make future payments in the event specified triggering events or conditions were to occur over the term of the guarantee. In accordance with the applicable accounting rules, it is the Company’s accounting policy to recognize a liability at inception associated with such a guarantee at the greater of the fair value of the guarantee or the Company's estimate of the contingent liability arising from the guarantee. Subsequent to initial recognition, the liability is adjusted based on the passage of time to perform under the guarantee and the changes to the probabilities of occurrence related to the specified triggering events or conditions that would require the Company to perform on the guarantee.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, and records the identifiable assets, liabilities and any NCI of the acquired business at their acquisition date fair values. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Any changes in the estimated acquisition date fair values of the net assets recorded prior to the finalization of a more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to the Company’s Consolidated Financial Statements will be adjusted retrospectively. All acquisition related costs are expensed as incurred.

The results of operations of the acquired companies are recorded in the Consolidated Statements of Operations from the date of acquisition. The application of business combination principles, including the determination of the fair value of the net assets acquired, requires the use of significant estimates and assumptions.

Revenue Recognition

The Company primarily earns interest and non-interest income from various sources, including:
Lending (interest income and loan fees)
Investment securities
Loan sales and servicing
Finance leases
BOLI
Depository services
Commissions and trailer fees
Interchange income, net.
Underwriting service Fees
Asset and wealth management fees

140110




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

Lending and Investment Securities

The principal source of revenue is interest income from loans and investment securities. Interest income is recognized on an accrual basis primarily according to non-discretionary formulas in written contracts, such as loan agreements or securities contracts. Revenue earned on interest-earning assets, including amortization of deferred loan fees and origination costs and the accretion of discounts recognized on acquired or purchased loans, is recognized based on the constant effective yield of such interest-earning assets.

Gains or losses on sales of investment securities are recognized on the trade date.

Loan Sales and Servicing

The Company recognizes revenue from servicing commercial mortgages and consumer loans as earned. Mortgage banking income, net includes fees associated with servicing loans for third parties based on the specific contractual terms and changes in the fair value of MSRs. Gains or losses on sales of residential mortgage, multifamily and home equity loans are included within mortgage banking revenues and are recognized when the sale is complete.

Finance Leases

Income from finance leases is recognized as part of interest income over the term of the lease using the constant effective yield method, while income arising from operating leases is recognized as part of other non-interest income over the term of the lease on a straight-line basis.

BOLI

Income from BOLI represents increases in the cash surrender value of the policies, as well as insurance proceeds and interest.

Depository services

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

Commissions and trailer fees

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

Interchange income, net

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

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

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

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

Underwriting service fees

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

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

Asset and wealth management fees

Asset and wealth management fees includes fee income generated from discretionary investment management and non-discretionary investment advisory contracts with customers. Discretionary investment management fees are earned for the management of the assets in the customer's account and are recognized as earned and charged to the customer on a quarterly basis. Non-discretionary investment advisory fees are earned for providing investment advisory services to customers, such as recommending the re-balancing or restructuring of the assets in the customer’s account. The investment advisory fee is recognized as earned and charged to the customer on a quarterly basis. The fee for the discretionary and nondiscretionary contracts is based on a percentage of the average assets included in the customer’s account.

Fair Value Measurements

The Company uses fair value measurements to estimate the fair value of certain assets and liabilities for both measurement and disclosure purposes. 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, 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.

When measuring the fair value of a liability, the Company assumes that the transfer will not affect the nonperformance risk associated with the liability. The Company considers the effect of the credit risk on the fair value for any period in which fair value is measured. There are three valuation approaches for measuring fair value: the market approach, the income approach and the cost approach. Selecting the appropriate technique for valuing a particular asset or liability should consider the exit market for the asset or liability, the nature of the asset or liability being measured, and how a market participant would value the same asset or liability. Ultimately, selecting the appropriate valuation method requires significant judgment. These assumptions result in classification of financial instruments into the fair value hierarchy levels 1, 2 and 3 for disclosure purposes.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on the Company's own information or assessment of assumptions used by other market participants in pricing the asset or liability. The unobservable inputs are based on the best and most current information available on the measurement date.

Subsequent Events

The Company evaluated events from the date of the Consolidated Financial Statements on December 31, 20172019 through the issuance of these Consolidated Financial Statements, and has determined that there have been no material events that would require recognition in its Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements for the year ended December 31, 20172019 other than the transactionstransaction disclosed in Note 4, Note 11, and Note 2113 of these Consolidated Financial Statements.

112




NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU, as amended, requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principles of revenue recognition under ASC 606. The amended standard will be effective for the Company for the first annual period beginning after December 15, 2017. It should be applied retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption.

Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), it will not have a material impact on the elements of the Company's Consolidated Statements of Operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains and losses). For revenues in scope of the new standard, SHUSA evaluated contracts for potential accounting changes, such as timing differences and gross versus net reporting of revenues and expenses related to certain arrangements, such as securities underwriting and debit/credit card interchange. Several changes to gross versus net reporting will result in an immaterial impact to the Company’s Consolidated Financial Statements. The Company adopted this ASU in the first quarter of 2018 using a modified retrospective approach resulting in an immaterial cumulative-effect adjustment to opening retained earnings. The most significant impact of adoption will be expanded disclosures relating to disaggregation of in-scope revenue, which will be included in our first quarter 2018 Form 10-Q.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as amended. This new guidance amends the presentation and accounting for certain financial instruments, including liabilities measured at fair value under the fair value option and equity investments. The guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost. The Company adopted this standard in the first quarter of 2018, and it did not have a material impact on the Company's financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance, as amended, in this update supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases. The new guidance requires lessees to evaluate whether a lease is a finance lease using criteria similar to what lessees use today to determine whether they have a capital lease. Leases not classified as finance leases are classified as operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similarly to today’s guidance for operating leases. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. The Company does not intend to early adopt this ASU. Adoption of this amendment must be applied on a modified retrospective approach. The Company is in the process of reviewing our existing property and equipment lease contracts, as well as service contracts that may include embedded leases. Upon adoption, the Company expects to report higher assets and liabilities from recording the present value of the future minimum lease payments of the leases.

141




NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This new guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ForThe amendment introduces a new credit reserving framework known as CECL, which replaces the incurred loss impairment framework in current GAAP with one that reflects expected credit losses over the full expected 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. Additionally, the standard changes the accounting framework for purchased credit-deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities entities will be required to record allowances rather than reduceusing an allowance instead of reducing the carrying amount as they do todayit is under the current OTTI model. The standard also simplifies the accounting model for purchased credit-impaired debt securities and loans. The new guidance will be effective for the Company for the first reporting period beginning after December 15, 2019, with earlier adoption permitted. Adoption of this new guidance can be applied only on a prospective basis as a cumulative-effect adjustment to retained earnings.framework. The Company is currently evaluating the impact ofadopted the new guidance on its Consolidated Financial Statements. It is expected thatJanuary 1, 2020.

The Company established a cross-functional working group for implementation of this standard. Generally, our implementation process included 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 over financial reporting frameworks, and updating accounting policies and procedures. The status of our implementation was periodically presented to the Audit Committee and the Risk Committee. The Company completed multiple parallel model will include different assumptions used in calculatingruns to test and refine its current expected credit losses, such as estimating losses overloss models to satisfy the estimated liferequirements of a financial asset, and will consider expected future changes in macroeconomic conditions. the new standard.

The adoption of this ASU may resultstandard resulted in anthe increase in the ACL of approximately $2.5 billion and a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase is based on forecasts of expected future economic conditions and is primarily driven by the Company’s ACL, whichfact that the allowance will depend uponcover expected credit losses over the nature and characteristicsfull expected life of the Company's portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date.loan portfolios. The Company currently does not intend to early adopt this new guidance.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This new guidance amends the hedge accounting model to enable entities to better portray their risk management activities in their financial statements. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line in which the earnings effect of the hedged item is reported. The new guidance is effective for public companies for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted this standard in the first quarter of 2018.  It did not have a material impact on the opening balanceCompany’s other financial instruments. Additionally, we elected to utilize regulatory relief which will permit us to phase in 25 percent of retained earnings for the cumulative-effect adjustment related to eliminatingcapital impact of CECL in our calculation of regulatory capital amounts and ratios in 2020, and an additional 25 percent each subsequent year until fully phased-in by the separate measurementfirst quarter of ineffectiveness.2023.

On January 18,In August 2018, the FASB issued ASU 2018-02,2018-13, Income StatementFair Value Measurement (Topic 820): Disclosure Framework - Reporting Comprehensive Income (Topic 220): ReclassificationChanges to the Disclosure Requirements for Fair Value Measurement. This ASU removes the requirement to disclose the amount of Certain Tax Effects from Accumulated Other Comprehensive Income.and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timin The amendmentsg of transfers between levels, and the valuation processes for Level 3 fair value measurements. This ASU requires disclosure of changes in this ASU allow a reclassification from accumulated other comprehensive incomeunrealized 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 retained earnings for stranded tax effects resulting from the TCJA. The amendments are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, for public companies for reporting periods for which financial statements have not yet been issued. develop Level 3 fair value measurements. The Company is currently evaluatingadopted the new guidance effective January 1, 2020 and it did not have a material impact on the Company’s business, financial position or results of this standard.operations.

In addition to those described in detail above, on January 1, 2020, the Company is in the process of evaluating the following ASUs,adopted ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, and doesit did not expect them to have a material impact on the Company's business, financial position, results of operations, or disclosures:disclosures.

ASU’s Effective in Q1 2018:


ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (A consensus of the FASB Emerging Issues Task Force)
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting

ASU’s Effective in Q1 2019:

ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging Issues Task Force)
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

142113




NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

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


NOTE 3. INVESTMENT SECURITIES

InvestmentSummary of Investments in Debt Securities Summary - AFS and HTM

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities AFS at the dates indicated:
 December 31, 2017 December 31, 2016 December 31, 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
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Loss
 Fair
Value
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Loss
 Fair
Value
U.S. Treasury securities $1,006,219
 $
 $(8,107) $998,112
 $1,857,357
 $1,826
 $(2,326) $1,856,857
 $4,086,733
 $4,497
 $(292) $4,090,938
 $1,815,914
 $560
 $(11,729) $1,804,745
Corporate debt securities 11,639
 21
 
 11,660
 
 
 
 
 139,696
 39
 (22) 139,713
 160,164
 12
 (62) 160,114
Asset-backed securities (“ABS”) 501,575
 6,901
 (1,314) 507,162
 1,196,702
 16,410
 (2,388) 1,210,724
Equity securities 11,428
 
 (614) 10,814
 11,716
 
 (565) 11,151
ABS 138,839
 1,034
 (1,473) 138,400
 435,464
 3,517
 (2,144) 436,837
State and municipal securities 23
 
 
 23
 30
 
 
 30
 9
 
 
 9
 16
 
 
 16
Mortgage-backed securities (“MBS”):                
MBS:                
GNMA - Residential 4,745,998
 3,531
 (62,524) 4,687,005
 5,424,412
 3,253
 (64,537) 5,363,128
 4,868,512
 12,895
 (16,066) 4,865,341
 2,829,075
 861
 (85,675) 2,744,261
GNMA - Commercial 1,377,449
 179
 (19,917) 1,357,711
 948,696
 1,998
 (8,196) 942,498
 773,889
 6,954
 (1,785) 779,058
 954,651
 1,250
 (19,515) 936,386
FHLMC and FNMA - Residential 6,958,433
 1,093
 (141,393) 6,818,133
 7,765,003
 6,712
 (154,858) 7,616,857
 4,270,426
 14,296
 (30,325) 4,254,397
 5,687,221
 267
 (188,515) 5,498,973
FHLMC and FNMA - Commercial 23,003
 
 (440) 22,563
 23,636
 
 (670) 22,966
 69,242
 2,665
 (5) 71,902
 51,808
 384
 (537) 51,655
Non-agency securities 
 
 
 
 14
 
 
 14
Total investment securities AFS $14,635,767
 $11,725
 $(234,309) $14,413,183
 $17,227,566
 $30,199
 $(233,540) $17,024,225
Total investments in debt securities AFS $14,347,346
 $42,380
 $(49,968) $14,339,758
 $11,934,313
 $6,851
 $(308,177) $11,632,987

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities held-to-maturityHTM at the dates indicated:
 December 31, 2017 December 31, 2016 December 31, 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
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Loss
 
Fair
Value
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Loss
 Fair
Value
MBS:                                
GNMA - Residential $1,447,669
 $722
 $(26,150) $1,422,241
 $1,658,644
 $2,195
 $(25,426) $1,635,413
 $1,948,025
 $11,354
 $(7,670) $1,951,709
 $1,718,687
 $1,806
 $(54,184) $1,666,309
GNMA - Commercial 352,139
 325
 (767) 351,697
 
 
 
 
 1,990,772
 20,115
 (5,369) 2,005,518
 1,031,993
 1,426
 (23,679) 1,009,740
Total investment securities HTM $1,799,808
 $1,047
 $(26,917) $1,773,938
 $1,658,644
 $2,195
 $(25,426) $1,635,413
Total investments in debt securities HTM $3,938,797
 $31,469
 $(13,039) $3,957,227
 $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 December 31, 20172019 and December 31, 2016,2018, the Company had investment securities AFS with an estimated faircarrying value of $5.9$7.5 billion and $7.2$6.6 billion, respectively, pledged as collateral, which waswere comprised of the following: $3.0$2.7 billion and $3.2$3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the FRB; $2.3$3.5 billion and $3.0$2.7 billion, respectively, were pledged to secure public fund deposits; $243.8$148.5 million and $109.7$78.0 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $0.0$699.1 million and $622.0$423.3 million, respectively, were pledged to deposits with clearing organizations; and $387.9$461.9 million and $271.2$415.1 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At December 31, 20172019 and December 31, 2016,2018, the Company had $47.0$46.0 million and $44.8$40.2 million, respectively, of accrued interest related to investment securities which is included in the Other assets line of the Company's Consolidated Balance Sheets.

There were no transfers of securities between AFS and HTM during the year ended December 31, 2019. In 2018, the Company transferred securities with approximately a $1.2 billion carrying value (fair value $1.2 billion) from AFS to HTM. Unrealized holding losses of $29.1 million were retained in OCI at the date of transfer and will be amortized over the remaining lives of the securities.



143114




NOTE 3. INVESTMENT SECURITIES (continued)

Contractual Maturity of Investments in Debt Securities

Contractual maturities of the Company’s investments in debt securities AFS at December 31, 20172019 were as follows:
            
(in thousands) Due Within One Year Due After 1 Within 5 Years Due After 5 Within 10 Years Due After 10 Years/No Maturity 
Total (1)
 
Weighted Average Yield (2)
 Due Within One Year Due After 1 Within 5 Years Due After 5 Within 10 Years Due After 10 Years/No Maturity 
Total(1)
 
Weighted Average Yield(2)
U.S Treasury securities $154,712
 $843,400
 $
 $
 $998,112
 1.42%
U.S Treasuries $3,289,865
 $801,073
 $
 $
 $4,090,938
 1.91%
Corporate debt securities 11,647
 
 13
 
 11,660
 2.99% 139,699
 
 14
 
 139,713
 2.60%
ABS 
 350,229
 27,688
 129,245
 507,162
 2.90% 12,234
 63,123
 
 63,043
 138,400
 4.23%
State and municipal securities 
 23
 
 
 23
 7.39% 
 9
 
 
 9
 7.75%
MBS:                        
GNMA - Residential 
 3,685
 117
 4,683,203
 4,687,005
 2.07% 1,738
 48
 60,710
 4,802,845
 4,865,341
 2.31%
GNMA - Commercial 
 
 
 1,357,711
 1,357,711
 2.43% 
 
 
 779,058
 779,058
 2.41%
FHLMC and FNMA - Residential 
 11,022
 142,067
 6,665,044
 6,818,133
 2.25% 301
 8,024
 266,204
 3,979,868
 4,254,397
 1.96%
FHLMC and FNMA - Commercial 
 7,696
 12,201
 2,666
 22,563
 2.54% 
 430
 52,298
 19,174
 71,902
 3.00%
Total fair value $166,359
 $1,216,055
 $182,086
 $12,837,869
 $14,402,369
 2.17% $3,443,837
 $872,707
 $379,226
 $9,643,988
 $14,339,758
 2.12%
Weighted Average Yield 1.21% 1.99% 1.83% 2.21% 2.17%   2.02% 1.87% 2.27% 2.18% 2.12%  
Total amortized cost $166,398
 $1,217,343
 $183,930
 $13,056,668
 $14,624,339
   $3,441,868
 $869,377
 $375,291
 $9,660,810
 $14,347,346
 
(1)The maturities above do not represent the effective duration of the Company's portfolio, since the amounts above are based on contractual maturities and do not contemplate anticipated prepayments.
(2)Yields on tax-exempt securities are calculated on a tax equivalent basis and are based on the statutory federal tax rate.

Contractual maturities of the Company’s investments in debt securities HTM at December 31, 20172019 were as follows:
             
(in thousands) Due Within One Year Due After 1 Within 5 Years Due After 5 Within 10 Years Due After 10 Years/No Maturity 
Total(1)
 
Weighted Average Yield(2)
MBS:            
GNMA - Residential $
 $
 $
 $1,951,709
 $1,951,709
 2.26%
GNMA - Commercial 
 
 
 2,005,518
 2,005,518
 2.39%
Total fair value $
 $
 $
 $3,957,227
 $3,957,227
 2.32%
Weighted average yield % % % 2.32% 2.32%  
Total amortized cost $
 $
 $
 $3,938,797
 $3,938,797
  
(1) (2) See corresponding footnotes to the December 31, 2019 "Contractual Maturity of Debt Securities" table above for investments in debt securities AFS.

Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.
(in thousands) Due Within One Year Due After 1 Within 5 Years Due After 5 Within 10 Years Due After 10 Years/No Maturity 
Total (1)
 Weighted Average Yield
MBS:            
GNMA - Residential $
 $
 $
 $1,422,241
 $1,422,241
 2.34%
GNMA - Commercial 
 
 
 351,697
 351,697
 2.22%
Total fair value $
 $
 $
 $1,773,938
 $1,773,938
 2.31%
Weighted Average Yield % % % 2.31% 2.31%  
Total amortized cost $
 $
 $
 $1,799,808
 $1,799,808
  
(1)The maturities above do not represent the effective duration of the Company's portfolio, since the amounts above are based on contractual maturities and do not contemplate anticipated prepayments.

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

The following tables presenttable presents the aggregate amount of unrealized losses as of December 31, 20172019 and December 31, 20162018 on debt securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
 December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
 Less than 12 months 12 months or longer Less than 12 months 12 months or longer 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
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 Fair Value Unrealized
Losses
 Fair Value Unrealized
Losses
U.S. Treasury securities $998,112
 $(8,107) $
 $
 $1,016,654
 $(2,326) $
 $
 $200,096
 $(167) $499,883
 $(125) $288,660
 $(315) $914,212
 $(11,414)
Corporate debt securities 110,802
 (22) 
 
 152,247
 (62) 13
 
ABS 8,013
 (125) 103,559
 (1,189) 76,552
 (1,021) 111,758
 (1,367) 27,662
 (44) 47,616
 (1,429) 31,888
 (249) 77,766
 (1,895)
Equity securities 335
 (2) 10,398
 (612) 770
 (16) 9,800
 (549)
MBS:                                
GNMA - Residential 1,236,716
 (8,600) 2,583,955
 (53,924) 3,831,354
 (46,846) 1,027,609
 (17,691) 2,053,763
 (6,895) 997,024
 (9,171) 102,418
 (2,014) 2,521,278
 (83,661)
GNMA - Commercial 1,022,452
 (11,492) 251,209
 (8,425) 532,334
 (4,451) 98,918
 (3,745) 217,291
 (1,756) 14,300
 (29) 199,495
 (2,982) 622,989
 (16,533)
FHLMC and FNMA - Residential 3,429,678
 (32,899) 3,017,533
 (108,494) 4,740,824
 (58,514) 1,981,886
 (96,344) 660,078
 (4,110) 1,344,057
 (26,215) 237,050
 (5,728) 5,236,028
 (182,787)
FHLMC and FNMA - Commercial 6,948
 (103) 15,614
 (337) 22,504
 (659) 462
 (11) 
 
 430
 (5) 
 
 21,819
 (537)
Total investment securities AFS $6,702,254
 $(61,328) $5,982,268
 $(172,981) $10,220,992
 $(113,833) $3,230,433
 $(119,707)
Total investments in debt securities AFS $3,269,692
 $(12,994) $2,903,310
 $(36,974) $1,011,758
 $(11,350) $9,394,105
 $(296,827)


144115




NOTE 3. INVESTMENT SECURITIES (continued)

The following tables presenttable presents the aggregate amount of unrealized losses as of December 31, 20172019 and December 31, 20162018 on debt securities in the Company’s held-to-maturityHTM investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
 December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
 Less than 12 months 12 months or longer Less than 12 months 12 months or longer 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
 Fair Value 
Unrealized
Losses
 Fair Value 
Unrealized
Losses
 Fair Value Unrealized
Losses
 Fair Value Unrealized
Losses
MBS:                
GNMA - Residential $434,322
 $(6,419) $739,612
 (19,731) $1,311,390
 $(25,426) $
 $
 $559,058
 $(2,004) $657,733
 $(5,666) $205,573
 $(4,810) $1,295,554
 $(49,374)
GNMA - Commercial 118,951
 (767) 
 
 
 
 
 
 731,445
 (5,369) 
 
 221,250
 (5,572) 629,847
 (18,107)
Total investment securities HTM $553,273
 $(7,186) $739,612
 $(19,731) $1,311,390
 $(25,426) $
 $
Total investments in debt securities HTM $1,290,503
 $(7,373) $657,733
 $(5,666) $426,823
 $(10,382) $1,925,401
 $(67,481)

OTTI

Management evaluates all investmentinvestments in debt 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")FICO scores and weighted average LTV ratio, rating or scoring, credit ratings and market spreads, as applicable.

The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company has determined that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.

The Company recordeddid not record any OTTI related to its investmentinvestments in debt securities of $44 thousand and $1.1 million for the years ended December 31, 2016 and 2015, respectively. There was no OTTI recorded for the year ended December 31,2019, 2018 or 2017.

Management has concluded that the unrealized losses on its investments in debt and equity securities for which it has not recognized OTTI (which were comprised of 626727 individual securities at December 31, 2017)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.other than temporary.

Gains (Losses) and Proceeds on Sales of Investments in Debt Securities

Proceeds from sales of investmentinvestments in debt securities and the realized gross gains and losses from those sales arewere as follows:
 Year Ended December 31, Year Ended December 31,
(in thousands) 2017 2016 2015 2019 2018 2017
Proceeds from the sales of AFS securities $3,256,378
 $6,755,299
 $2,809,779
 $1,423,579
 $1,262,409
 $3,256,378
            
Gross realized gains $21,745
 $60,367
 $24,183
 $9,496
 $5,517
 $22,224
Gross realized losses (19,943) (2,559) (5,692) (3,680) (12,234) (24,668)
OTTI 
 (44) (1,092) 
 
 
Net realized gains (1)
 $1,802
 $57,764
 $17,399
Net realized gains/(losses) (1)
 $5,816
 $(6,717) $(2,444)
(1)Excludes theIncludes net realized gains/gain/(losses) related toon trading securities.securities of (0.8) million, $(1.4) million and $(4.2) million for the years ended December 31, 2019, 2018 and 2017, respectively.

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


145
116




NOTE 3. INVESTMENT SECURITIES (continued)

Trading SecuritiesOther Investments

The Company held $1 thousandOther Investments consisted of trading securitiesthe following as of December 31, 2017, compared to $1.6 million held at December 31, 2016. Gains and losses on trading securities are recorded within Net (losses)/gains on sale of investment securities on the Company's Consolidated Statements of Operations.of:

Other Investments
(in thousands)December 31, 2019 December 31, 2018
FHLB of Pittsburgh and FRB stock $716,615
 $631,239
LIHTC investments 265,271
 163,113
Equity securities not held for trading 12,697
 10,995
Trading securities 1,097
 10
Total $995,680
 $805,357

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB with aggregate carrying amounts of $516.7 million and $680.5 million as of December 31, 2017 and December 31, 2016, respectively.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 year ended December 31, 2017,2019, the Company purchased $163.0$298.6 million of FHLB stock at par, and redeemed $327.6$212.4 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the year ended December 31, 2017,2019, the Company did not purchase any FRB stock. Other

The Company's LIHTC investments also include $88.2 million and $50.4 million of low-income housing tax credit ("LIHTC") investmentsare accounted for using the proportional amortization method. Equity securities are measured at fair value as of December 31, 20172019, with changes in fair value recognized in net income, and December 31, 2016, respectively. Other investments also includes $54.0 million and $0.0 millionconsist primarily of time deposits with a maturity of greater than 90 days held at a non-affiliate financial institution as of December 31, 2017 and December 31, 2016, respectively.CRA mutual fund investments.

TheWith 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 SPEs. These loans totaled $50.8$53.9 billion at December 31, 20172019 and $53.5$49.5 billion at December 31, 2016.2018.

Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at December 31, 20172019 was $2.5$1.4 billion, compared to $2.6$1.3 billion at December 31, 2016.2018. LHFS in the residential mortgage portfolio that were originated with the intent to sell were $289.0 million as of December 31, 2019 and are either reported at either estimated fair value (if the FVO is elected) or at the lower of cost or fair value. For a discussion on the valuation of LHFS at fair value, see Note 1816 to thethese Consolidated Financial Statements. During the third quarter of 2015, the Company determined that it no longer intended to hold certain personal lending assets at SC for investment. The Company adjusted the ACL associated with SC's personal loan portfolio through the provision for credit losses to value the portfolio at the lower of cost or market. Upon transferring the loans to LHFS at fair value, the adjusted ACL was released as a charge-off. Loan originations and purchasesLoans under SC’s personal lending platform during 2016 and 2017 have been classified as held for saleHFS and subsequent adjustments to lower of cost or market are recorded through Miscellaneous Income (Expense),income, net on the Consolidated Statements of Operations. As of December 31, 2017 and 2016,2019, the carrying value of the personal unsecured held-for-saleHFS portfolio was $1.1$1.0 billion.

During 2019, the Company sold $1.4 billion of performing residential loans to FNMA for a net gain of $7.9 million.

In October 2019, SBNA agreed to sell from its portfolio certain restructured residential mortgage and home equity loans (with approximately $187.0 million of principal balances outstanding) to two unrelated third parties. This transaction settled in the fourth quarter with an immaterial impact on the Consolidated Statements of Operations. The loans were sold with servicing released to the purchasers.

On October 4, 2019, SBNA agreed to sell approximately $768.2 million of equipment finance loans and approximately $74.2 million of operating leases to an unrelated third party. This transaction settled on November 29, 2019, with a gain of $5.6 million on the sale.

117




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

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 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 December 31, 20172019 and 2016,December 31, 2018, accrued interest receivable on the Company's loans was $515.9$497.7 million and $554.5$524.0 million, respectively.

On February 16, 2018, an agreement was executed to sell substantially all of SBNA’s warehouse facilities with a balance of $830 million atDuring the years ended December 31, 2019, 2018 and 2017, the Company purchased retail installment contract financial receivables from third-party lenders for a price contingent upon total consented commitments.  These facilities are included in$1.1 billion, $67.2 thousand and zero, respectively. The UPB of these loans as of the commercialacquisition date was $1.12 billion, $74.1 thousand and industrial loans segment reported under LHFI.  This transaction is expected to close within the first quarter of 2018.zero, respectively.


146




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

Loan and Lease Portfolio Composition

The following presents the composition of the gross loans and leases held-for-investmentHFI by portfolio and by rate type:
 December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent
Commercial LHFI:                
CRE loans $9,279,225
 11.5% $10,112,043
 11.8% $8,468,023
 9.1% $8,704,481
 10.0%
Commercial and industrial loans 14,438,311
 17.9% 18,812,002
 21.9%
C&I loans 16,534,694
 17.8% 15,738,158
 18.1%
Multifamily loans 8,274,435
 10.1% 8,683,680
 10.1% 8,641,204
 9.3% 8,309,115
 9.5%
Other commercial(2)
 7,174,739
 8.9% 6,832,403
 8.0% 7,390,795
 8.2% 7,630,004
 8.8%
Total commercial LHFI 39,166,710
 48.4% 44,440,128
 51.8% 41,034,716
 44.4% 40,381,758
 46.4%
Consumer loans secured by real estate:                
Residential mortgages 8,846,765
 11.0% 7,775,272
 9.1% 8,835,702
 9.5% 9,884,462
 11.4%
Home equity loans and lines of credit 5,907,733
 7.3% 6,001,192
 7.0% 4,770,344
 5.1% 5,465,670
 6.3%
Total consumer loans secured by real estate 14,754,498
 18.3% 13,776,464
 16.1% 13,606,046
 14.6% 15,350,132
 17.7%
Consumer loans not secured by real estate:                
RICs and auto loans - originated 23,081,424
 28.6% 22,104,918
 25.8%
RICs and auto loans - purchased 1,834,868
 2.3% 3,468,803
 4.0%
RICs and auto loans 36,456,747

39.3%
29,335,220

33.7%
Personal unsecured loans 1,285,677
 1.6% 1,234,094
 1.4% 1,291,547
 1.4% 1,531,708
 1.8%
Other consumer(3)
 617,675
 0.8% 795,378
 0.9% 316,384
 0.3% 447,050
 0.4%
Total consumer loans 41,574,142
 51.6% 41,379,657
 48.2% 51,670,724
 55.6% 46,664,110
 53.6%
Total LHFI(1)
 $80,740,852
 100.0% $85,819,785
 100.0% $92,705,440
 100.0% $87,045,868
 100.0%
Total LHFI:                
Fixed rate $50,653,790
 62.7% $51,752,761
 60.3% $61,775,942
 66.6% $56,696,491
 65.1%
Variable rate 30,087,062
 37.3% 34,067,024
 39.7% 30,929,498
 33.4% 30,349,377
 34.9%
Total LHFI(1)
 $80,740,852
 100.0% $85,819,785
 100.0% $92,705,440
 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 $1.3$3.2 billion and $845.8 million$1.4 billion as of December 31, 20172019 and December 31, 2016,2018, respectively.
(2)Other commercial includes commercial equipment vehicle financing ("CEVF")CEVF leveraged leases and loans.
(3)Other consumer primarily includes recreational vehicle ("RV")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.

Portfolio segments and classes

GAAP requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes,” based on management’s systematic methodology for determining the ACL. The Company utilizes an alternatesimilar categorization compared to the financial statement categorization of loans to model and calculate the ACL and track the credit quality, delinquency and impairment status of the underlying loan populations. In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer segments.

The commercial segmentation reflects line of business distinctions. The three CRE linesline of business distinctions include “Corporate banking,” which includes commercial and industrialC&I owner-occupied real estate “Middle market real estate,” which represents the portfolio ofand specialized lending for investment real estate, including financingestate. The Company's allowance methodology further classifies loans in this line of business into construction and non-construction loans; however, the methodology for continuing care retirement communitiesdevelopment and “Santander real estate capital”, which is the CREdetermination of the specialized lending group. "Commercial and industrial"allowance is generally consistent between the two portfolios. "C&I" includes non-real estate-related commercial and industrialC&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 business.

portfolio.

147118




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

The following table reconciles the Company's recorded investment classified by its major portfolio classifications to its commercial loan classifications utilized in its determination of the ALLL and other credit quality disclosures at December 31, 2017 and December 31, 2016, respectively:

Commercial Portfolio Segment(2)
    
Major Loan Classifications(1)
 December 31, 2017 December 31, 2016
  (in thousands)
Commercial LHFI:    
CRE:    
Corporate Banking $3,433,971
 $3,693,109
Middle Market Real Estate 4,820,727
 5,180,572
Santander Real Estate Capital 1,024,527
 1,238,362
Total commercial real estate 9,279,225
 10,112,043
Commercial and industrial (3)
 14,438,311
 18,812,002
Multifamily 8,274,435
 8,683,680
Other commercial 7,174,739
 6,832,403
Total commercial LHFI $39,166,710
 $44,440,128
(1)These represent the Company's loan categories based on SEC Regulation S-X, Article 9.
(2)These represent the Company's loan classes used to determine its ALLL.
(3)Commercial and industrial loans excluded $149.2 million of LHFS at December 31, 2017 and excluded $121.1 million of LHFS at December 31, 2016.

The Company's portfolio classes are substantially the same as its financial statement categorization of loans for the consumer loan populations. “Residential mortgages” includes mortgages on residential property, including single family and 1-4 family units. "Home equity loans and lines of credit" include all organic home equity contracts and purchased home equity portfolios. "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 for the purchased loan portfolios acquired with evidence of credit deterioration, on which we elected to apply the FVO.

Consumer Portfolio Segment(2)
    
Major Loan Classifications(1)
 December 31, 2017 December 31, 2016
  (in thousands)
Consumer loans secured by real estate:   
Residential mortgages(3)
 $8,846,765
 $7,775,272
Home equity loans and lines of credit 5,907,733
 6,001,192
Total consumer loans secured by real estate 14,754,498
 13,776,464
Consumer loans not secured by real estate:   
RICs and auto loans - originated (4)
 23,081,424
 22,104,918
RICs and auto loans - purchased (4)
 1,834,868
 3,468,803
Personal unsecured loans(5)
 1,285,677
 1,234,094
Other consumer 617,675
 795,378
Total consumer LHFI $41,574,142
 $41,379,657
(1)These represent the Company's loan categories based on the SEC's Regulation S-X, Article 9.
(2)These represent the Company's loan classes used to determine its ALLL.
(3)Residential mortgages exclude $210.2 million and $462.9 million of LHFS at December 31, 2017 and December 31, 2016, respectively.
(4)RIC and auto loans exclude $1.1 billion and $924.7 million of LHFS at December 31, 2017 and December 31, 2016, respectively.
(5)Personal unsecured loans exclude $1.1 billion and $1.1 billion of LHFS at December 31, 2017 and December 31, 2016, respectively.


148




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

The RICAt December 31, 2019 and auto loan portfolio is comprised of: (1) RICs2018, the Company had $279.4 million and $803.1 million, respectively, of loans originated by SC prior to the Change in Control, (2) RICs originated by SC after the Change in Control,Control. The purchase marks on these portfolios were $726.5 thousand and (3) auto loans originated by SBNA. The composition of the portfolio segment is as follows:$2.1 million at December 31, 2019 and 2018, respectively.

(in thousands) December 31, 2017 December 31, 2016
RICs - Purchased HFI:    
Unpaid principal balance ("UPB") (1)
 $1,929,548
 $3,765,714
UPB - FVO (2)
 24,926
 29,481
Total UPB 1,954,474
 3,795,195
Purchase marks (3)
 (119,606) (326,392)
Total RICs - Purchased HFI 1,834,868
 3,468,803
     
RICs - Originated HFI:    
UPB (1)
 23,373,202
 22,527,753
Net discount (309,920) (441,131)
Total RICs - Originated 23,063,282
 22,086,622
SBNA auto loans 18,142
 18,296
Total RICs - originated post Change in Control 23,081,424
 22,104,918
Total RICs and auto loans HFI $24,916,292
 $25,573,721
(1)UPB does not include amounts related to the loan receivables - unsecured and loan receivables from dealers due to the short-term and revolving nature of these receivables.
(2)The Company elected to account for these loans, which were acquired with evidence of credit deterioration, under the FVO.
(3)Includes purchase marks of $5.5 million and $6.7 million related to purchase loan portfolios on which we elected to apply the FVO at December 31, 2017 and December 31, 2016, respectively.

During the years ended December 31, 20172019 and 2016, the Company2018, SC originated $6.7$12.8 billion and $8.0$7.9 billion, respectively, in Chrysler Capital loans (including the SBNA originations program), which represented 47%56% and 49%46%, respectively, of the Company'sUPB of SC's total RIC originations. As of December 31, 2017 and December 31, 2016,originations (including the Company's auto RIC portfolio consisted of $8.2 billion and $7.4 billion, respectively, of Chrysler loans, which represented 37% and 32%, respectively, of the Company's auto RIC portfolio.SBNA originations program).

ACL Rollforward by Portfolio Segment
The activity in the ACL by portfolio segment for the yearyears ended December 31, 2017, 2016,2019, and 20152018 was as follows:
 Year Ended December 31, 2017 Year Ended December 31, 2019
(in thousands) Commercial Consumer Unallocated Total Commercial Consumer Unallocated Total
ALLL, beginning of period $449,837
 $3,317,604
 $47,023
 $3,814,464
 $441,083
 $3,409,024
 $47,023
 $3,897,130
Provision for loan and lease losses 99,606
 2,561,500
 
 2,661,106
 89,962
 2,200,870
 
 2,290,832
Other(1)
 356
 5,283
 
 5,639
Charge-offs (144,002) (4,865,244) 
 (5,009,246) (185,035) (5,364,673) (275) (5,549,983)
Recoveries 37,999
 2,401,613
 
 2,439,612
 53,819
 2,954,391
 
 3,008,210
Charge-offs, net of recoveries (106,003) (2,463,631) 
 (2,569,634) (131,216) (2,410,282) (275) (2,541,773)
ALLL, end of period $443,796
 $3,420,756
 $47,023
 $3,911,575
 $399,829
 $3,199,612
 $46,748
 $3,646,189
Reserve for unfunded lending commitments, beginning of period $121,612
 $806
 $
 $122,418
 $89,472
 $6,028
 $
 $95,500
Release of reserve for unfunded lending commitments (10,112) (500) 
 (10,612)
(Release of) / Provision for reserve for unfunded lending commitments 1,321
 (136) 
 1,185
Loss on unfunded lending commitments (2,695) 
 
 (2,695) (4,859) 
 
 (4,859)
Reserve for unfunded lending commitments, end of period 108,805
 306
 
 109,111
 85,934
 5,892
 
 91,826
Total ACL, end of period $552,601
 $3,421,062
 $47,023
 $4,020,686
 $485,763
 $3,205,504
 $46,748
 $3,738,015
Ending balance, individually evaluated for impairment(2)
 $102,326
 $1,751,828
 $
 $1,854,154
Ending balance, individually evaluated for impairment(1)
 $50,307
 $935,086
 $
 $985,393
Ending balance, collectively evaluated for impairment 341,470
 1,668,928
 47,023
 2,057,421
 349,525
 2,264,523
 46,748
 2,660,796
                
Financing receivables:        
Financing receivables:(2)
        
Ending balance $39,315,888
 $43,947,450
 $
 $83,263,338
 $41,151,009
 $52,974,654
 $
 $94,125,663
Ending balance, evaluated under the FVO or lower of cost or fair value 149,177
 2,420,155
 
 2,569,332
 116,293
 1,376,911
 
 1,493,204
Ending balance, individually evaluated for impairment(1)
 593,585
 6,586,222
 
 7,179,807
 342,295
 4,225,331
 
 4,567,626
Ending balance, collectively evaluated for impairment 38,573,126
 34,941,073
 
 73,514,199
 40,692,421
 47,372,412
 
 88,064,833
(1)Includes transfers in for the period ending December 31, 2017 related to the contribution of SFS to SHUSA.
(2)Consists of loans in TDR status.
(2) Contains LHFS of $1.4 billionfor the year ended December 31, 2019.


149119




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

 Year Ended December 31, 2016 Year Ended December 31, 2018
(in thousands) Commercial Consumer Unallocated Total Commercial Consumer Unallocated Total
ALLL, beginning of period $456,812
 $2,742,088
 $47,245
 $3,246,145
 $443,796
 $3,504,068
 $47,023
 $3,994,887
Provision for loan and lease losses 152,112
 2,852,730
 (222) 3,004,620
 45,897
 2,306,896
 
 2,352,793
Charge-offs (245,399) (4,720,135) 
 (4,965,534) (108,750) (4,974,547) 
 (5,083,297)
Recoveries 86,312
 2,442,921
 
 2,529,233
 60,140
 2,572,607
 
 2,632,747
Charge-offs, net of recoveries (159,087) (2,277,214) 
 (2,436,301) (48,610) (2,401,940) 
 (2,450,550)
ALLL, end of period $449,837
 $3,317,604
 $47,023
 $3,814,464
 $441,083
 $3,409,024
 $47,023
 $3,897,130
        
Reserve for unfunded lending commitments, beginning of period $148,207
 $814
 $
 $149,021
 $103,835
 $5,276
 $
 $109,111
Provision for / (Release of) unfunded lending commitments (24,887) (8) 
 (24,895)
Release of unfunded lending commitments (13,647) 752
 
 (12,895)
Loss on unfunded lending commitments (1,708) 
 
 (1,708) (716) 
 
 (716)
Reserve for unfunded lending commitments, end of period 121,612
 806
 
 122,418
 89,472
 6,028
 
 95,500
Total ACL, end of period $571,449
 $3,318,410
 $47,023
 $3,936,882
 $530,555
 $3,415,052
 $47,023
 $3,992,630
Ending balance, individually evaluated for impairment(1)
 $98,596
 $1,520,375
 $
 $1,618,971
 $94,120
 $1,457,174
 $
 $1,551,294
Ending balance, collectively evaluated for impairment 351,241
 1,797,229
 47,023
 2,195,493
 346,963
 1,951,850
 47,023
 2,345,836
                
Financing receivables:        
Financing receivables:(2)
        
Ending balance $44,561,193
 $43,844,900
 $
 $88,406,093
 $40,381,758
 $47,947,388
 $
 $88,329,146
Ending balance, evaluated under the FVO or lower of cost or fair value(1)
 121,065
 2,482,595
 
 2,603,660
Ending balance, evaluated under the FVO or lower of cost or fair value 
 1,393,476
 
 1,393,476
Ending balance, individually evaluated for impairment(1)
 666,386
 5,795,366
 
 6,461,752
 444,031
 5,779,998
 
 6,224,029
Ending balance, collectively evaluated for impairment 43,773,742
 35,566,939
 
 79,340,681
 39,937,727
 40,773,914
 
 80,711,641
(1)Consists of loans in TDR status.
         
  Year Ended December 31, 2015
(in thousands) Commercial Consumer Unallocated Total
ALLL, beginning of period $413,885
 $1,329,063
 $34,941
 $1,777,889
Provision for loan losses 152,944
 3,899,813
 12,304
 4,065,061
Other(1)
 
 (27,117) 
 (27,117)
Charge-offs (175,234) (4,489,848) 
 (4,665,082)
Recoveries 65,217
 2,030,177
 
 2,095,394
Charge-offs, net of recoveries (110,017) (2,459,671) 
 (2,569,688)
ALLL, end of period $456,812
 $2,742,088
 $47,245
 $3,246,145
         
Reserve for unfunded lending commitments, beginning of period $133,002
 $1,001
 $
 $134,003
Provision for unfunded lending commitments 14,756
 (74) 
 14,682
Loss on unfunded lending commitments 449
 (113) 
 336
Reserve for unfunded lending commitments, end of period 148,207
 814
 
 149,021
Total ACL end of period $605,019
 $2,742,902
 $47,245
 $3,395,166
         
Ending balance, individually evaluated for impairment(2)
 $54,836
 $911,364
 $
 $966,200
Ending balance, collectively evaluated for impairment 401,976
 1,830,724
 47,245
 2,279,945
         
Financing receivables:        
Ending balance $46,536,277
 $43,679,576
 $
 $90,215,853
Ending balance, evaluated under the FVO or lower of cost or fair value(1)
 86,399
 3,432,322
 
 3,518,721
Ending balance, individually evaluated for impairment(2)
 504,919
 4,473,320
 
 4,978,239
Ending balance, collectively evaluated for impairment 45,944,959
 35,773,934
 
 81,718,893
(1)The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1 billion of RICs as held-for-sale during the year.
(2)ConsistsContains LHFS of loans in TDR status.$1.3 billion for the year ended December 31, 2018.

  Year Ended December 31, 2017
(in thousands) Commercial Consumer Unallocated Total
ALLL, beginning of period $449,837
 $3,317,604
 $47,023
 $3,814,464
Provision for loan losses 99,606
 2,670,950
 
 2,770,556
Other(1)
 356
 5,283
 
 5,639
Charge-offs (144,002) (4,891,383) 
 (5,035,385)
Recoveries 37,999
 2,401,614
 
 2,439,613
Charge-offs, net of recoveries (106,003) (2,489,769) 
 (2,595,772)
ALLL, end of period $443,796
 $3,504,068
 $47,023
 $3,994,887
Reserve for unfunded lending commitments, beginning of period $116,866
 $5,552
 $
 $122,418
Provision for unfunded lending commitments (10,336) (276) 
 (10,612)
Loss on unfunded lending commitments (2,695) 
 
 (2,695)
Reserve for unfunded lending commitments, end of period 103,835
 5,276
 
 109,111
Total ACL end of period $547,631
 $3,509,344
 $47,023
 $4,103,998
Ending balance, individually evaluated for impairment(2)
 $102,326
 $1,824,640
 $
 $1,926,966
Ending balance, collectively evaluated for impairment 341,470
 1,679,428
 47,023
 2,067,921
         
Financing receivables:(3)
        
Ending balance $39,315,888
 $43,997,279
 $
 $83,313,167
Ending balance, evaluated under the FVO or lower of cost or fair value(1)
 149,177
 2,420,155
 
 2,569,332
Ending balance, individually evaluated for impairment(2)
 593,585
 6,652,949
 
 7,246,534
Ending balance, collectively evaluated for impairment 38,573,126
 34,924,175
 
 73,497,301
(1) Includes transfers in for the period ending December 31, 2017 related to the contribution of SFS to SHUSA.
(2) Consists of loans in TDR status.
(3) Contains LHFS of $2.5 billion for the year ended December 31, 2017.

150120




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

The following table presents the activity in the allowance for loan losses for the RICs acquired in the Change in Control and those originated by SC subsequent to the Change in Control.

 Year ended
 December 31, 2017
(in thousands)Purchased
Originated
Total
ALLL, beginning of period$559,092
 $2,538,127
 $3,097,219
Provision for loan and lease losses181,698
 2,222,710
 2,404,408
Charge-offs(606,898) (4,102,110) (4,709,008)
Recoveries250,275
 2,120,317
 2,370,592
Charge-offs, net of recoveries(356,623) (1,981,793) (2,338,416)
ALLL, end of period$384,167
 $2,779,044
 $3,163,211
 Year ended
 December 31, 2016
(in thousands)Purchased Originated Total
ALLL, beginning of period$590,807
 $1,891,989
 $2,482,796
Provision for loan and lease losses309,664
 2,459,588
 2,769,252
Charge-offs(1,024,882) (3,539,153) (4,564,035)
Recoveries683,503
 1,725,703
 2,409,206
Charge-offs, net of recoveries(341,379) (1,813,450) (2,154,829)
ALLL, end of period$559,092
 $2,538,127
 $3,097,219
 Year ended
 December 31, 2015
(in thousands)Purchased Originated Total
ALLL, beginning of period$963
 $709,024
 $709,987
Provision for loan and lease losses1,106,462
 2,313,825
 3,420,287
Other(1)
(27,117) 
 (27,117)
Charge-offs(1,516,951) (2,035,878) (3,552,829)
Recoveries1,027,450
 905,018
 1,932,468
Charge-offs, net of recoveries(489,501) (1,130,860) (1,620,361)
ALLL, end of period$590,807
 $1,891,989
 $2,482,796
(1)The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1 billion of RICs as held-for-sale during the first quarter of 2015.

Refer to Note 19 for discussion of contingencies and possible losses related to the impact of hurricane activity in regions where the Company has lending activities.


151




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

Non-accrual loans by Class of Financing Receivable

The recorded investment in non-accrual loans disaggregated by class of financing receivables and other non-performing assets is summarized as follows:
(in thousands) December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
    
Non-accrual loans:        
Commercial:        
CRE:    
Corporate banking $84,072
 $104,879
Middle market commercial real estate 54,783
 71,264
Santander real estate capital 381
 3,077
Commercial and industrial 230,481
 182,368
CRE $83,117
 $88,500
C&I 153,428
 189,827
Multifamily 11,348
 8,196
 5,112
 13,530
Other commercial 83,468
 11,097
 31,987
 72,841
Total commercial loans 464,533
 380,881
 273,644
 364,698
Consumer:        
Residential mortgages 265,436
 287,140
 134,957
 216,815
Home equity loans and lines of credit 134,162
 120,065
 107,289
 115,813
RICs and auto loans - originated 1,816,226
 1,045,587
RICs - purchased 256,617
 284,486
RICs and auto loans 1,643,459
 1,545,322
Personal unsecured loans 2,366
 5,201
 2,212
 3,602
Other consumer 10,657
 12,694
 11,491
 9,187
Total consumer loans 2,485,464
 1,755,173
 1,899,408
 1,890,739
Total non-accrual loans 2,949,997
 2,136,054
 2,173,052
 2,255,437
        
Other real estate owned ("OREO") 130,777
 116,705
OREO 66,828
 107,868
Repossessed vehicles 210,692
 231,746
 212,966
 224,046
Foreclosed and other repossessed assets 2,190
 3,838
 4,218
 1,844
Total OREO and other repossessed assets 343,659
 352,289
 284,012
 333,758
Total non-performing assets $3,293,656
 $2,488,343
 $2,457,064
 $2,589,195

Age Analysis of Past Due Loans

The servicing practices for RICs originated after January 1, 2017 changed such that there isCompany generally considers an increase in the minimum payment requirements. While this change does impact the measurement of customer delinquencies, we concluded that it does not have a significant impact on the amount or timing of the recognition of credit losses and allowance for loan losses. For reporting of past due loans, a payment ofaccount delinquent when an obligor fails to pay substantially all (defined as 90% or more of the amount due is considered to meet the contractual requirements. For certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90%) of the scheduled payment regardless of which origination channel through whichby the receivable was originated. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time.

152




NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)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:
  December 31, 2017
(in thousands) 30-89
Days Past
Due
 90
Days or Greater
 Total
Past Due
 Current 
Total
Financing
Receivables
(1)
 Recorded Investment
> 90 Days and
Accruing
Commercial:            
CRE:            
Corporate banking $14,396
 $46,704
 $61,100
 $3,372,871
 $3,433,971
 $
Middle market commercial real estate 5,501
 53,820
 59,321
 4,761,406
 4,820,727
 
Santander real estate capital 5,277
 
 5,277
 1,019,250
 1,024,527
 
Commercial and industrial 49,584
 75,924
 125,508
 14,461,981
 14,587,489
 
Multifamily 3,562
 2,990
 6,552
 8,267,883
 8,274,435
 
Other commercial 34,021
 3,359
 37,380
 7,137,359
 7,174,739
 
Consumer:            
Residential mortgages 217,558
 210,777
 428,335
 8,628,600
 9,056,935
 
Home equity loans and lines of credit 50,919
 91,975
 142,894
 5,764,839
 5,907,733
 
RICs and auto loans - originated 3,405,721
 327,045
 3,732,766
 20,449,706
 24,182,472
 
RICs and auto loans - purchased 452,235
 40,516
 492,751
 1,342,117
 1,834,868
 
Personal unsecured loans 85,394
 105,054
 190,448
 2,157,319
 2,347,767
 96,461
Other consumer 24,879
 14,220
 39,099
 578,576
 617,675
 
Total $4,349,047
 $972,384
 $5,321,431
 $77,941,907
 $83,263,338
 $96,461
(1)Financing receivables include LHFS.
 As of:
  December 31, 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 $51,472
 $65,290
 $116,762
 $8,351,261
 $8,468,023
 $
C&I(1)
 55,957
 84,640
 140,597
 16,510,391
 16,650,988
 
Multifamily 10,456
 3,704
 14,160
 8,627,044
 8,641,204
 
Other commercial 61,973
 6,352
 68,325
 7,322,469
 7,390,794
 
Consumer:            
Residential mortgages(2)
 154,978
 128,578
 283,556
 8,848,971
 9,132,527
 
Home equity loans and lines of credit 45,417
 75,972
 121,389
 4,648,955
 4,770,344
 
RICs and auto loans 4,364,110
 404,723
 4,768,833
 31,687,914
 36,456,747
 
Personal unsecured loans(3)
 85,277
 102,572
 187,849
 2,110,803
 2,298,652
 93,102
Other consumer 11,375
 7,479
 18,854
 297,530
 316,384
 
Total $4,841,015
 $879,310
 $5,720,325
 $88,405,338
 $94,125,663
 $93,102
 As of
  December 31, 2016
(in thousands) 30-89
Days Past
Due
 90
Days or Greater
 Total
Past Due
 Current 
Total
Financing
Receivable
(1)
 Recorded
Investment
> 90 Days and
Accruing
Commercial:            
CRE:            
Corporate banking $14,973
 $40,170
 $55,143
 $3,637,966
 $3,693,109
 $
Middle market commercial real estate 6,967
 57,520
 64,487
 5,116,085
 5,180,572
 
Santander real estate capital 177
 
 177
 1,238,185
 1,238,362
 
Commercial and industrial 46,104
 33,800
 79,904
 18,853,163
 18,933,067
 
Multifamily 7,133
 2,339
 9,472
 8,674,208
 8,683,680
 
Other commercial 45,379
 2,590
 47,969
 6,784,434
 6,832,403
 1
Consumer:             
Residential mortgages 230,850
 224,790
 455,640
 7,782,525
 8,238,165
 
Home equity loans and lines of credit 37,209
 75,668
 112,877
 5,888,315
 6,001,192
 
RICs and auto loans - originated 3,092,841
 296,085
 3,388,926
 19,640,740
 23,029,666
 
RICs and auto loans - purchased 800,993
 71,273
 872,266
 2,596,537
 3,468,803
 
Personal unsecured loans 89,524
 103,698
 193,222
 2,118,474
 2,311,696
 93,845
Other consumer 31,980
 20,386
 52,366
 743,012
 795,378
 
Total $4,404,130
 $928,319
 $5,332,449
 $83,073,644
 $88,406,093
 $93,846
(1)Financing receivables include LHFS.
(1) C&I loans includes $116.3 million of LHFS at December 31, 2019.
(2) Residential mortgages includes $296.8 million of LHFS at December 31, 2019.
(3) Personal unsecured loans includes $1.0 billion of LHFS at December 31, 2019.

153121




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

 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 4,318,619
 441,742
 4,760,361
 24,574,859
 29,335,220
 
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.

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:
 December 31, 2017 December 31, 2019
(in thousands) 
Recorded Investment(1)
 UPB Related
Specific
Reserves
 Average
Recorded
Investment
 
Recorded Investment(1)
 UPB Related
Specific Reserves
 Average
Recorded Investment
With no related allowance recorded:                
Commercial:                
CRE:        
Corporate banking $90,061
 $115,410
 $
 $89,538
Middle market commercial real estate 36,345
 59,432
 
 48,216
Santander real estate capital 
 
 
 1,309
Commercial and industrial 82,541
 96,324
 
 75,338
CRE $87,252
 $92,180
 $
 $83,154
C&I 24,816
 26,814
 
 25,338
Multifamily 9,887
 10,838
 
 10,129
 2,927
 3,807
 
 10,594
Other commercial 767
 911
 
 903
 2,190
 2,205
 
 4,769
Consumer:                
Residential mortgages 107,320
 128,458
 
 141,195
 99,815
 149,887
 
 122,357
Home equity loans and lines of credit 52,397
 54,421
 
 50,635
 37,496
 39,675
 
 41,783
RICs and auto loans - originated 
 
 
 
RICs and auto loans - purchased 16,192
 20,783
 
 25,283
Personal unsecured loans(2)
 30,992
 30,992
 
 28,500
RICs and auto loans 3,201
 3,222
 
 5,132
Personal unsecured loans 10
 10
 
 7
Other consumer 9,557
 13,055
 
 14,446
 2,995
 2,995
 
 3,293
With an allowance recorded:                
Commercial:                
CRE:        
Corporate banking 64,097
 80,058
 13,177
 72,269
Middle market commercial real estate 25,243
 29,332
 4,295
 37,757
Santander real estate capital 8,340
 8,340
 1,051
 8,466
Commercial and industrial 176,769
 200,382
 59,696
 196,674
Multifamily 6,201
 6,201
 313
 4,566
CRE 59,778
 88,746
 10,725
 59,320
C&I 130,209
 147,959
 35,596
 155,194
Other commercial 77,712
 77,772
 23,794
 42,465
 22,587
 27,669
 3,986
 41,251
Consumer:                
Residential mortgages 322,092
 392,833
 40,963
 303,361
 141,093
 238,571
 13,006
 197,529
Home equity loans and lines of credit 64,827
 77,435
 4,770
 57,345
 33,498
 39,406
 3,182
 47,019
RICs and auto loans - originated 4,788,299
 4,847,929
 1,350,022
 4,029,808
RICs and auto loans - purchased 1,166,476
 1,318,306
 347,663
 1,511,212
RICs and auto loans 3,844,618
 3,846,003
 913,642
 4,544,652
Personal unsecured loans 16,477
 16,661
 6,259
 16,668
 14,716
 14,947
 4,282
 15,449
Other consumer 11,592
 15,290
 2,151
 12,343
 51,090
 54,061
 974
 30,575
Total:                
Commercial $577,963
 $685,000
 $102,326
 $587,630
 $329,759
 $389,380
 $50,307
 $379,620
Consumer 6,586,221
 6,916,163
 1,751,828
 6,190,796
 4,228,532
 4,388,777
 935,086
 5,007,796
Total $7,164,184
 $7,601,163
 $1,854,154
 $6,778,426
 $4,558,291
 $4,778,157
 $985,393
 $5,387,416
(1)Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, and net of discounts as well as purchase accounting adjustments.
(2)Includes LHFS.discounts.

154122




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

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

 December 31, 2016 December 31, 2018
(in thousands) 
Recorded Investment(1)
 UPB Related
Specific
Reserves
 Average
Recorded
Investment
 
Recorded Investment(1)
 UPB Related
Specific
Reserves
 Average
Recorded
Investment
With no related allowance recorded:                
Commercial:                
CRE:        
Corporate banking $89,014
 $106,212
 $
 $93,495
Middle market commercial real estate 60,086
 83,173
 
 69,206
Santander real estate capital 2,618
 2,618
 
 2,717
Commercial and industrial 68,135
 74,034
 
 40,163
CRE $79,056
 $88,960
 $
 $102,731
C&I 25,859
 36,067
 
 54,200
Multifamily 10,370
 11,127
 
 9,919
 18,260
 19,175
 
 14,074
Other commercial 1,038
 1,038
 
 639
 7,348
 7,380
 
 4,058
Consumer:                
Residential mortgages 175,070
 222,142
 
 160,373
 144,899
 201,905
 
 126,110
Home equity loans and lines of credit 48,872
 48,872
 
 39,976
 46,069
 48,021
 
 49,233
RICs and auto loans - originated 
 
 
 8
RICs and auto loans - purchased 34,373
 44,296
 
 55,036
Personal unsecured loans(2)
 26,008
 26,008
 
 19,437
RICs and auto loans 7,062
 9,072
 
 11,628
Personal unsecured loans 4
 4
 
 42
Other consumer 19,335
 23,864
 
 15,915
 3,591
 3,591
 
 6,574
With an allowance recorded:                
Commercial:                
Corporate banking 80,440
 85,309
 21,202
 71,667
Middle market commercial real estate 50,270
 66,059
 12,575
 44,158
Santander real estate capital 8,591
 8,591
 890
 4,623
Commercial and industrial 216,578
 232,204
 57,855
 166,999
CRE 58,861
 66,645
 6,449
 78,271
C&I 180,178
 197,937
 66,329
 178,474
Multifamily 2,930
 2,930
 876
 4,292
 
 
 
 3,101
Other commercial 7,218
 7,218
 5,198
 5,217
 59,914
 59,914
 21,342
 68,813
Consumer:                
Residential mortgages 284,630
 324,188
 38,764
 303,845
 253,965
 289,447
 29,156
 288,029
Home equity loans and lines of credit 49,862
 63,775
 3,467
 60,855
 60,540
 71,475
 4,272
 62,684
RICs and auto loans - originated 3,271,316
 3,332,297
 997,169
 2,298,646
RICs and auto loans - purchased 1,855,948
 2,097,520
 471,687
 2,155,028
RICs and auto loans 5,244,685
 5,346,013
 1,415,709
 5,633,094
Personal unsecured loans 16,858
 17,126
 6,846
 9,349
 16,182
 16,446
 6,875
 16,330
Other consumer 13,093
 17,253
 2,442
 15,878
 10,060
 13,275
 1,162
 10,826
Total:                
Commercial $597,288
 $680,513
 $98,596
 $513,095
 $429,476
 $476,078
 $94,120
 $503,722
Consumer 5,795,365
 6,217,341
 1,520,375
 5,134,346
 5,787,057
 5,999,249
 1,457,174
 6,204,550
Total $6,392,653
 $6,897,854
 $1,618,971
 $5,647,441
 $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, and net of discounts as well as purchase accounting adjustments.
(2)Includes LHFS.discounts.

The Company recognized interest income not including the impact of purchase accounting adjustments, of $657.5$585.5 million for the year ended December 31, 2016 on approximately $5.2$3.6 billion of TDRs that were in performing status as of December 31, 2016.2019 and $761.0 million on approximately $5.1 billion of TDRs that were in performing status as of December 31, 2018.

Commercial Lending Asset Quality IndicatorsConsumer Loan TDRs

Commercial credit quality disaggregated by classThe majority of financing receivablesthe Company's TDR balance is summarized according to standard regulatory classifications as follows:comprised of RICs and auto loans. The terms of the modifications for the RIC and auto loan portfolio generally include one or a combination of: a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

PASS. AssetIn accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICs under which the consumer is well-protected byallowed to defer a maximum of three payments per event to the current net worth and paying capacityend of the obligorloan. More than 90% of deferrals granted are for two payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the life of the loan for all automobile RICs is eight, while some marine and RV contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or guarantors,more, or deferred at least twice, as TDRs. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs.

RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans on nonaccrual status, interest income is recognized on a cash basis. For TDR loans on nonaccrual status, the accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due.

At the time a deferral is granted on a RIC, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any or by the fair value less costs to acquire and sell any underlying collateral in a timely manner.other account.

155104




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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the ALLL 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 ALLL and related provision for loan and lease losses.

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.

Consumer TDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status at the time of modification, and returned to accrual when they have made six consecutive on-time payments. In addition to those identified as TDRs above, loans discharged under Chapter 7 bankruptcy are considered TDRs and collateral-dependent, regardless of delinquency status. These loans are written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

TDR Impact to ALLL

The ALLL is established to recognize losses in funded loans that are probable and can be reasonably estimated. Prior to loans being placed in TDR status, the Company generally measures its allowance under a loss contingency methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.

Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence using the effective interest rate or fair value of collateral (less costs to sell). The amount of the required valuation allowance 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 subsequently defaulted loans 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 the fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

Impaired loans

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 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

The Company considers all of its TDRs and all of its non-accrual commercial loans in excess of $1 million to be impaired as of the balance sheet date. The Company may perform an impairment analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant.

105




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

The Company measures impairment on impaired loans based on the present value of expected future cash flows discounted at the loan's original effective interest rate, except that, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral, less the costs to sell, if the loan is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment and the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

LHFS

LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Generally, residential loans are valued on an aggregate portfolio basis, and commercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Miscellaneous income, net. For residential mortgages for which the FVO is selected, direct loan origination fees are recorded in Miscellaneous income, net at origination.

All other LHFS which the Company does not have the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the lower of cost or fair value. When loans are transferred from HFI, the Company will recognize a charge-off to the ALLL, if warranted under the Company’s charge off policies. Any excess ALLL for the transferred loans is reversed through provision expense. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneous income, net as lower of cost or market adjustments.

Leases (as Lessor)

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease.

Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired in a business combination are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.

Lease payments due from customers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed if a delinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.

106




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

Under the accounting for impairment or disposal of long-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and the proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of leased assets are included in Miscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. No impairment for leased assets was recognized during the years ended December 31, 2019, 2018, or 2017.

Leases (as Lessee)

Operating lease ROU assets and lease liabilities are recognized upon lease commencement based on the present value of lease payments over the lease term, discounted at the Company's estimated rate of interest for a collateralized borrowing for a similar term. The lease term includes options to extend or terminate a lease when the Company considers it reasonably certain that such options will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Premises and Equipment

Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the straight-line method. Estimated useful lives are as follows:
Office buildings10 to 50 years
Leasehold improvements(1)
10 to 30 years
Software(2)
3 to 7 years
Furniture, fixtures and equipment3 to 10 years
Automobiles5 years
(1) Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the remaining term of the leases.
(2) The standard depreciable period for software is three years. However, for certain software implementation projects, a seven-year period is utilized.

Expenditures for maintenance and repairs are charged to Occupancy and equipment expense in the Consolidated Statements of Operations as incurred.

Equity Method Investments

The Company uses the equity method for general and limited partnership interests, limited liability companies and other unconsolidated equity investments in which the Company is considered to have significant influence over the operations of the investee. Under the equity method, the Company records its equity ownership share of net income or loss of the investee in "Other miscellaneous expenses." Investments accounted for under the equity method of accounting above are included in the caption "Other Assets" on the Consolidated Balance Sheets.

Goodwill and Intangible Assets

Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the acquisition method. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis at October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. A reporting unit is an operating segment or one level below.

An entity's goodwill impairment quantitative analysis is required to be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, in which case no further analysis is required. An entity has an unconditional option to bypass the preceding qualitative assessment (often referred to as step 0) for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test.

107




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

The quantitative test includes a comparison of the fair value of each reporting unit to its respective carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as the excess of carrying value over fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit and cannot subsequently be reversed even if the fair value of the reporting unit recovers.

The Company's intangible assets consist of assets purchased or acquired through business combinations, including trade names and dealer networks. Certain intangible assets are amortized over their useful lives. The Company evaluates identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.

MSRs

The Company has elected to measure most of its residential MSRs at fair value to be consistent with the risk management strategy to hedge changes in the fair value of these assets. The fair value of residential MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions. Assumptions incorporated into the residential MSRs valuation model reflect management's best estimate of factors that a market participant would use in valuing the residential MSRs. Although sales of residential MSRs do occur, residential MSRs do not trade in an active market with readily observable prices. Those MSRs not accounted for at fair value are accounted for at amortized cost, less impairment.

As a benchmark for the reasonableness of the residential MSRs' fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own discounted cash flow DCF calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. Management compares the internally-developed residential MSR values to the ranges of values received from Brokers. If the residential MSRs fair value falls outside the Brokers' ranges, management will assess whether a valuation adjustment is warranted. Residential MSRs value is considered to represent a reasonable estimate of fair value.

See Note 16 to these Consolidated Financial Statements for detail on MSRs.

BOLI

BOLI represents the cash surrender value of life insurance policies for certain current and former employees who have provided positive consent to allow the Bank to be the beneficiary of such policies. Increases in the net cash surrender value of the policies, as well as insurance proceeds received, are recorded in non-interest income, and are not subject to income taxes.

OREO and Other Repossessed Assets

OREO and other repossessed assets consist of properties, vehicles, and other assets acquired by, or in lieu of, foreclosure or repossession in partial or total satisfaction of NPLs, including RICs and leases. Assets obtained in satisfaction of a loan are recorded at the estimated fair value minus estimated costs to sell based upon the asset's appraisal value at the date of transfer. The excess of the carrying value of the loan over the fair value of the asset minus estimated costs to sell are charged to the ALLL at the initial measurement date. Subsequent to the acquisition date, OREO and repossessed assets are carried at the lower of cost or estimated fair value, net of estimated cost to sell. Any declines in the fair value of OREO and repossessed assets below the initial cost basis are recorded through a valuation allowance with a charge to non-interest income. Increases in the fair value of OREO and repossessed assets net of estimated selling costs will reverse the valuation allowance, but only up to the cost basis which was established at the initial measurement date. Costs of holding the assets are recorded as operating expenses, except for significant property improvements, which are capitalized to the extent that the carrying value does not exceed the estimated fair value. The Company generally begins vehicle repossession activity once a customer's account becomes 60 days past due. The customer has an opportunity to redeem the repossessed vehicle by paying all outstanding balances, including finance changes and fees. Any vehicles not redeemed are sold at auction. OREO and other repossessed assets are recorded within Other assets on the Consolidated Balance Sheets.

108




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

Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity, and credit risk. Derivative financial instruments are also used to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities, and often sells derivative products to commercial loan customers to hedge interest rate risk associated with loans made by the Company. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes for its own account. Derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of each derivative financial instrument depends on whether it has been designated and qualifies as a hedge for accounting purposes, as well as the type of hedging relationship identified.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk such as interest rate risk are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The Company formally documents the relationships of qualifying hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.

Fair value hedges that are highly effective are accounted for by recording the change in the fair value of the derivative instrument and the related hedged asset, liability or firm commitment on the Consolidated Balance Sheets, with the corresponding income or expense recorded in the Consolidated Statements of Operations. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as an other asset or other liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense associated with the hedged asset or liability.

Cash flow hedges that are highly effective are accounted for by recording the fair value of the derivative instrument on the Consolidated Balance Sheets as an asset or liability, with a corresponding charge or credit for the change in the fair value of the derivative, net of tax, recorded in accumulated OCI within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated OCI to the Consolidated Statements of Operations in the period or periods the hedged transaction affects earnings. In the case in which certain cash flow hedging relationships have been terminated, the Company continues to defer the net gain or loss in accumulated OCI and reclassifies it into interest expense as the future cash flows occur, unless it becomes probable that the future cash flows will not occur.

We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; the derivative is de-designated as a fair value or cash flow hedge; or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If we determine that the derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value, with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

Changes in the fair value of derivatives not designated in hedging relationships are recognized immediately in the Consolidated Statements of Operations. Derivatives are classified in the Consolidated Balance Sheets as "Other assets" or "Other liabilities," as applicable. See Note 14 to the Consolidated Financial Statements for further discussion.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. On December 22, 2017, the TCJA was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets.

109




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

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws of the U.S., its states and municipalities, and abroad. 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. Interest and penalties on income tax payments are included within Income tax provision on the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. See Note 15 to the Consolidated Financial Statements for details on the Company's income taxes.

Stock-Based Compensation

The Company, through Santander, sponsors stock plans under which incentive and non-qualified stock options and non-vested stock may be granted periodically to certain employees. The Company recognizes compensation expense related to stock options and non-vested stock awards based upon the fair value of the awards on the date of the grant, which is charged to earnings over the requisite service period (i.e., the vesting period). The impact of the forfeiture of awards is recognized as forfeitures occur. Amounts in the Consolidated Statements of Operations associated with the Company's stock compensation plan were negligible in all years presented.

Guarantees

Certain off-balance sheet financial instruments of the Company meet the definition of a guarantee that require the Company to perform and make future payments in the event specified triggering events or conditions were to occur over the term of the guarantee. In accordance with the applicable accounting rules, it is the Company’s accounting policy to recognize a liability at inception associated with such a guarantee at the greater of the fair value of the guarantee or the Company's estimate of the contingent liability arising from the guarantee. Subsequent to initial recognition, the liability is adjusted based on the passage of time to perform under the guarantee and the changes to the probabilities of occurrence related to the specified triggering events or conditions that would require the Company to perform on the guarantee.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, and records the identifiable assets, liabilities and any NCI of the acquired business at their acquisition date fair values. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Any changes in the estimated acquisition date fair values of the net assets recorded prior to the finalization of a more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to the Company’s Consolidated Financial Statements will be adjusted retrospectively. All acquisition related costs are expensed as incurred.

The results of operations of the acquired companies are recorded in the Consolidated Statements of Operations from the date of acquisition. The application of business combination principles, including the determination of the fair value of the net assets acquired, requires the use of significant estimates and assumptions.

Revenue Recognition

The Company primarily earns interest and non-interest income from various sources, including:
Lending (interest income and loan fees)
Investment securities
Loan sales and servicing
Finance leases
BOLI
Depository services
Commissions and trailer fees
Interchange income, net.
Underwriting service Fees
Asset and wealth management fees

110




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

Lending and Investment Securities

The principal source of revenue is interest income from loans and investment securities. Interest income is recognized on an accrual basis primarily according to non-discretionary formulas in written contracts, such as loan agreements or securities contracts. Revenue earned on interest-earning assets, including amortization of deferred loan fees and origination costs and the accretion of discounts recognized on acquired or purchased loans, is recognized based on the constant effective yield of such interest-earning assets.

Gains or losses on sales of investment securities are recognized on the trade date.

Loan Sales and Servicing

The Company recognizes revenue from servicing commercial mortgages and consumer loans as earned. Mortgage banking income, net includes fees associated with servicing loans for third parties based on the specific contractual terms and changes in the fair value of MSRs. Gains or losses on sales of residential mortgage, multifamily and home equity loans are included within mortgage banking revenues and are recognized when the sale is complete.

Finance Leases

Income from finance leases is recognized as part of interest income over the term of the lease using the constant effective yield method, while income arising from operating leases is recognized as part of other non-interest income over the term of the lease on a straight-line basis.

BOLI

Income from BOLI represents increases in the cash surrender value of the policies, as well as insurance proceeds and interest.

Depository services

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

Commissions and trailer fees

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

Interchange income, net

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

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

111




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

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

Underwriting service fees

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

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

Asset and wealth management fees

Asset and wealth management fees includes fee income generated from discretionary investment management and non-discretionary investment advisory contracts with customers. Discretionary investment management fees are earned for the management of the assets in the customer's account and are recognized as earned and charged to the customer on a quarterly basis. Non-discretionary investment advisory fees are earned for providing investment advisory services to customers, such as recommending the re-balancing or restructuring of the assets in the customer’s account. The investment advisory fee is recognized as earned and charged to the customer on a quarterly basis. The fee for the discretionary and nondiscretionary contracts is based on a percentage of the average assets included in the customer’s account.

Fair Value Measurements

The Company uses fair value measurements to estimate the fair value of certain assets and liabilities for both measurement and disclosure purposes. 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, 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.

When measuring the fair value of a liability, the Company assumes that the transfer will not affect the nonperformance risk associated with the liability. The Company considers the effect of the credit risk on the fair value for any period in which fair value is measured. There are three valuation approaches for measuring fair value: the market approach, the income approach and the cost approach. Selecting the appropriate technique for valuing a particular asset or liability should consider the exit market for the asset or liability, the nature of the asset or liability being measured, and how a market participant would value the same asset or liability. Ultimately, selecting the appropriate valuation method requires significant judgment. These assumptions result in classification of financial instruments into the fair value hierarchy levels 1, 2 and 3 for disclosure purposes.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on the Company's own information or assessment of assumptions used by other market participants in pricing the asset or liability. The unobservable inputs are based on the best and most current information available on the measurement date.

Subsequent Events

The Company evaluated events from the date of the Consolidated Financial Statements on December 31, 2019 through the issuance of these Consolidated Financial Statements, and has determined that there have been no material events that would require recognition in its Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements for the year ended December 31, 2019 other than the transaction disclosed in Note 13 of these Consolidated Financial Statements.

112




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 measured at amortized cost. The amendment introduces a new credit reserving framework known as CECL, which replaces the incurred loss impairment framework in current GAAP with one that reflects expected credit losses over the full expected 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. Additionally, the standard changes the accounting framework for purchased credit-deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it is under the current OTTI framework. The Company adopted the new guidance on January 1, 2020.

The Company established a cross-functional working group for implementation of this standard. Generally, our implementation process included 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 over financial reporting frameworks, and updating accounting policies and procedures. The status of our implementation was periodically presented to the Audit Committee and the Risk Committee. The Company completed multiple parallel model runs to test and refine its current expected credit loss models to satisfy the requirements of the new standard.

The adoption of this standard resulted in the increase in the ACL of approximately $2.5 billion and a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase is based on 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. The standard did not have a material impact on the Company’s other financial instruments. Additionally, we elected to utilize regulatory relief which will permit us to phase in 25 percent of the capital impact of CECL in our calculation of regulatory capital amounts and ratios in 2020, and an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023.

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. The Company adopted the new guidance effective January 1, 2020 and it did not have a material impact on the Company’s business, financial position or results of operations.

In addition to those described in detail above, on January 1, 2020, the Company adopted ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, and it did not have a material impact on the Company's business, financial position, results of operations, or disclosures.




113




NOTE 3. INVESTMENT SECURITIES

Summary of Investments in Debt Securities - AFS and HTM

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities AFS at the dates indicated:
  December 31, 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 $4,086,733
 $4,497
 $(292) $4,090,938
 $1,815,914
 $560
 $(11,729) $1,804,745
Corporate debt securities 139,696
 39
 (22) 139,713
 160,164
 12
 (62) 160,114
ABS 138,839
 1,034
 (1,473) 138,400
 435,464
 3,517
 (2,144) 436,837
State and municipal securities 9
 
 
 9
 16
 
 
 16
MBS:                
GNMA - Residential 4,868,512
 12,895
 (16,066) 4,865,341
 2,829,075
 861
 (85,675) 2,744,261
GNMA - Commercial 773,889
 6,954
 (1,785) 779,058
 954,651
 1,250
 (19,515) 936,386
FHLMC and FNMA - Residential 4,270,426
 14,296
 (30,325) 4,254,397
 5,687,221
 267
 (188,515) 5,498,973
FHLMC and FNMA - Commercial 69,242
 2,665
 (5) 71,902
 51,808
 384
 (537) 51,655
Total investments in debt securities AFS $14,347,346
 $42,380
 $(49,968) $14,339,758
 $11,934,313
 $6,851
 $(308,177) $11,632,987

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities HTM at the dates indicated:
  December 31, 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 $1,948,025
 $11,354
 $(7,670) $1,951,709
 $1,718,687
 $1,806
 $(54,184) $1,666,309
GNMA - Commercial 1,990,772
 20,115
 (5,369) 2,005,518
 1,031,993
 1,426
 (23,679) 1,009,740
Total investments in debt securities HTM $3,938,797
 $31,469
 $(13,039) $3,957,227
 $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 December 31, 2019 and December 31, 2018, the Company had investment securities with an estimated carrying value of $7.5 billion and $6.6 billion, respectively, pledged as collateral, which were comprised of the following: $2.7 billion and $3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the FRB; $3.5 billion and $2.7 billion, respectively, were pledged to secure public fund deposits; $148.5 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; $699.1 million and $423.3 million, respectively, were pledged to deposits with clearing organizations; and $461.9 million and $415.1 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At December 31, 2019 and December 31, 2018, the Company had $46.0 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 Consolidated Balance Sheets.

There were no transfers of securities between AFS and HTM during the year ended December 31, 2019. In 2018, the Company transferred securities with approximately a $1.2 billion carrying value (fair value $1.2 billion) from AFS to HTM. Unrealized holding losses of $29.1 million were retained in OCI at the date of transfer and will be amortized over the remaining lives of the securities.



114




NOTE 3. INVESTMENT SECURITIES (continued)

Contractual Maturity of Investments in Debt Securities

Contractual maturities of the Company’s investments in debt securities AFS at December 31, 2019 were as follows:
             
(in thousands) Due Within One Year Due After 1 Within 5 Years Due After 5 Within 10 Years Due After 10 Years/No Maturity 
Total(1)
 
Weighted Average Yield(2)
U.S Treasuries $3,289,865
 $801,073
 $
 $
 $4,090,938
 1.91%
Corporate debt securities 139,699
 
 14
 
 139,713
 2.60%
ABS 12,234
 63,123
 
 63,043
 138,400
 4.23%
State and municipal securities 
 9
 
 
 9
 7.75%
MBS:            
GNMA - Residential 1,738
 48
 60,710
 4,802,845
 4,865,341
 2.31%
GNMA - Commercial 
 
 
 779,058
 779,058
 2.41%
FHLMC and FNMA - Residential 301
 8,024
 266,204
 3,979,868
 4,254,397
 1.96%
FHLMC and FNMA - Commercial 
 430
 52,298
 19,174
 71,902
 3.00%
Total fair value $3,443,837
 $872,707
 $379,226
 $9,643,988
 $14,339,758
 2.12%
Weighted Average Yield 2.02% 1.87% 2.27% 2.18% 2.12%  
Total amortized cost $3,441,868
 $869,377
 $375,291
 $9,660,810
 $14,347,346
 
(1)The maturities above do not represent the effective duration of the Company's portfolio, since the amounts above are based on contractual maturities and do not contemplate anticipated prepayments.
(2)Yields on tax-exempt securities are calculated on a tax equivalent basis and are based on the statutory federal tax rate.
Contractual maturities of the Company’s investments in debt securities HTM at December 31, 2019 were as follows:
             
(in thousands) Due Within One Year Due After 1 Within 5 Years Due After 5 Within 10 Years Due After 10 Years/No Maturity 
Total(1)
 
Weighted Average Yield(2)
MBS:            
GNMA - Residential $
 $
 $
 $1,951,709
 $1,951,709
 2.26%
GNMA - Commercial 
 
 
 2,005,518
 2,005,518
 2.39%
Total fair value $
 $
 $
 $3,957,227
 $3,957,227
 2.32%
Weighted average yield % % % 2.32% 2.32%  
Total amortized cost $
 $
 $
 $3,938,797
 $3,938,797
  
(1) (2) See corresponding footnotes to the December 31, 2019 "Contractual Maturity of Debt Securities" table above for investments in debt securities AFS.

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 Investments in Debt Securities AFS and HTM

The following table presents the aggregate amount of unrealized losses as of December 31, 2019 and December 31, 2018 on debt securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
  December 31, 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 $200,096
 $(167) $499,883
 $(125) $288,660
 $(315) $914,212
 $(11,414)
Corporate debt securities 110,802
 (22) 
 
 152,247
 (62) 13
 
ABS 27,662
 (44) 47,616
 (1,429) 31,888
 (249) 77,766
 (1,895)
MBS:                
GNMA - Residential 2,053,763
 (6,895) 997,024
 (9,171) 102,418
 (2,014) 2,521,278
 (83,661)
GNMA - Commercial 217,291
 (1,756) 14,300
 (29) 199,495
 (2,982) 622,989
 (16,533)
FHLMC and FNMA - Residential 660,078
 (4,110) 1,344,057
 (26,215) 237,050
 (5,728) 5,236,028
 (182,787)
FHLMC and FNMA - Commercial 
 
 430
 (5) 
 
 21,819
 (537)
Total investments in debt securities AFS $3,269,692
 $(12,994) $2,903,310
 $(36,974) $1,011,758
 $(11,350) $9,394,105
 $(296,827)


115




NOTE 3. INVESTMENT SECURITIES (continued)

The following table presents the aggregate amount of unrealized losses as of December 31, 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:
  December 31, 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 $559,058
 $(2,004) $657,733
 $(5,666) $205,573
 $(4,810) $1,295,554
 $(49,374)
GNMA - Commercial 731,445
 (5,369) 
 
 221,250
 (5,572) 629,847
 (18,107)
Total investments in debt securities HTM $1,290,503
 $(7,373) $657,733
 $(5,666) $426,823
 $(10,382) $1,925,401
 $(67,481)

OTTI

Management evaluates all investments in debt 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 FICO scores and weighted average LTV ratio, rating or scoring, credit ratings and market spreads, as applicable.

The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company has determined that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.

The Company did not record any OTTI related to its investments in debt securities for the years ended December 31, 2019, 2018 or 2017.

Management has concluded that the unrealized losses on its investments in debt securities for which it has not recognized OTTI (which were comprised of 727 individual securities at December 31, 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 Investments in Debt Securities

Proceeds from sales of investments in debt securities and the realized gross gains and losses from those sales were as follows:
  Year Ended December 31,
(in thousands) 2019 2018 2017
Proceeds from the sales of AFS securities $1,423,579
 $1,262,409
 $3,256,378
       
Gross realized gains $9,496
 $5,517
 $22,224
Gross realized losses (3,680) (12,234) (24,668)
OTTI 
 
 
    Net realized gains/(losses) (1)
 $5,816
 $(6,717) $(2,444)
(1)Includes net realized gain/(losses) on trading securities of (0.8) million, $(1.4) million and $(4.2) million for the years ended December 31, 2019, 2018 and 2017, respectively.

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


116




NOTE 3. INVESTMENT SECURITIES (continued)

Other Investments

Other Investments consisted of the following as of:
(in thousands)December 31, 2019 December 31, 2018
FHLB of Pittsburgh and FRB stock $716,615
 $631,239
LIHTC investments 265,271
 163,113
Equity securities not held for trading 12,697
 10,995
Trading securities 1,097
 10
Total $995,680
 $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 year ended December 31, 2019, the Company purchased $298.6 million of FHLB stock at par, and redeemed $212.4 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the year ended December 31, 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 December 31, 2019, with changes in fair value recognized in net income, and consist primarily of 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 SPEs. These loans totaled $53.9 billion at December 31, 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 December 31, 2019 was $1.4 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 $289.0 million as of December 31, 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 16 to these 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 Consolidated Statements of Operations. As of December 31, 2019, the carrying value of the personal unsecured HFS portfolio was $1.0 billion.

During 2019, the Company sold $1.4 billion of performing residential loans to FNMA for a net gain of $7.9 million.

In October 2019, SBNA agreed to sell from its portfolio certain restructured residential mortgage and home equity loans (with approximately $187.0 million of principal balances outstanding) to two unrelated third parties. This transaction settled in the fourth quarter with an immaterial impact on the Consolidated Statements of Operations. The loans were sold with servicing released to the purchasers.

On October 4, 2019, SBNA agreed to sell approximately $768.2 million of equipment finance loans and approximately $74.2 million of operating leases to an unrelated third party. This transaction settled on November 29, 2019, with a gain of $5.6 million on the sale.

117




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

SPECIAL MENTION. Asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may resultInterest 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 deteriorationthe Consolidated Statements of Operations over the contractual life of the repayment prospectsloan 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 December 31, 2019 and December 31, 2018, accrued interest receivable on the Company's loans was $497.7 million and $524.0 million, respectively.

During the years ended December 31, 2019, 2018 and 2017, the Company purchased retail installment contract financial receivables from third-party lenders for $1.1 billion, $67.2 thousand and zero, respectively. The UPB of these loans as of the acquisition date was $1.12 billion, $74.1 thousand and zero, respectively.

Loan and Lease Portfolio Composition

The following presents the composition of gross loans and leases HFI by portfolio and by rate type:
  December 31, 2019 December 31, 2018
(dollars in thousands) Amount Percent Amount Percent
Commercial LHFI:        
CRE loans $8,468,023
 9.1% $8,704,481
 10.0%
C&I loans 16,534,694
 17.8% 15,738,158
 18.1%
Multifamily loans 8,641,204
 9.3% 8,309,115
 9.5%
Other commercial(2)
 7,390,795
 8.2% 7,630,004
 8.8%
Total commercial LHFI 41,034,716
 44.4% 40,381,758
 46.4%
Consumer loans secured by real estate:        
Residential mortgages 8,835,702
 9.5% 9,884,462
 11.4%
Home equity loans and lines of credit 4,770,344
 5.1% 5,465,670
 6.3%
Total consumer loans secured by real estate 13,606,046
 14.6% 15,350,132
 17.7%
Consumer loans not secured by real estate:        
RICs and auto loans 36,456,747

39.3%
29,335,220

33.7%
Personal unsecured loans 1,291,547
 1.4% 1,531,708
 1.8%
Other consumer(3)
 316,384
 0.3% 447,050
 0.4%
Total consumer loans 51,670,724
 55.6% 46,664,110
 53.6%
Total LHFI(1)
 $92,705,440
 100.0% $87,045,868
 100.0%
Total LHFI:        
Fixed rate $61,775,942
 66.6% $56,696,491
 65.1%
Variable rate 30,929,498
 33.4% 30,349,377
 34.9%
Total LHFI(1)
 $92,705,440
 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 $3.2 billion and $1.4 billion as of December 31, 2019 and December 31, 2018, respectively.
(2)Other commercial includes CEVF leveraged leases and loans.
(3)Other consumer primarily includes RV and marine loans.
(4)Beginning in 2018, the Bank has an asset at some future date. Special mention assets are not adversely classified.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.

SUBSTANDARD. Asset is inadequately protected byPortfolio segments and classes

GAAP requires that entities disclose information about the current net worthcredit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and paying capacity“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 obligor or byunderlying loan populations. In disaggregating its financing receivables portfolio, the collateral pledged, if any. A well-defined weakness or weaknesses exist that jeopardizeCompany’s methodology begins with the liquidationcommercial 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 debt. Theallowance is generally consistent between the two portfolios. "C&I" includes non-real estate-related C&I loans. "Multifamily" represents loans are characterized by the distinct possibility that the Company will sustain some loss if deficienciesfor multifamily residential housing units. “Other commercial” includes loans to global customer relationships in Latin America which are not corrected.

DOUBTFUL. Exhibits the inherent weaknesses of a substandard credit. Additional characteristics exist that make collectiondefined as commercial 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 strengtheningconsumer for regulatory purposes. The remainder 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 whenportfolio primarily represents the recovery would occur.

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

December 31, 2017 Corporate
banking
 Middle
market
CRE
 Santander
real estate
capital
 Commercial and industrial Multifamily Remaining
commercial
 
Total(1)
  (in thousands)
Rating:              
Pass $2,841,401
 $4,450,160
 $990,065
 $13,176,248
 $8,123,727
 $7,059,627
 $36,641,228
Special mention 382,445
 246,651
 16,739
 941,683
 105,225
 29,657
 1,722,400
Substandard 196,382
 103,405
 17,723
 398,325
 45,483
 21,747
 783,065
Doubtful 13,743
 20,511
 
 71,233
 
 63,708
 169,195
Total commercial loans $3,433,971
 $4,820,727
 $1,024,527
 $14,587,489
 $8,274,435
 $7,174,739
 $39,315,888
(1)Financing receivables include LHFS.
December 31, 2016 Corporate
banking
 Middle
market
CRE
 Santander
real estate
capital
 Commercial and industrial Multifamily Remaining
commercial
 
Total(1)
  (in thousands)
Rating:              
Pass $3,303,428
 $4,843,468
 $1,170,259
 $17,865,871
 $8,515,866
 $6,804,184
 $42,503,076
Special mention 144,125
 136,989
 44,281
 541,828
 120,731
 10,651
 998,605
Substandard 226,206
 161,962
 23,822
 503,185
 47,083
 11,932
 974,190
Doubtful 19,350
 38,153
 
 22,183
 
 5,636
 85,322
Total commercial loans $3,693,109
 $5,180,572
 $1,238,362
 $18,933,067
 $8,683,680
 $6,832,403
 $44,561,193
(1)Financing receivables include LHFS.

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)
 December 31, 2017 December 31, 2016
(dollars in thousands) 
RICs and auto loans(3)
 Percent 
RICs and auto loans(3)
 Percent
No FICO®(1)
 $4,530,238
 17.4% $4,154,228
 15.7%
<600 13,395,203
 51.4% 14,100,215
 53.2%
600-639 4,332,278
 16.7% 4,597,541
 17.4%
>=640 3,759,621
 14.5% 3,646,485
 13.7%
Total $26,017,340
 100.0% $26,498,469
 100.0%
(1)Consists primarily of loans for which credit scores are not considered in the ALLL model.
(2)Credit scores updated quarterly.
(3)RICs and auto loans include $1.1 billion and $924.7 million of LHFS at December 31, 2017 and December 31, 2016, respectively, that do not have an allowance.

156118




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

Consumer Lending Asset Quality Indicators-FICOThe 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 LTV Ratio

For both residential1-4 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 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 valuecredit cards. “Other consumer” includes an acquired portfolio 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 LTVmarine RICs and RV contracts as well as indirect auto loans.

In accordance with the associated loss given defaultCompany's accounting policy when establishing the collective ACL for each LTV band. Reappraisalsoriginated loans, the Company's estimate of losses on a recurring basisrecorded investment includes the estimate of the related net unaccreted discount balance that is expected at the individual property level are not considered cost-effective or necessary; however, reappraisals are performed on certain higher risk accountstime of charge-off, while it considers the entire unaccreted discount for loan portfolios purchased at a discount as available to support line management activities, default servicing decisions, orabsorb the credit losses when other situations arise for whichdetermining the ACL specific to these portfolios.

At December 31, 2019 and 2018, the Company believeshad $279.4 million and $803.1 million, respectively, of loans originated prior to the additional expense is warranted.Change in Control. The purchase marks on these portfolios were $726.5 thousand and $2.1 million at December 31, 2019 and 2018, respectively.

Residential mortgageDuring the years ended December 31, 2019 and home equity financing receivables2018, SC originated $12.8 billion and $7.9 billion, respectively, in Chrysler Capital loans (including the SBNA originations program), which represented 56% and 46%, respectively, of the UPB of SC's total RIC originations (including the SBNA originations program).

ACL Rollforward by LTVPortfolio Segment
The activity in the ACL by portfolio segment for the years ended December 31, 2019, and FICO range are summarized2018 was as follows:
  
Residential Mortgages(1)(3)
December 31, 2017 
N/A(2)
 LTV<=70% 70.01-80% 80.01-90% 90.01-100% 100.01-110% LTV>110% Grand Total
FICO Score (dollars in thousands)
N/A(2)
 $372,116
 $6,759
 $1,214
 $
 $
 $
 $
 $380,089
<600 21
 220,737
 55,108
 35,617
 23,834
 2,505
 6,020
 343,842
600-639 45
 155,920
 42,420
 35,009
 34,331
 2,696
 6,259
 276,680
640-679 37
 320,248
 94,601
 90,708
 86,740
 3,011
 2,641
 597,986
680-719 98
 554,058
 236,602
 136,980
 147,754
 3,955
 10,317
 1,089,764
720-759 92
 952,532
 480,900
 178,876
 183,527
 4,760
 8,600
 1,809,287
>=760 588
 3,019,514
 1,066,919
 263,541
 187,713
 8,418
 12,594
 4,559,287
Grand Total $372,997
 $5,229,768
 $1,977,764
 $740,731
 $663,899
 $25,345
 $46,431
 $9,056,935
(1) Includes LHFS.
(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3) Allowance model considers LTV for financing receivables in first lien position for the Company and combined LTV ("CLTV") for financing receivables in second lien position for the Company.
  
Home Equity Loans and Lines of Credit(2)
December 31, 2017 
N/A(1)
 LTV<=70% 70.01-90% 90.01-110% LTV>110% Grand Total
FICO Score (dollars in thousands)
N/A(1)
 $154,690
 $536
 $238
 $
 $
 $155,464
<600 8,064
 190,657
 64,554
 16,634
 22,954
 302,863
600-639 6,276
 158,461
 61,250
 9,236
 9,102
 244,325
640-679 6,745
 297,003
 127,347
 19,465
 14,058
 464,618
680-719 8,875
 500,234
 258,284
 24,675
 20,261
 812,329
720-759 8,587
 724,831
 332,508
 30,526
 19,119
 1,115,571
>=760 17,499
 1,917,373
 768,905
 73,573
 35,213
 2,812,563
Grand Total $210,736
 $3,789,095
 $1,613,086
 $174,109
 $120,707
 $5,907,733
  Year Ended December 31, 2019
(in thousands) Commercial Consumer Unallocated Total
ALLL, beginning of period $441,083
 $3,409,024
 $47,023
 $3,897,130
Provision for loan and lease losses 89,962
 2,200,870
 
 2,290,832
Charge-offs (185,035) (5,364,673) (275) (5,549,983)
Recoveries 53,819
 2,954,391
 
 3,008,210
Charge-offs, net of recoveries (131,216) (2,410,282) (275) (2,541,773)
ALLL, end of period $399,829
 $3,199,612
 $46,748
 $3,646,189
Reserve for unfunded lending commitments, beginning of period $89,472
 $6,028
 $
 $95,500
(Release of) / Provision for reserve for unfunded lending commitments 1,321
 (136) 
 1,185
Loss on unfunded lending commitments (4,859) 
 
 (4,859)
Reserve for unfunded lending commitments, end of period 85,934
 5,892
 
 91,826
Total ACL, end of period $485,763
 $3,205,504
 $46,748
 $3,738,015
Ending balance, individually evaluated for impairment(1)
 $50,307
 $935,086
 $
 $985,393
Ending balance, collectively evaluated for impairment 349,525
 2,264,523
 46,748
 2,660,796
         
Financing receivables:(2)
        
Ending balance $41,151,009
 $52,974,654
 $
 $94,125,663
Ending balance, evaluated under the FVO or lower of cost or fair value 116,293
 1,376,911
 
 1,493,204
Ending balance, individually evaluated for impairment(1)
 342,295
 4,225,331
 
 4,567,626
Ending balance, collectively evaluated for impairment 40,692,421
 47,372,412
 
 88,064,833
(1)Residential mortgages and home equityConsists of 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.TDR status.
(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.
(2) Contains LHFS of $1.4 billionfor the year ended December 31, 2019.


157119




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

  
Residential Mortgages(1)(3)
December 31, 2016 
N/A (2)
 LTV<=70% 70.01-80% 80.01-90% 90.01-100% 100.01-110% LTV>110% Grand Total
FICO Score (dollars in thousands)
N/A(2)
 $696,730
 $102,911
 $4,635
 $2,327
 $196
 $150
 $
 $806,949
<600 80
 228,794
 70,793
 49,253
 30,720
 6,622
 5,885
 392,147
600-639 147
 152,728
 48,006
 42,443
 42,356
 4,538
 6,675
 296,893
640-679 98
 283,054
 101,495
 81,669
 93,552
 5,287
��4,189
 569,344
680-719 112
 487,257
 193,351
 136,937
 146,090
 6,766
 11,795
 982,308
720-759 56
 767,192
 348,524
 163,163
 178,264
 8,473
 16,504
 1,482,176
>=760 495
 2,415,542
 860,582
 219,014
 180,841
 11,134
 20,740
 3,708,348
Grand Total $697,718
 $4,437,478
 $1,627,386
 $694,806
 $672,019
 $42,970
 $65,788
 $8,238,165
  Year Ended December 31, 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 45,897
 2,306,896
 
 2,352,793
Charge-offs (108,750) (4,974,547) 
 (5,083,297)
Recoveries 60,140
 2,572,607
 
 2,632,747
Charge-offs, net of recoveries (48,610) (2,401,940) 
 (2,450,550)
ALLL, end of period $441,083
 $3,409,024
 $47,023
 $3,897,130
Reserve for unfunded lending commitments, beginning of period $103,835
 $5,276
 $
 $109,111
Release of unfunded lending commitments (13,647) 752
 
 (12,895)
Loss on unfunded lending commitments (716) 
 
 (716)
Reserve for unfunded lending commitments, end of period 89,472
 6,028
 
 95,500
Total ACL, end of period $530,555
 $3,415,052
 $47,023
 $3,992,630
Ending balance, individually evaluated for impairment (1)
 $94,120
 $1,457,174
 $
 $1,551,294
Ending balance, collectively evaluated for impairment 346,963
 1,951,850
 47,023
 2,345,836
         
Financing receivables:(2)
        
Ending balance $40,381,758
 $47,947,388
 $
 $88,329,146
Ending balance, evaluated under the FVO or lower of cost or fair value 
 1,393,476
 
 1,393,476
Ending balance, individually evaluated for impairment(1)
 444,031
 5,779,998
 
 6,224,029
Ending balance, collectively evaluated for impairment 39,937,727
 40,773,914
 
 80,711,641
(1)Includes LHFS.Consists of loans in TDR status.
(2)Residential mortgages and home equity loans and linesContains LHFS of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3)Allowance model considers LTV for financing receivables in first lien position$1.3 billion for the Company and CLTV for financing receivables in second lien position for the Company.year ended December 31, 2018.
  
Home Equity Loans and Lines of Credit(2)
December 31, 2016 
N/A(1)
 LTV<=70% 70.01-90% 90.01-110% LTV>110% Grand Total
FICO Score (dollars in thousands)
N/A(1)
 $172,836
 $530
 $157
 $
 $
 $173,523
<600 10,198
 166,702
 64,446
 14,474
 12,684
 268,504
600-639 7,323
 143,666
 68,415
 16,680
 8,873
 244,957
640-679 10,225
 278,913
 139,940
 27,823
 14,127
 471,028
680-719 11,507
 461,285
 271,264
 39,668
 25,158
 808,882
720-759 12,640
 662,217
 383,186
 45,496
 28,608
 1,132,147
>=760 25,425
 1,814,060
 919,295
 94,522
 48,849
 2,902,151
Grand Total $250,154
 $3,527,373
 $1,846,703
 $238,663
 $138,299
 $6,001,192
(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.

  Year Ended December 31, 2017
(in thousands) Commercial Consumer Unallocated Total
ALLL, beginning of period $449,837
 $3,317,604
 $47,023
 $3,814,464
Provision for loan losses 99,606
 2,670,950
 
 2,770,556
Other(1)
 356
 5,283
 
 5,639
Charge-offs (144,002) (4,891,383) 
 (5,035,385)
Recoveries 37,999
 2,401,614
 
 2,439,613
Charge-offs, net of recoveries (106,003) (2,489,769) 
 (2,595,772)
ALLL, end of period $443,796
 $3,504,068
 $47,023
 $3,994,887
Reserve for unfunded lending commitments, beginning of period $116,866
 $5,552
 $
 $122,418
Provision for unfunded lending commitments (10,336) (276) 
 (10,612)
Loss on unfunded lending commitments (2,695) 
 
 (2,695)
Reserve for unfunded lending commitments, end of period 103,835
 5,276
 
 109,111
Total ACL end of period $547,631
 $3,509,344
 $47,023
 $4,103,998
Ending balance, individually evaluated for impairment(2)
 $102,326
 $1,824,640
 $
 $1,926,966
Ending balance, collectively evaluated for impairment 341,470
 1,679,428
 47,023
 2,067,921
         
Financing receivables:(3)
        
Ending balance $39,315,888
 $43,997,279
 $
 $83,313,167
Ending balance, evaluated under the FVO or lower of cost or fair value(1)
 149,177
 2,420,155
 
 2,569,332
Ending balance, individually evaluated for impairment(2)
 593,585
 6,652,949
 
 7,246,534
Ending balance, collectively evaluated for impairment 38,573,126
 34,924,175
 
 73,497,301
(1) Includes transfers in for the period ending December 31, 2017 related to the contribution of SFS to SHUSA.
(2) Consists of loans in TDR Loansstatus.

The following table summarizes(3) Contains LHFS of $2.5 billion for the Company’s performing and non-performing TDRs at the dates indicated:
(in thousands) December 31, 2017 December 31, 2016
Performing $5,824,304
 $5,169,788
Non-performing 982,868
 937,127
Total $6,807,172
 $6,106,915

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationships with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions 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.year ended December 31, 2017.

158120




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

Non-accrual loans by Class of Financing Receivable

The recorded investment in non-accrual loans disaggregated by class of financing receivables and other non-performing assets is summarized as follows:
(in thousands) December 31, 2019 December 31, 2018
     
Non-accrual loans:    
Commercial:    
CRE $83,117
 $88,500
C&I 153,428
 189,827
Multifamily 5,112
 13,530
Other commercial 31,987
 72,841
Total commercial loans 273,644
 364,698
Consumer:    
Residential mortgages 134,957
 216,815
Home equity loans and lines of credit 107,289
 115,813
RICs and auto loans 1,643,459
 1,545,322
Personal unsecured loans 2,212
 3,602
Other consumer 11,491
 9,187
Total consumer loans 1,899,408
 1,890,739
Total non-accrual loans 2,173,052
 2,255,437
     
OREO 66,828
 107,868
Repossessed vehicles 212,966
 224,046
Foreclosed and other repossessed assets 4,218
 1,844
Total OREO and other repossessed assets 284,012
 333,758
Total non-performing assets $2,457,064
 $2,589,195

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:
  December 31, 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 $51,472
 $65,290
 $116,762
 $8,351,261
 $8,468,023
 $
C&I(1)
 55,957
 84,640
 140,597
 16,510,391
 16,650,988
 
Multifamily 10,456
 3,704
 14,160
 8,627,044
 8,641,204
 
Other commercial 61,973
 6,352
 68,325
 7,322,469
 7,390,794
 
Consumer:            
Residential mortgages(2)
 154,978
 128,578
 283,556
 8,848,971
 9,132,527
 
Home equity loans and lines of credit 45,417
 75,972
 121,389
 4,648,955
 4,770,344
 
RICs and auto loans 4,364,110
 404,723
 4,768,833
 31,687,914
 36,456,747
 
Personal unsecured loans(3)
 85,277
 102,572
 187,849
 2,110,803
 2,298,652
 93,102
Other consumer 11,375
 7,479
 18,854
 297,530
 316,384
 
Total $4,841,015
 $879,310
 $5,720,325
 $88,405,338
 $94,125,663
 $93,102
(1) C&I loans includes $116.3 million of LHFS at December 31, 2019.
(2) Residential mortgages includes $296.8 million of LHFS at December 31, 2019.
(3) Personal unsecured loans includes $1.0 billion of LHFS at December 31, 2019.

121




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

 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 4,318,619
 441,742
 4,760,361
 24,574,859
 29,335,220
 
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.

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:
  December 31, 2019
(in thousands) 
Recorded Investment(1)
 UPB Related
Specific Reserves
 Average
Recorded Investment
With no related allowance recorded:        
Commercial:        
CRE $87,252
 $92,180
 $
 $83,154
C&I 24,816
 26,814
 
 25,338
Multifamily 2,927
 3,807
 
 10,594
Other commercial 2,190
 2,205
 
 4,769
Consumer:        
Residential mortgages 99,815
 149,887
 
 122,357
Home equity loans and lines of credit 37,496
 39,675
 
 41,783
RICs and auto loans 3,201
 3,222
 
 5,132
Personal unsecured loans 10
 10
 
 7
Other consumer 2,995
 2,995
 
 3,293
With an allowance recorded:        
Commercial:        
CRE 59,778
 88,746
 10,725
 59,320
C&I 130,209
 147,959
 35,596
 155,194
Other commercial 22,587
 27,669
 3,986
 41,251
Consumer:        
Residential mortgages 141,093
 238,571
 13,006
 197,529
Home equity loans and lines of credit 33,498
 39,406
 3,182
 47,019
RICs and auto loans 3,844,618
 3,846,003
 913,642
 4,544,652
  Personal unsecured loans 14,716
 14,947
 4,282
 15,449
  Other consumer 51,090
 54,061
 974
 30,575
Total:        
Commercial $329,759
 $389,380
 $50,307
 $379,620
Consumer 4,228,532
 4,388,777
 935,086
 5,007,796
Total $4,558,291
 $4,778,157
 $985,393
 $5,387,416
(1)Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, and net of discounts.

122




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

  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 7,062
 9,072
 
 11,628
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 5,244,685
 5,346,013
 1,415,709
 5,633,094
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, and net of discounts.

The Company recognized interest income of $585.5 million on approximately $3.6 billion of TDRs that were in performing status as of December 31, 2019 and $761.0 million on approximately $5.1 billion of TDRs that were in performing status as of December 31, 2018.

Consumer Loan TDRs

The majority of the Company's TDR balance is comprised of RICs and auto loans. The terms of the modifications for the RIC and auto loan portfolio generally include one or a combination of: a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

In accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICs under which the consumer is allowed to defer a maximum of three payments per event to the end of the loan. More than 90% of deferrals granted are for two payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the life of the loan for all automobile RICs is eight, while some marine and RV contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs.

RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans on nonaccrual status, interest income is recognized on a cash basis. For TDR loans on nonaccrual status, the accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due.

At the time a deferral is granted on a RIC, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.

104




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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the ALLL 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 ALLL and related provision for loan and lease losses.

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, an extension of the maturity date or principal forgiveness.

Consumer TDRs excluding RICsin the residential mortgage and home equity portfolios are generally placed on non-accrual status untilat the Company believes repayment under the revised terms is reasonably assuredtime of modification, 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 returnreturned 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.

they have made six consecutive on-time payments. In addition to loansthose identified as TDRs above, the guidance also requires loans discharged under Chapter 7 bankruptcy proceedings to beare considered TDRs and collateral-dependent, regardless of delinquency status. TDRs thatThese loans are collateral-dependent loans must be written down to fair market value of the collateral, less costs to sell and classified as non-accrual/NPLsnon-performing 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 held for investment that are probable and can be reasonably estimated. Prior to loans being placed in TDR status, the Company generally measures its allowance under a loss contingency methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.

Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence by discounting expected future cash flows using the original effective interest rate or fair value of collateral less(less costs to sell.sell). The amount of the required ALLLvaluation allowance 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 defaultssubsequently defaulted loans 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 theirthe fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

Impaired loans

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 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

The Company considers all of its TDRs and all of its non-accrual commercial loans in excess of $1 million to be impaired as of the balance sheet date. The Company may perform an impairment analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant.

159105




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

The Company measures impairment on impaired loans based on the present value of expected future cash flows discounted at the loan's original effective interest rate, except that, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral, less the costs to sell, if the loan is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment and the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows 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.

LHFS

LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Generally, residential loans are valued on an aggregate portfolio basis, and commercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Miscellaneous income, net. For residential mortgages for which the FVO is selected, direct loan origination fees are recorded in Miscellaneous income, net at origination.

All other LHFS which the Company does not have the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the lower of cost or fair value. When loans are transferred from HFI, the Company will recognize a charge-off to the ALLL, if warranted under the Company’s charge off policies. Any excess ALLL for the transferred loans is reversed through provision expense. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneous income, net as lower of cost or market adjustments.

Leases (as Lessor)

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease.

Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired in a business combination are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.

Lease payments due from customers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed if a delinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.

106




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

Under the accounting for impairment or disposal of long-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and the proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of leased assets are included in Miscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. No impairment for leased assets was recognized during the years ended December 31, 2019, 2018, or 2017.

Leases (as Lessee)

Operating lease ROU assets and lease liabilities are recognized upon lease commencement based on the present value of lease payments over the lease term, discounted at the Company's estimated rate of interest for a collateralized borrowing for a similar term. The lease term includes options to extend or terminate a lease when the Company considers it reasonably certain that such options will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Premises and Equipment

Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the straight-line method. Estimated useful lives are as follows:
Office buildings10 to 50 years
Leasehold improvements(1)
10 to 30 years
Software(2)
3 to 7 years
Furniture, fixtures and equipment3 to 10 years
Automobiles5 years
(1) Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the remaining term of the leases.
(2) The standard depreciable period for software is three years. However, for certain software implementation projects, a seven-year period is utilized.

Expenditures for maintenance and repairs are charged to Occupancy and equipment expense in the Consolidated Statements of Operations as incurred.

Equity Method Investments

The Company uses the equity method for general and limited partnership interests, limited liability companies and other unconsolidated equity investments in which the Company is considered to have significant influence over the operations of the investee. Under the equity method, the Company records its equity ownership share of net income or loss of the investee in "Other miscellaneous expenses." Investments accounted for under the equity method of accounting above are included in the caption "Other Assets" on the Consolidated Balance Sheets.

Goodwill and Intangible Assets

Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the acquisition method. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis at October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. A reporting unit is an operating segment or one level below.

An entity's goodwill impairment quantitative analysis is required to be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, in which case no further analysis is required. An entity has an unconditional option to bypass the preceding qualitative assessment (often referred to as step 0) for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test.

107




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

The quantitative test includes a comparison of the fair value of each reporting unit to its respective carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as the excess of carrying value over fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit and cannot subsequently be reversed even if the fair value of the reporting unit recovers.

The Company's intangible assets consist of assets purchased or acquired through business combinations, including trade names and dealer networks. Certain intangible assets are amortized over their useful lives. The Company evaluates identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.

MSRs

The Company has elected to measure most of its residential MSRs at fair value to be consistent with the risk management strategy to hedge changes in the fair value of these assets. The fair value of residential MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions. Assumptions incorporated into the residential MSRs valuation model reflect management's best estimate of factors that a market participant would use in valuing the residential MSRs. Although sales of residential MSRs do occur, residential MSRs do not trade in an active market with readily observable prices. Those MSRs not accounted for at fair value are accounted for at amortized cost, less impairment.

As a benchmark for the reasonableness of the residential MSRs' fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own discounted cash flow DCF calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. Management compares the internally-developed residential MSR values to the ranges of values received from Brokers. If the residential MSRs fair value falls outside the Brokers' ranges, management will assess whether a valuation adjustment is warranted. Residential MSRs value is considered to represent a reasonable estimate of fair value.

See Note 16 to these Consolidated Financial Statements for detail on MSRs.

BOLI

BOLI represents the cash surrender value of life insurance policies for certain current and former employees who have provided positive consent to allow the Bank to be the beneficiary of such policies. Increases in the net cash surrender value of the policies, as well as insurance proceeds received, are recorded in non-interest income, and are not subject to income taxes.

OREO and Other Repossessed Assets

OREO and other repossessed assets consist of properties, vehicles, and other assets acquired by, or in lieu of, foreclosure or repossession in partial or total satisfaction of NPLs, including RICs and leases. Assets obtained in satisfaction of a loan are recorded at the estimated fair value minus estimated costs to sell based upon the asset's appraisal value at the date of transfer. The excess of the carrying value of the loan over the fair value of the asset minus estimated costs to sell are charged to the ALLL at the initial measurement date. Subsequent to the acquisition date, OREO and repossessed assets are carried at the lower of cost or estimated fair value, net of estimated cost to sell. Any declines in the fair value of OREO and repossessed assets below the initial cost basis are recorded through a valuation allowance with a charge to non-interest income. Increases in the fair value of OREO and repossessed assets net of estimated selling costs will reverse the valuation allowance, but only up to the cost basis which was established at the initial measurement date. Costs of holding the assets are recorded as operating expenses, except for significant property improvements, which are capitalized to the extent that the carrying value does not exceed the estimated fair value. The Company generally begins vehicle repossession activity once a customer's account becomes 60 days past due. The customer has an opportunity to redeem the repossessed vehicle by paying all outstanding balances, including finance changes and fees. Any vehicles not redeemed are sold at auction. OREO and other repossessed assets are recorded within Other assets on the Consolidated Balance Sheets.

108




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

Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity, and credit risk. Derivative financial instruments are also used to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities, and often sells derivative products to commercial loan customers to hedge interest rate risk associated with loans made by the Company. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes for its own account. Derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of each derivative financial instrument depends on whether it has been designated and qualifies as a hedge for accounting purposes, as well as the type of hedging relationship identified.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk such as interest rate risk are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The Company formally documents the relationships of qualifying hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.

Fair value hedges that are highly effective are accounted for by recording the change in the fair value of the derivative instrument and the related hedged asset, liability or firm commitment on the Consolidated Balance Sheets, with the corresponding income or expense recorded in the Consolidated Statements of Operations. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as an other asset or other liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense associated with the hedged asset or liability.

Cash flow hedges that are highly effective are accounted for by recording the fair value of the derivative instrument on the Consolidated Balance Sheets as an asset or liability, with a corresponding charge or credit for the change in the fair value of the derivative, net of tax, recorded in accumulated OCI within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated OCI to the Consolidated Statements of Operations in the period or periods the hedged transaction affects earnings. In the case in which certain cash flow hedging relationships have been terminated, the Company continues to defer the net gain or loss in accumulated OCI and reclassifies it into interest expense as the future cash flows occur, unless it becomes probable that the future cash flows will not occur.

We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; the derivative is de-designated as a fair value or cash flow hedge; or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If we determine that the derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value, with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

Changes in the fair value of derivatives not designated in hedging relationships are recognized immediately in the Consolidated Statements of Operations. Derivatives are classified in the Consolidated Balance Sheets as "Other assets" or "Other liabilities," as applicable. See Note 14 to the Consolidated Financial Statements for further discussion.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. On December 22, 2017, the TCJA was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets.

109




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

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws of the U.S., its states and municipalities, and abroad. 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. Interest and penalties on income tax payments are included within Income tax provision on the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. See Note 15 to the Consolidated Financial Statements for details on the Company's income taxes.

Stock-Based Compensation

The Company, through Santander, sponsors stock plans under which incentive and non-qualified stock options and non-vested stock may be granted periodically to certain employees. The Company recognizes compensation expense related to stock options and non-vested stock awards based upon the fair value of the awards on the date of the grant, which is charged to earnings over the requisite service period (i.e., the vesting period). The impact of the forfeiture of awards is recognized as forfeitures occur. Amounts in the Consolidated Statements of Operations associated with the Company's stock compensation plan were negligible in all years presented.

Guarantees

Certain off-balance sheet financial instruments of the Company meet the definition of a guarantee that require the Company to perform and make future payments in the event specified triggering events or conditions were to occur over the term of the guarantee. In accordance with the applicable accounting rules, it is the Company’s accounting policy to recognize a liability at inception associated with such a guarantee at the greater of the fair value of the guarantee or the Company's estimate of the contingent liability arising from the guarantee. Subsequent to initial recognition, the liability is adjusted based on the passage of time to perform under the guarantee and the changes to the probabilities of occurrence related to the specified triggering events or conditions that would require the Company to perform on the guarantee.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, and records the identifiable assets, liabilities and any NCI of the acquired business at their acquisition date fair values. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Any changes in the estimated acquisition date fair values of the net assets recorded prior to the finalization of a more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to the Company’s Consolidated Financial Statements will be adjusted retrospectively. All acquisition related costs are expensed as incurred.

The results of operations of the acquired companies are recorded in the Consolidated Statements of Operations from the date of acquisition. The application of business combination principles, including the determination of the fair value of the net assets acquired, requires the use of significant estimates and assumptions.

Revenue Recognition

The Company primarily earns interest and non-interest income from various sources, including:
Lending (interest income and loan fees)
Investment securities
Loan sales and servicing
Finance leases
BOLI
Depository services
Commissions and trailer fees
Interchange income, net.
Underwriting service Fees
Asset and wealth management fees

110




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

Lending and Investment Securities

The principal source of revenue is interest income from loans and investment securities. Interest income is recognized on an accrual basis primarily according to non-discretionary formulas in written contracts, such as loan agreements or securities contracts. Revenue earned on interest-earning assets, including amortization of deferred loan fees and origination costs and the accretion of discounts recognized on acquired or purchased loans, is recognized based on the constant effective yield of such interest-earning assets.

Gains or losses on sales of investment securities are recognized on the trade date.

Loan Sales and Servicing

The Company recognizes revenue from servicing commercial mortgages and consumer loans as earned. Mortgage banking income, net includes fees associated with servicing loans for third parties based on the specific contractual terms and changes in the fair value of MSRs. Gains or losses on sales of residential mortgage, multifamily and home equity loans are included within mortgage banking revenues and are recognized when the sale is complete.

Finance Leases

Income from finance leases is recognized as part of interest income over the term of the lease using the constant effective yield method, while income arising from operating leases is recognized as part of other non-interest income over the term of the lease on a straight-line basis.

BOLI

Income from BOLI represents increases in the cash surrender value of the policies, as well as insurance proceeds and interest.

Depository services

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

Commissions and trailer fees

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

Interchange income, net

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

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

111




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

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

Underwriting service fees

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

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

Asset and wealth management fees

Asset and wealth management fees includes fee income generated from discretionary investment management and non-discretionary investment advisory contracts with customers. Discretionary investment management fees are earned for the management of the assets in the customer's account and are recognized as earned and charged to the customer on a quarterly basis. Non-discretionary investment advisory fees are earned for providing investment advisory services to customers, such as recommending the re-balancing or restructuring of the assets in the customer’s account. The investment advisory fee is recognized as earned and charged to the customer on a quarterly basis. The fee for the discretionary and nondiscretionary contracts is based on a percentage of the average assets included in the customer’s account.

Fair Value Measurements

The Company uses fair value measurements to estimate the fair value of certain assets and liabilities for both measurement and disclosure purposes. 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, 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.

When measuring the fair value of a liability, the Company assumes that the transfer will not affect the nonperformance risk associated with the liability. The Company considers the effect of the credit risk on the fair value for any period in which fair value is measured. There are three valuation approaches for measuring fair value: the market approach, the income approach and the cost approach. Selecting the appropriate technique for valuing a particular asset or liability should consider the exit market for the asset or liability, the nature of the asset or liability being measured, and how a market participant would value the same asset or liability. Ultimately, selecting the appropriate valuation method requires significant judgment. These assumptions result in classification of financial instruments into the fair value hierarchy levels 1, 2 and 3 for disclosure purposes.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on the Company's own information or assessment of assumptions used by other market participants in pricing the asset or liability. The unobservable inputs are based on the best and most current information available on the measurement date.

Subsequent Events

The Company evaluated events from the date of the Consolidated Financial Statements on December 31, 2019 through the issuance of these Consolidated Financial Statements, and has determined that there have been no material events that would require recognition in its Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements for the year ended December 31, 2019 other than the transaction disclosed in Note 13 of these Consolidated Financial Statements.

112




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 measured at amortized cost. The amendment introduces a new credit reserving framework known as CECL, which replaces the incurred loss impairment framework in current GAAP with one that reflects expected credit losses over the full expected 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. Additionally, the standard changes the accounting framework for purchased credit-deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it is under the current OTTI framework. The Company adopted the new guidance on January 1, 2020.

The Company established a cross-functional working group for implementation of this standard. Generally, our implementation process included 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 over financial reporting frameworks, and updating accounting policies and procedures. The status of our implementation was periodically presented to the Audit Committee and the Risk Committee. The Company completed multiple parallel model runs to test and refine its current expected credit loss models to satisfy the requirements of the new standard.

The adoption of this standard resulted in the increase in the ACL of approximately $2.5 billion and a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase is based on 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. The standard did not have a material impact on the Company’s other financial instruments. Additionally, we elected to utilize regulatory relief which will permit us to phase in 25 percent of the capital impact of CECL in our calculation of regulatory capital amounts and ratios in 2020, and an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023.

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. The Company adopted the new guidance effective January 1, 2020 and it did not have a material impact on the Company’s business, financial position or results of operations.

In addition to those described in detail above, on January 1, 2020, the Company adopted ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, and it did not have a material impact on the Company's business, financial position, results of operations, or disclosures.




113




NOTE 3. INVESTMENT SECURITIES

Summary of Investments in Debt Securities - AFS and HTM

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities AFS at the dates indicated:
  December 31, 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 $4,086,733
 $4,497
 $(292) $4,090,938
 $1,815,914
 $560
 $(11,729) $1,804,745
Corporate debt securities 139,696
 39
 (22) 139,713
 160,164
 12
 (62) 160,114
ABS 138,839
 1,034
 (1,473) 138,400
 435,464
 3,517
 (2,144) 436,837
State and municipal securities 9
 
 
 9
 16
 
 
 16
MBS:                
GNMA - Residential 4,868,512
 12,895
 (16,066) 4,865,341
 2,829,075
 861
 (85,675) 2,744,261
GNMA - Commercial 773,889
 6,954
 (1,785) 779,058
 954,651
 1,250
 (19,515) 936,386
FHLMC and FNMA - Residential 4,270,426
 14,296
 (30,325) 4,254,397
 5,687,221
 267
 (188,515) 5,498,973
FHLMC and FNMA - Commercial 69,242
 2,665
 (5) 71,902
 51,808
 384
 (537) 51,655
Total investments in debt securities AFS $14,347,346
 $42,380
 $(49,968) $14,339,758
 $11,934,313
 $6,851
 $(308,177) $11,632,987

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities HTM at the dates indicated:
  December 31, 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 $1,948,025
 $11,354
 $(7,670) $1,951,709
 $1,718,687
 $1,806
 $(54,184) $1,666,309
GNMA - Commercial 1,990,772
 20,115
 (5,369) 2,005,518
 1,031,993
 1,426
 (23,679) 1,009,740
Total investments in debt securities HTM $3,938,797
 $31,469
 $(13,039) $3,957,227
 $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 December 31, 2019 and December 31, 2018, the Company had investment securities with an estimated carrying value of $7.5 billion and $6.6 billion, respectively, pledged as collateral, which were comprised of the following: $2.7 billion and $3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the FRB; $3.5 billion and $2.7 billion, respectively, were pledged to secure public fund deposits; $148.5 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; $699.1 million and $423.3 million, respectively, were pledged to deposits with clearing organizations; and $461.9 million and $415.1 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At December 31, 2019 and December 31, 2018, the Company had $46.0 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 Consolidated Balance Sheets.

There were no transfers of securities between AFS and HTM during the year ended December 31, 2019. In 2018, the Company transferred securities with approximately a $1.2 billion carrying value (fair value $1.2 billion) from AFS to HTM. Unrealized holding losses of $29.1 million were retained in OCI at the date of transfer and will be amortized over the remaining lives of the securities.



114




NOTE 3. INVESTMENT SECURITIES (continued)

Contractual Maturity of Investments in Debt Securities

Contractual maturities of the Company’s investments in debt securities AFS at December 31, 2019 were as follows:
             
(in thousands) Due Within One Year Due After 1 Within 5 Years Due After 5 Within 10 Years Due After 10 Years/No Maturity 
Total(1)
 
Weighted Average Yield(2)
U.S Treasuries $3,289,865
 $801,073
 $
 $
 $4,090,938
 1.91%
Corporate debt securities 139,699
 
 14
 
 139,713
 2.60%
ABS 12,234
 63,123
 
 63,043
 138,400
 4.23%
State and municipal securities 
 9
 
 
 9
 7.75%
MBS:            
GNMA - Residential 1,738
 48
 60,710
 4,802,845
 4,865,341
 2.31%
GNMA - Commercial 
 
 
 779,058
 779,058
 2.41%
FHLMC and FNMA - Residential 301
 8,024
 266,204
 3,979,868
 4,254,397
 1.96%
FHLMC and FNMA - Commercial 
 430
 52,298
 19,174
 71,902
 3.00%
Total fair value $3,443,837
 $872,707
 $379,226
 $9,643,988
 $14,339,758
 2.12%
Weighted Average Yield 2.02% 1.87% 2.27% 2.18% 2.12%  
Total amortized cost $3,441,868
 $869,377
 $375,291
 $9,660,810
 $14,347,346
 
(1)The maturities above do not represent the effective duration of the Company's portfolio, since the amounts above are based on contractual maturities and do not contemplate anticipated prepayments.
(2)Yields on tax-exempt securities are calculated on a tax equivalent basis and are based on the statutory federal tax rate.
Contractual maturities of the Company’s investments in debt securities HTM at December 31, 2019 were as follows:
             
(in thousands) Due Within One Year Due After 1 Within 5 Years Due After 5 Within 10 Years Due After 10 Years/No Maturity 
Total(1)
 
Weighted Average Yield(2)
MBS:            
GNMA - Residential $
 $
 $
 $1,951,709
 $1,951,709
 2.26%
GNMA - Commercial 
 
 
 2,005,518
 2,005,518
 2.39%
Total fair value $
 $
 $
 $3,957,227
 $3,957,227
 2.32%
Weighted average yield % % % 2.32% 2.32%  
Total amortized cost $
 $
 $
 $3,938,797
 $3,938,797
  
(1) (2) See corresponding footnotes to the December 31, 2019 "Contractual Maturity of Debt Securities" table above for investments in debt securities AFS.

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 Investments in Debt Securities AFS and HTM

The following table presents the aggregate amount of unrealized losses as of December 31, 2019 and December 31, 2018 on debt securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
  December 31, 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 $200,096
 $(167) $499,883
 $(125) $288,660
 $(315) $914,212
 $(11,414)
Corporate debt securities 110,802
 (22) 
 
 152,247
 (62) 13
 
ABS 27,662
 (44) 47,616
 (1,429) 31,888
 (249) 77,766
 (1,895)
MBS:                
GNMA - Residential 2,053,763
 (6,895) 997,024
 (9,171) 102,418
 (2,014) 2,521,278
 (83,661)
GNMA - Commercial 217,291
 (1,756) 14,300
 (29) 199,495
 (2,982) 622,989
 (16,533)
FHLMC and FNMA - Residential 660,078
 (4,110) 1,344,057
 (26,215) 237,050
 (5,728) 5,236,028
 (182,787)
FHLMC and FNMA - Commercial 
 
 430
 (5) 
 
 21,819
 (537)
Total investments in debt securities AFS $3,269,692
 $(12,994) $2,903,310
 $(36,974) $1,011,758
 $(11,350) $9,394,105
 $(296,827)


115




NOTE 3. INVESTMENT SECURITIES (continued)

The following table presents the aggregate amount of unrealized losses as of December 31, 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:
  December 31, 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 $559,058
 $(2,004) $657,733
 $(5,666) $205,573
 $(4,810) $1,295,554
 $(49,374)
GNMA - Commercial 731,445
 (5,369) 
 
 221,250
 (5,572) 629,847
 (18,107)
Total investments in debt securities HTM $1,290,503
 $(7,373) $657,733
 $(5,666) $426,823
 $(10,382) $1,925,401
 $(67,481)

OTTI

Management evaluates all investments in debt 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 FICO scores and weighted average LTV ratio, rating or scoring, credit ratings and market spreads, as applicable.

The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company has determined that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.

The Company did not record any OTTI related to its investments in debt securities for the years ended December 31, 2019, 2018 or 2017.

Management has concluded that the unrealized losses on its investments in debt securities for which it has not recognized OTTI (which were comprised of 727 individual securities at December 31, 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 Investments in Debt Securities

Proceeds from sales of investments in debt securities and the realized gross gains and losses from those sales were as follows:
  Year Ended December 31,
(in thousands) 2019 2018 2017
Proceeds from the sales of AFS securities $1,423,579
 $1,262,409
 $3,256,378
       
Gross realized gains $9,496
 $5,517
 $22,224
Gross realized losses (3,680) (12,234) (24,668)
OTTI 
 
 
    Net realized gains/(losses) (1)
 $5,816
 $(6,717) $(2,444)
(1)Includes net realized gain/(losses) on trading securities of (0.8) million, $(1.4) million and $(4.2) million for the years ended December 31, 2019, 2018 and 2017, respectively.

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


116




NOTE 3. INVESTMENT SECURITIES (continued)

Other Investments

Other Investments consisted of the following as of:
(in thousands)December 31, 2019 December 31, 2018
FHLB of Pittsburgh and FRB stock $716,615
 $631,239
LIHTC investments 265,271
 163,113
Equity securities not held for trading 12,697
 10,995
Trading securities 1,097
 10
Total $995,680
 $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 year ended December 31, 2019, the Company purchased $298.6 million of FHLB stock at par, and redeemed $212.4 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the year ended December 31, 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 December 31, 2019, with changes in fair value recognized in net income, and consist primarily of 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 SPEs. These loans totaled $53.9 billion at December 31, 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 December 31, 2019 was $1.4 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 $289.0 million as of December 31, 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 16 to these 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 Consolidated Statements of Operations. As of December 31, 2019, the carrying value of the personal unsecured HFS portfolio was $1.0 billion.

During 2019, the Company sold $1.4 billion of performing residential loans to FNMA for a net gain of $7.9 million.

In October 2019, SBNA agreed to sell from its portfolio certain restructured residential mortgage and home equity loans (with approximately $187.0 million of principal balances outstanding) to two unrelated third parties. This transaction settled in the fourth quarter with an immaterial impact on the Consolidated Statements of Operations. The loans were sold with servicing released to the purchasers.

On October 4, 2019, SBNA agreed to sell approximately $768.2 million of equipment finance loans and approximately $74.2 million of operating leases to an unrelated third party. This transaction settled on November 29, 2019, with a gain of $5.6 million on the sale.

117




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

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 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 December 31, 2019 and December 31, 2018, accrued interest receivable on the Company's loans was $497.7 million and $524.0 million, respectively.

During the years ended December 31, 2019, 2018 and 2017, the Company purchased retail installment contract financial receivables from third-party lenders for $1.1 billion, $67.2 thousand and zero, respectively. The UPB of these loans as of the acquisition date was $1.12 billion, $74.1 thousand and zero, respectively.

Loan and Lease Portfolio Composition

The following presents the composition of gross loans and leases HFI by portfolio and by rate type:
  December 31, 2019 December 31, 2018
(dollars in thousands) Amount Percent Amount Percent
Commercial LHFI:        
CRE loans $8,468,023
 9.1% $8,704,481
 10.0%
C&I loans 16,534,694
 17.8% 15,738,158
 18.1%
Multifamily loans 8,641,204
 9.3% 8,309,115
 9.5%
Other commercial(2)
 7,390,795
 8.2% 7,630,004
 8.8%
Total commercial LHFI 41,034,716
 44.4% 40,381,758
 46.4%
Consumer loans secured by real estate:        
Residential mortgages 8,835,702
 9.5% 9,884,462
 11.4%
Home equity loans and lines of credit 4,770,344
 5.1% 5,465,670
 6.3%
Total consumer loans secured by real estate 13,606,046
 14.6% 15,350,132
 17.7%
Consumer loans not secured by real estate:        
RICs and auto loans 36,456,747

39.3%
29,335,220

33.7%
Personal unsecured loans 1,291,547
 1.4% 1,531,708
 1.8%
Other consumer(3)
 316,384
 0.3% 447,050
 0.4%
Total consumer loans 51,670,724
 55.6% 46,664,110
 53.6%
Total LHFI(1)
 $92,705,440
 100.0% $87,045,868
 100.0%
Total LHFI:        
Fixed rate $61,775,942
 66.6% $56,696,491
 65.1%
Variable rate 30,929,498
 33.4% 30,349,377
 34.9%
Total LHFI(1)
 $92,705,440
 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 $3.2 billion and $1.4 billion as of December 31, 2019 and December 31, 2018, respectively.
(2)Other commercial includes CEVF leveraged leases and loans.
(3)Other consumer primarily includes 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.

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.

118




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

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.

At December 31, 2019 and 2018, the Company had $279.4 million and $803.1 million, respectively, of loans originated prior to the Change in Control. The purchase marks on these portfolios were $726.5 thousand and $2.1 million at December 31, 2019 and 2018, respectively.

During the years ended December 31, 2019 and 2018, SC originated $12.8 billion and $7.9 billion, respectively, in Chrysler Capital loans (including the SBNA originations program), which represented 56% and 46%, respectively, of the UPB of SC's total RIC originations (including the SBNA originations program).

ACL Rollforward by Portfolio Segment
The activity in the ACL by portfolio segment for the years ended December 31, 2019, and 2018 was as follows:
  Year Ended December 31, 2019
(in thousands) Commercial Consumer Unallocated Total
ALLL, beginning of period $441,083
 $3,409,024
 $47,023
 $3,897,130
Provision for loan and lease losses 89,962
 2,200,870
 
 2,290,832
Charge-offs (185,035) (5,364,673) (275) (5,549,983)
Recoveries 53,819
 2,954,391
 
 3,008,210
Charge-offs, net of recoveries (131,216) (2,410,282) (275) (2,541,773)
ALLL, end of period $399,829
 $3,199,612
 $46,748
 $3,646,189
Reserve for unfunded lending commitments, beginning of period $89,472
 $6,028
 $
 $95,500
(Release of) / Provision for reserve for unfunded lending commitments 1,321
 (136) 
 1,185
Loss on unfunded lending commitments (4,859) 
 
 (4,859)
Reserve for unfunded lending commitments, end of period 85,934
 5,892
 
 91,826
Total ACL, end of period $485,763
 $3,205,504
 $46,748
 $3,738,015
Ending balance, individually evaluated for impairment(1)
 $50,307
 $935,086
 $
 $985,393
Ending balance, collectively evaluated for impairment 349,525
 2,264,523
 46,748
 2,660,796
         
Financing receivables:(2)
        
Ending balance $41,151,009
 $52,974,654
 $
 $94,125,663
Ending balance, evaluated under the FVO or lower of cost or fair value 116,293
 1,376,911
 
 1,493,204
Ending balance, individually evaluated for impairment(1)
 342,295
 4,225,331
 
 4,567,626
Ending balance, collectively evaluated for impairment 40,692,421
 47,372,412
 
 88,064,833
(1)Consists of loans in TDR status.
(2) Contains LHFS of $1.4 billionfor the year ended December 31, 2019.


119




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

  Year Ended December 31, 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 45,897
 2,306,896
 
 2,352,793
Charge-offs (108,750) (4,974,547) 
 (5,083,297)
Recoveries 60,140
 2,572,607
 
 2,632,747
Charge-offs, net of recoveries (48,610) (2,401,940) 
 (2,450,550)
ALLL, end of period $441,083
 $3,409,024
 $47,023
 $3,897,130
Reserve for unfunded lending commitments, beginning of period $103,835
 $5,276
 $
 $109,111
Release of unfunded lending commitments (13,647) 752
 
 (12,895)
Loss on unfunded lending commitments (716) 
 
 (716)
Reserve for unfunded lending commitments, end of period 89,472
 6,028
 
 95,500
Total ACL, end of period $530,555
 $3,415,052
 $47,023
 $3,992,630
Ending balance, individually evaluated for impairment (1)
 $94,120
 $1,457,174
 $
 $1,551,294
Ending balance, collectively evaluated for impairment 346,963
 1,951,850
 47,023
 2,345,836
         
Financing receivables:(2)
        
Ending balance $40,381,758
 $47,947,388
 $
 $88,329,146
Ending balance, evaluated under the FVO or lower of cost or fair value 
 1,393,476
 
 1,393,476
Ending balance, individually evaluated for impairment(1)
 444,031
 5,779,998
 
 6,224,029
Ending balance, collectively evaluated for impairment 39,937,727
 40,773,914
 
 80,711,641
(1)Consists of loans in TDR status.
(2)Contains LHFS of $1.3 billion for the year ended December 31, 2018.
  Year Ended December 31, 2017
(in thousands) Commercial Consumer Unallocated Total
ALLL, beginning of period $449,837
 $3,317,604
 $47,023
 $3,814,464
Provision for loan losses 99,606
 2,670,950
 
 2,770,556
Other(1)
 356
 5,283
 
 5,639
Charge-offs (144,002) (4,891,383) 
 (5,035,385)
Recoveries 37,999
 2,401,614
 
 2,439,613
Charge-offs, net of recoveries (106,003) (2,489,769) 
 (2,595,772)
ALLL, end of period $443,796
 $3,504,068
 $47,023
 $3,994,887
Reserve for unfunded lending commitments, beginning of period $116,866
 $5,552
 $
 $122,418
Provision for unfunded lending commitments (10,336) (276) 
 (10,612)
Loss on unfunded lending commitments (2,695) 
 
 (2,695)
Reserve for unfunded lending commitments, end of period 103,835
 5,276
 
 109,111
Total ACL end of period $547,631
 $3,509,344
 $47,023
 $4,103,998
Ending balance, individually evaluated for impairment(2)
 $102,326
 $1,824,640
 $
 $1,926,966
Ending balance, collectively evaluated for impairment 341,470
 1,679,428
 47,023
 2,067,921
         
Financing receivables:(3)
        
Ending balance $39,315,888
 $43,997,279
 $
 $83,313,167
Ending balance, evaluated under the FVO or lower of cost or fair value(1)
 149,177
 2,420,155
 
 2,569,332
Ending balance, individually evaluated for impairment(2)
 593,585
 6,652,949
 
 7,246,534
Ending balance, collectively evaluated for impairment 38,573,126
 34,924,175
 
 73,497,301
(1) Includes transfers in for the period ending December 31, 2017 related to the contribution of SFS to SHUSA.
(2) Consists of loans in TDR status.
(3) Contains LHFS of $2.5 billion for the year ended December 31, 2017.

120




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

Non-accrual loans by Class of Financing Receivable

The recorded investment in non-accrual loans disaggregated by class of financing receivables and other non-performing assets is summarized as follows:
(in thousands) December 31, 2019 December 31, 2018
     
Non-accrual loans:    
Commercial:    
CRE $83,117
 $88,500
C&I 153,428
 189,827
Multifamily 5,112
 13,530
Other commercial 31,987
 72,841
Total commercial loans 273,644
 364,698
Consumer:    
Residential mortgages 134,957
 216,815
Home equity loans and lines of credit 107,289
 115,813
RICs and auto loans 1,643,459
 1,545,322
Personal unsecured loans 2,212
 3,602
Other consumer 11,491
 9,187
Total consumer loans 1,899,408
 1,890,739
Total non-accrual loans 2,173,052
 2,255,437
     
OREO 66,828
 107,868
Repossessed vehicles 212,966
 224,046
Foreclosed and other repossessed assets 4,218
 1,844
Total OREO and other repossessed assets 284,012
 333,758
Total non-performing assets $2,457,064
 $2,589,195

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:
  December 31, 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 $51,472
 $65,290
 $116,762
 $8,351,261
 $8,468,023
 $
C&I(1)
 55,957
 84,640
 140,597
 16,510,391
 16,650,988
 
Multifamily 10,456
 3,704
 14,160
 8,627,044
 8,641,204
 
Other commercial 61,973
 6,352
 68,325
 7,322,469
 7,390,794
 
Consumer:            
Residential mortgages(2)
 154,978
 128,578
 283,556
 8,848,971
 9,132,527
 
Home equity loans and lines of credit 45,417
 75,972
 121,389
 4,648,955
 4,770,344
 
RICs and auto loans 4,364,110
 404,723
 4,768,833
 31,687,914
 36,456,747
 
Personal unsecured loans(3)
 85,277
 102,572
 187,849
 2,110,803
 2,298,652
 93,102
Other consumer 11,375
 7,479
 18,854
 297,530
 316,384
 
Total $4,841,015
 $879,310
 $5,720,325
 $88,405,338
 $94,125,663
 $93,102
(1) C&I loans includes $116.3 million of LHFS at December 31, 2019.
(2) Residential mortgages includes $296.8 million of LHFS at December 31, 2019.
(3) Personal unsecured loans includes $1.0 billion of LHFS at December 31, 2019.

121




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

 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 4,318,619
 441,742
 4,760,361
 24,574,859
 29,335,220
 
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.

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:
  December 31, 2019
(in thousands) 
Recorded Investment(1)
 UPB Related
Specific Reserves
 Average
Recorded Investment
With no related allowance recorded:        
Commercial:        
CRE $87,252
 $92,180
 $
 $83,154
C&I 24,816
 26,814
 
 25,338
Multifamily 2,927
 3,807
 
 10,594
Other commercial 2,190
 2,205
 
 4,769
Consumer:        
Residential mortgages 99,815
 149,887
 
 122,357
Home equity loans and lines of credit 37,496
 39,675
 
 41,783
RICs and auto loans 3,201
 3,222
 
 5,132
Personal unsecured loans 10
 10
 
 7
Other consumer 2,995
 2,995
 
 3,293
With an allowance recorded:        
Commercial:        
CRE 59,778
 88,746
 10,725
 59,320
C&I 130,209
 147,959
 35,596
 155,194
Other commercial 22,587
 27,669
 3,986
 41,251
Consumer:        
Residential mortgages 141,093
 238,571
 13,006
 197,529
Home equity loans and lines of credit 33,498
 39,406
 3,182
 47,019
RICs and auto loans 3,844,618
 3,846,003
 913,642
 4,544,652
  Personal unsecured loans 14,716
 14,947
 4,282
 15,449
  Other consumer 51,090
 54,061
 974
 30,575
Total:        
Commercial $329,759
 $389,380
 $50,307
 $379,620
Consumer 4,228,532
 4,388,777
 935,086
 5,007,796
Total $4,558,291
 $4,778,157
 $985,393
 $5,387,416
(1)Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, and net of discounts.

122




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

  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 7,062
 9,072
 
 11,628
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 5,244,685
 5,346,013
 1,415,709
 5,633,094
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, and net of discounts.

The Company recognized interest income of $585.5 million on approximately $3.6 billion of TDRs that were in performing status as of December 31, 2019 and $761.0 million on approximately $5.1 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.

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.

123




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

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:
December 31, 2019 CRE C&I Multifamily Remaining
commercial
 
Total(1)
    (in thousands)
Rating:          
Pass $7,513,567
 $14,816,669
 $8,356,377
 $7,072,083
 $37,758,696
Special mention 508,133
 743,462
 260,764
 260,051
 1,772,410
Substandard 379,199
 321,842
 24,063
 44,919
 770,023
Doubtful 24,378
 47,010
 
 13,741
 85,129
N/A (2)
 42,746
 722,005
 
 
 764,751
Total commercial loans $8,468,023
 $16,650,988
 $8,641,204
 $7,390,794
 $41,151,009
(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)
 December 31, 2019 December 31, 2018
(dollars in thousands) RICs and auto loans Percent RICs and auto loans Percent
No FICO(1)
 $3,178,459
 8.7% $3,136,449
 10.7%
<600 15,013,670
 41.2% 14,884,385
 50.7%
600-639 5,957,970
 16.3% 5,185,412
 17.7%
>=640 12,306,648
 33.8% 6,128,974
 20.9%
Total $36,456,747
 100.0% $29,335,220
 100.0%
(1)Consists primarily of loans for which credit scores are not considered in the ALLL model.
(2)FICO score at origination.

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.

124




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

Residential mortgage and home equity financing receivables by LTV and FICO range are summarized as follows:
  
Residential Mortgages(1)(3)
December 31, 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)
 $92,052
 $4,654
 $534
 $
 $
 $
 $
 $97,240
<600 33
 180,465
 48,344
 36,401
 27,262
 1,518
 2,325
 296,348
600-639 31
 122,675
 45,189
 34,690
 37,358
 636
 1,108
 241,687
640-679 1,176
 263,781
 89,179
 78,215
 87,067
 946
 1,089
 521,453
680-719 7,557
 511,018
 219,766
 132,076
 155,857
 1,583
 2,508
 1,030,365
720-759 14,427
 960,290
 413,532
 195,335
 191,850
 1,959
 3,334
 1,780,727
>=760 36,621
 3,324,285
 938,368
 353,989
 203,665
 3,673
 7,281
 4,867,882
Grand Total $151,897
 $5,367,168
 $1,754,912
 $830,706
 $703,059
 $10,315
 $17,645
 $8,835,702
(1) Excludes LHFS.
(2) Residential mortgages 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.
  
Home Equity Loans and Lines of Credit(2)
December 31, 2019 
N/A(1)
 LTV<=70% 70.01-90% 90.01-110% LTV>110% Grand Total
FICO Score (dollars in thousands)
N/A(1)
 $176,138
 $189
 $153
 $
 $
 $176,480
<600 824
 215,977
 66,675
 11,467
 4,459
 299,402
600-639 1,602
 147,089
 34,624
 4,306
 3,926
 191,547
640-679 9,964
 264,021
 78,645
 8,079
 3,626
 364,335
680-719 17,120
 478,817
 146,529
 12,558
 9,425
 664,449
720-759 25,547
 665,647
 204,104
 12,606
 10,857
 918,761
>=760 61,411
 1,639,702
 408,812
 30,259
 15,186
 2,155,370
Grand Total $292,606
 $3,411,442
 $939,542
 $79,275
 $47,479
 $4,770,344
(1) Excludes LHFS.
(2)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 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.

125




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)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) December 31, 2019 
December 31, 2018(2)
     
Performing $3,646,354
 $5,069,879
Non-performing 673,777
 908,490
Total (1)
 $4,320,131
 $5,978,369
(1) Excludes LHFS.
(2)Balances at December 31, 2018 have been updated to include RV/marine TDRs in the amount of $56.0 million ($55.7 million performing, $0.4 million non-performing) that were not identified at that date.

Financial Impact and TDRs by Concession Type
The Company's modifications consist primarily of term extensions. The following tables detail the activity of TDRs for the yearyears ended December 31, 2017, 2016,2019, 2018 and 2015, respectively:2017:
Year Ended December 31, 2017Year Ended December 31, 2019
Number of
Contracts
 
Pre-TDR Recorded
Investment
(1)
 Term ExtensionPrincipal Forbearance
Other(4)
Post-TDR Recorded Investment(2)
Number of
Contracts
 
Pre-TDR Recorded
Investment
(1)
 
Post-TDR Recorded Investment(2)
(dollars in thousands)(dollars in thousands)
Commercial:          
CRE:     
Corporate Banking74
 $131,790
 $(13,911)$(13,279)$(617)$103,983
Middle market CRE1
 20,760
 (33)

20,727
Commercial and industrial790
 24,915
 (11)
(42)24,862
CRE57
 $101,885
 $98,984
C&I91
 2,591
 2,601
Consumer:          
Residential mortgages(3)
212
 40,578
 5

251
40,834
112
 15,232
 15,498
Home equity loans and lines of credit70
 5,554
 

1,014
6,568
148
 14,671
 15,795
RICs and auto loans - originated189,246
 3,339,056
 (2,699)
(290)3,336,067
RICs - purchased17,717
 159,462
 (1,679)
(44)157,739
RICs and auto loans74,458
 1,274,067
 1,277,756
Personal unsecured loans12,466
 21,003
 

(269)20,734
211
 2,543
 2,572
Other consumer109
 3,055
 

24
3,079
72
 2,572
 2,556
Total220,685
 $3,746,173
 $(18,328)$(13,279)$27
$3,714,593
75,149
 $1,413,561
 $1,415,762
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month in which the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month in which the modification occurred.
(3) The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.
(4) Other modifications may include modifications such as fee waivers, or capitalization of fees.

126




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

Year Ended December 31, 2016Year Ended December 31, 2018
Number of
Contracts
 
Pre-TDR Recorded
Investment
(1)
 Term ExtensionPrincipal Forbearance
Other(4)
Post-TDR Recorded Investment(2)
Number of
Contracts
 
Pre-TDR Recorded
Investment
(1)
 
Post-TDR Recorded Investment(2)
(dollars in thousands)(dollars in thousands)
Commercial:      
CRE:     
Corporate Banking91
 $198,275
 $567
$(24,861)$922
$174,903
Middle market CRE
 
 



Santander real estate capital1
 8,729
 

(18)8,711
Commercial and industrial1,416
 47,003
 (7)
(149)46,847
CRE99
 $145,214
 $140,153
C&I247
 9,932
 9,515
Consumer:          
Residential mortgages(3)
277
 36,203
 (53)
9,982
46,132
189
 32,606
 31,770
Home equity loans and lines of credit161
 10,360
 

416
10,776
159
 10,629
 10,545
RICs and auto loans - originated155,114
 2,878,648
 (438)
(292)2,877,918
RICs - purchased42,774
 496,224
 (2,353)
(115)493,756
RICs and auto loans132,408
 2,204,895
 2,216,157
Personal unsecured loans19,723
 30,845
 

(744)30,101
363
 4,650
 4,589
Other consumer691
 18,246
 (38)
(1,133)17,075
11
 308
 228
Total220,248
 $3,724,533
 $(2,322)$(24,861)$8,869
$3,706,219
133,476
 $2,408,234
 $2,412,957
(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.

160




NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
     
Year Ended December 31, 2015Year Ended December 31, 2017
Number of
Contracts
 
Pre-TDR Recorded
Investment
(1)
 Term ExtensionPrincipal Forbearance
Other(4)
Post-TDR Recorded Investment(2)
Number of
Contracts
 
Pre-TDR Recorded
Investment
(1)
 
Post-TDR Recorded Investment(2)
(dollars in thousands)(dollars in thousands)
Commercial:          
CRE:     
Corporate Banking73
 $55,896
 $(1,027)$(4,159)$(194)$50,516
Middle market CRE2
 17,024
 

(2,110)14,914
Santander real estate capital1
 4,977
 

(7)4,970
Commercial and industrial615
 23,179
 
(1,469)
21,710
CRE75
 $152,550
 $124,710
C&I790
 24,915
 24,862
Multi-family
 
 
Other commercial
 
 
Consumer:          
Residential mortgages(3)
769
 114,731
 10
(911)265
114,095
212
 40,578
 40,834
Home equity loans and lines of credit470
 31,848
 

(256)31,592
70
 5,554
 6,568
RICs and auto loans - originated78,576
 1,486,951
 (335)
(274)1,486,342
RICs - purchased175,780
 2,412,434
 (4,619)
(829)2,406,986
RICs and auto loans206,963
 3,498,518
 3,493,806
Personal unsecured loans16,266
 28,099
 
(430)(96)27,573
391
 4,678
 4,548
Other consumer55
 3,218
 (1)
(217)3,000
109
 3,055
 3,079
Total272,607
 $4,178,357
 $(5,972)$(6,969)$(3,718)$4,161,698
208,610
 $3,729,848
 $3,698,407
(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 days past due.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 yearyears ended December 31, 2019, 2018, and 2017, December 31, 2016, and December 31, 2015, respectively.

127




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

Year Ended December 31,Year Ended December 31,
2017 2016 20152019 2018 2017
Number of
Contracts
 
Recorded Investment(1)
 Number of
Contracts
 
Recorded Investment(1)
 Number of
Contracts
 
Recorded Investment(1)
Number of
Contracts
 
Recorded Investment(1)
 Number of
Contracts
 
Recorded Investment(1)
 Number of
Contracts
 
Recorded Investment(1)
(dollars in thousands)(dollars in thousands)
Commercial                      
Middle Market CRE15
 $7,663
 
 $
 
 $
Commercial and industrial203
 7,693
 264
 16,996
 81
 5,522
CRE10
 $6,020
 7
 $21,654
 18
 $27,286
C&I122
 37,433
 155
 20,920
 205
 7,741
Other commercial5
 35
 
 
 2
 22
Consumer:                      
Residential mortgages302
 36,112
 63
 9,120
 46
 7,742
142
 16,368
 165
 20,783
 302
 36,112
Home equity loans and lines of credit6
 257
 15
 890
 15
 1,789
25
 1,867
 43
 2,609
 6
 257
RICs and auto loans47,789
 831,102
 48,686
 814,454
 51,202
 792,721
22,663
 375,216
 40,007
 673,875
 47,789
 831,102
Personal Unsecured loans8,609
 13,660
 4,104
 6,155
 3,662
 4,083
Personal unsecured loans215
 2,061
 194
 1,743
 320
 3,250
Other consumer35
 394
 215
 3,117
 32
 1,773
3
 125
 
 
 35
 394
Total56,959
 $896,881
 53,347
 $850,732
 55,038
 $813,630
23,185
 $439,125
 40,571
 $741,584
 48,677
 $906,164
(1)The recorded investment represents the period-end balance at December 31, 2017, 2016, and 2015.balance. Does not include Chapter 7 bankruptcy TDRs.

161





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 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 December 31, 20172019 and December 31, 2016:2018:
(in thousands) December 31, 2017 December 31, 2016
Leased vehicles $14,751,568
 $13,522,675
Origination fees and other costs 27,246
 23,141
Manufacturer subvention payments (1,047,113) (1,126,323)
Leased vehicles, gross 13,731,701
 12,419,493
Less: accumulated depreciation (3,333,125) (2,789,028)
Leased vehicles, net 10,398,576
 9,630,465
     
Commercial equipment vehicles and aircraft, gross 93,981
 65,401
Less: accumulated depreciation (18,249) (6,635)
Commercial equipment vehicles and aircraft, net 75,732
 58,766
     
Total operating lease assets, net $10,474,308
 $9,689,231

Periodically, the Company executes bulk sales of leases originated under the Chrysler Capital program. During the years ended December 31, 2017 and December 31, 2016, the Company did not execute any bulk sales of leases originated under the Chrysler Capital program.
(in thousands) December 31, 2019 December 31, 2018
Leased vehicles $21,722,726
 $18,737,338
Less: accumulated depreciation (4,159,944) (3,518,025)
Depreciated net capitalized cost 17,562,782
 15,219,313
Origination fees and other costs 76,542
 66,967
Manufacturer subvention payments (1,177,342) (1,307,424)
Leased vehicles, net 16,461,982
 13,978,856
     
Commercial equipment vehicles and aircraft, gross 41,154
 130,274
Less: accumulated depreciation (7,397) (30,337)
Commercial equipment vehicles and aircraft, net 
 33,757
 99,937
     
Total operating lease assets, net(1)
 $16,495,739
 $14,078,793

The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of December 31, 20172019 (in thousands):
2018 $1,680,541
2019 1,046,932
2020 382,527
 $2,706,652
2021 17,819
 1,704,747
2022 2,415
 572,819
2023 56,611
2024 2,542
Thereafter 2,659
 7,817
Total $3,132,893
 $5,051,188

Lease income was $2.0$2.9 billion, $1.8$2.4 billion, and $1.5$2.0 billion for the years ended December 31, 2017, 20162019, 2018, and 2015,2017, respectively.

During the years ended December 31, 20172019, 2018, and 2016,2017 the Company recognized $127.2$135.9 million, $202.8 million, and $66.9$127.2 million, respectively, of net gains on the sale of operating lease assets that had been returned to the Company at the end of the lease term. These amounts are recorded within Miscellaneous income, net in the Company's Consolidated Statements of Operations.

Lease expense was $1.6$2.1 billion, $1.3$1.8 billion, and $1.1$1.6 billion for the years ended December 31, 2017, 20162019, 2018, and 2015,2017 respectively.

128




NOTE 6. PREMISES AND EQUIPMENT

A summary of premises and equipment, less accumulated depreciation, follows:
(in thousands) December 31, 2017 December 31, 2016
Land $89,350
 $97,583
Office buildings 201,927
 225,578
Furniture, fixtures, and equipment 434,591
 428,606
Leasehold improvement 551,442
 530,119
Computer Software 1,002,260
 921,231
Automobiles and other 1,146
 7,960
Total premise and equipment 2,280,716
 2,211,077
Less accumulated depreciation (1,431,655) (1,214,579)
Total premises and equipment, net $849,061
 $996,498

162




NOTE 6. PREMISES AND EQUIPMENT (continued)
     
(in thousands) December 31, 2019 December 31, 2018
Land $84,194
 $87,531
Office buildings 177,246
 185,218
Furniture, fixtures, and equipment 485,851
 427,245
Leasehold improvement 543,816
 509,314
Computer software 990,758
 990,429
Automobiles and other 1,532
 1,475
Total premise and equipment 2,283,397
 2,201,212
Less accumulated depreciation (1,485,275) (1,395,272)
Total premises and equipment, net $798,122
 $805,940

Depreciation expense for premises and equipment, included in Occupancy and equipment expenses in the Consolidated Statements of Operations, was $300.0$226.1 million, $282.2$268.0 million, and $251.2$300.0 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.

During the year ended December 31, 20172019 the Company sold and leased back ten properties owned by SBNA.eight properties. The Company received net proceeds of $58.0$2.0 million in connectionfrom the sales, with these sales.a net gain of $350.0 thousand. The carrying value of these properties was $1.7 million.

In addition to the eight properties sold the Company also completed the sale of 14 bank branches to First Commonwealth Bank as discussed further in Note 1 to these Consolidated Financial Statements. The gain on the sale of these branches was $15.3immaterial.

In 2018 the Company sold 13 properties. The Company received net proceeds of $5.8 million from the sales, with a net gain of $2.1 million. The carrying value of these properties was $3.6 million. Of the 13 properties sold, the Company leased back one property and accounted for these transactionsthe transaction as sale-leasebacks,a sale-leaseback resulting in recognition of $31.2 milliona $154.0 thousand gain on the date of the transactions,transaction, and deferral of the remaining $11.5$1.3 million that will be amortized over the period of the lease terms.gain. Gain on sale of premises and equipment are included within Miscellaneous income in the Consolidated Statements of Operations.

In 2016,2017, the Company sold eightand leased back 10 properties. The Company received net proceeds of $58.0 million in connection with the sales. The carrying value of the properties which resultedsold was $15.3 million. The Company accounted for the transaction as a sale-leaseback resulting in the recognition of a $2.4 million gain. The Company sold one property for a $13.3$31.2 million gain on the date of the transactions, and deferral of the remaining $11.5 million. The remaining deferral was recognized in 2015.equity upon the adoption of ASU 2016-02 on January 1, 2019.

During the years ended December 31, 2019, 2018, and 2017 the Company recorded impairment of capitalized assets in the amount of $23.4 million, $14.8 million, and $15.5 million, respectively. These were primarily related to capitalized software assets.


NOTE 7. VIEs

The Company transfers RICs and leased vehiclesvehicle 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. Generally, these transactions are structured without recourse. The Trusts are considered VIEs under GAAP and when the Company holds the residual interest, are consolidated because the Company has: (a) power over the significant activities of each entity as servicer ofmay or may not consolidate these VIEs on its financial assets and (b) through the residual interest and in some cases debt securities held by the Company, an obligation to absorb losses or the right to receive benefits from each VIE that are potentially significant to the VIE. When the Company does not retain any debt or equity interests in its securitizations or subsequently sells such interests it records these transactions as sales of the associated RICs.Consolidated Balance Sheets.

The collateral borrowings under credit facilities and securitization notes payable of the Company'sCompany’s consolidated VIEs remain on the Company's Consolidated Balance Sheets.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. All of the Trusts are separate legal entities and the collateral and other assets held by these subsidiaries are legally owned by them and are not available to other creditors.

Revolving credit facilities generally also utilize entities that are considered VIEs, which are included on the Company's Consolidated Balance Sheets.

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 leaseleased vehicles. This titling trust is considered a VIE.

129




NOTE 7. VIEs (continued)

On-balance sheet VIEs

The assets of consolidated VIEs that are included in the Company's Consolidated Financial Statements, presented reflectingbased 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 these consolidatedthose entities for which creditors (or beneficial interest holders) do not have recourse to ourthe Company's general credit, were as follows:follows(1):

(in thousands) December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
Assets        
Restricted cash $1,995,557
 $2,087,177
 $1,629,870
 $1,582,158
Loans(2)
 22,712,864
 23,568,066
 26,532,328
 24,098,638
Operating lease assets, net 10,160,327
 8,564,628
 16,461,982
 13,978,855
Various other assets 733,123
 686,253
 625,359
 685,383
Total Assets $35,601,871
 $34,906,124
 $45,249,539
 $40,345,034
Liabilities        
Notes payable(2)
 $28,469,999
 $31,667,976
 $34,249,851
 $31,949,839
Various other liabilities 197,969
 91,234
 188,093
 122,010
Total Liabilities $28,667,968
 $31,759,210
 $34,437,944
 $32,071,849
(1) Includes $1.1 billion and $1.0 billion of RICs held for sale at December 31, 2017 and December 31, 2016, respectively.
(2) Reflects the impacts of purchase accounting.

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NOTE 7. VIEs (continued)

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

The Company retains servicing responsibilityrights 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.income, net. As of December 31, 20172019 and December 31, 2016,2018, the Company was servicing $26.1$27.3 billion and $27.4$27.1 billion, respectively, of gross RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.

Below is aA summary of the cash flows received from the on-balance sheetconsolidated Trusts for the periods indicated:years ended December 31, 2019, 2018 and 2017 is as follows:
 Year Ended December 31, Year Ended December 31,
(in thousands) 2017 2016 2015 2019 2018 2017
Assets securitized $18,442,793
 $15,828,921
 $18,516,641
 $22,286,033
 $26,650,284
 $18,442,793
            
Net proceeds from new securitizations (1)
 $14,126,211
 $13,319,530
 $15,232,692
 $17,199,821
 $17,338,880
 $14,126,211
Net proceeds from sale of retained bonds 499,354
 436,812
 
 251,602
 1,059,694
 499,354
Cash received for servicing fees (2)
 866,210
 787,778
 700,156
 990,612
 887,988
 866,210
Net distributions from Trusts (2)
 2,613,032
 1,748,013
 1,960,418
 3,615,461
 2,767,509
 2,613,032
Total cash received from Trusts $18,104,807
 $16,292,133
 $17,893,266
 $22,057,496
 $22,054,071
 $18,104,807
(1) Includes additional advances on existing securitizations.
(2) These amounts are not reflected in the accompanying Consolidated Statements of Cash FlowsSCF because the cash flows are between the VIEs and other entities included in the consolidation.

Off-balance sheet VIEs

During the year ended December 31, 2019, the Company sold no RICs to VIEs in off-balance sheet securitizations. During the years ended December 31, 2017, 20162018, and 2015,2017 the Company sold $2.6$2.9 billion $886.3 million and $1.6$2.6 billion, respectively, of gross RICs to VIEs in off-balanceoff- balance sheet securitizations for a gain (loss)loss of $(13.0) million, $(10.5)$20.7 million and $60.0$13.0 million, respectively. Beginning in 2017, the transactions arewere executed under the newCompany's securitization platformplatforms with Santander. Santander Santander Prime Auto Issuing Note ("SPAIN"). Santander will holdholds eligible vertical interests in notes and certificates of not less than 5% to comply with the DFA's risk retention rules.

130




NOTE 7. VIEs (continued)

As of December 31, 20172019 and December 31, 2016,2018, the Company was servicing $3.4$2.4 billion and $2.7$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) December 31, 2017 December 31, 2016
SPAIN $2,024,016
 $
Total serviced for related parties 2,024,016
 
     
Chrysler Capital securitizations 1,404,232
 2,472,756
Other third parties 
 268,345
Total serviced for third parties 1,404,232
 2,741,101
Total serviced for other portfolio $3,428,248
 $2,741,101
(in thousands) December 31, 2019 December 31, 2018
Related party SPAIN securitizations $2,149,008
 $3,461,793
Third party Chrysler Capital securitizations 259,197
 611,050
Total serviced for other portfolio $2,408,205
 $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.


164




NOTE 7. VIEs (continued)

A summary of the cash flows received from the off-balance sheet Trusts for the periods indicatedyears ended December 31, 2019, 2018 and 2017 is as follows:
 Year Ended December 31, Year Ended December 31,
(in thousands) 2017 2016 2015 2019 2018 2017
Assets securitized (1)
 $2,583,341
 $904,108
 $1,557,099
Receivables securitized (1)
 $
 $2,905,922
 $2,583,341
            
Net proceeds from new securitizations $2,588,227
 $876,592
 $1,578,320
 $
 $2,909,794
 $2,588,227
Cash received for servicing fees 35,682
 47,804
 23,848
 34,068
 43,859
 35,682
Total cash received from Trusts $2,623,909
 $924,396
 $1,602,168
 $34,068
 $2,953,653
 $2,623,909
(1) Represents the UPB at the time of original securitization.


NOTE 8. 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 December 31, 2017:2019:
(in thousands) Consumer and Business Banking CRE Commercial Banking GCB SC Santander BanCorp Total
Goodwill at December 31, 2016 $1,880,304
 $870,411
 $542,584
 $131,130
 $1,019,960
 $10,536
 $4,454,925
Impairment during the period 
 
 
 
 
 (10,536) (10,536)
Goodwill at December 31, 2017 $1,880,304

$870,411

$542,584

$131,130

$1,019,960

$

$4,444,389
(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 December 31, 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 23 to these Consolidated Financial Statements for additional details on the change in reportable segments.

During 2018, the fourth quarterreportable 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. This change in reportable segments was impacted by the 2019 change in reportable segments discussed above.

There were no disposals, additions or impairments of goodwill for the years ended December 31, 2019 or 2018. There were no disposals, additions or re-allocations of goodwill for 2017. After conducting an analysis of the fair value of each reporting unit as of October 1, 2017, the Company determined that the full amount of goodwill attributed to Santander BanCorp of $10.5 million was impaired and, as a result, it was written-off,written off, primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effecteffects of Hurricane Maria. There were no additions or re-allocations ofThe Company evaluates goodwill for impairment at the year ended December 31, 2017. There were no additions, re-allocations, or impairmentsreporting unit level. The Company completes its annual goodwill impairment test as of goodwill for the year ended December 31, 2016.

October 1 each year. The Company conducted its last annual goodwill impairment tests as of October 1, 20172019 using generally accepted valuation methods. After conducting an analysis of the fair value of each reporting unit as of October 1, 2017, no impairments of goodwill attributed to other reporting units were identified.

131




NOTE 8. 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.
 December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
(in thousands) 
Net
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Accumulated
Amortization
Intangibles subject to amortization:                
Dealer networks $426,411
 $(153,589) $465,625
 $(114,375) $347,982
 $(232,018) $387,196
 $(192,804)
Chrysler relationship 80,000
 (58,750) 95,000
 (43,750) 50,000
 (88,750) 65,000
 (73,750)
Core deposit intangibles 
 
 
 (295,842)
Trade name 15,900
 (2,100) 17,100
 (900) 13,500
 (4,500) 14,700
 (3,300)
Other intangibles 13,442
 (56,021) 19,519
 (98,492) 4,722
 (52,450) 8,297
 (46,894)
Total intangibles subject to amortization $535,753
 $(270,460) $597,244
 $(553,359) $416,204
 $(377,718) $475,193
 $(316,748)

At December 31, 20172019 and December 31, 2016,2018, the Company did not have any intangibles, other than goodwill, that were not subject to amortization.

Amortization expense on intangible assets was $61.5$59.0 million, $70.0$60.7 million, and $79.9$61.5 million for the years ended December 31, 2019, 2018, and 2017, December 31, 2016, and December 31, 2015, respectively.


165




NOTE 8. GOODWILL AND OTHER INTANGIBLES (continued)

During 2016, the Company's core deposit intangibles and purchased credit card relationship intangibles associated with its 2006 acquisitions, which were amortized straight-line over a period of ten years, became fully amortized. During 2016, $48.5 million of the Company's customer relationships associated with BSI became fully amortized.

The estimated aggregate amortization expense related to intangibles, excluding any impairment charges, for each of the five succeeding calendar years ending December 31 is:
Year Remaining Amount To Record Calendar Year Amount
 (in thousands) (in thousands)
2018 60,644
2019 58,975
2020 58,642
 $58,658
2021 39,889
 39,903
2022 39,889
 39,901
2023 28,649
2024 24,792
Thereafter 277,714
 224,301


NOTE 9. OTHER ASSETS

The following is a detail of items that comprise othercomprised Other assets at December 31, 20172019 and December 31, 2016:2018:
(in thousands) December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
Income tax receivables $292,220
 $294,796
Operating lease ROU assets $656,472
 $
Deferred tax assets 503,681
 625,087
Accrued interest receivable 545,148
 566,602
Derivative assets at fair value 448,977
 413,779
 555,880
 511,916
Other repossessed assets 212,882
 235,584
 217,184
 225,890
Equity method investments 271,656
 204,687
MSRs 149,197
 150,343
 132,683
 152,121
OREO 66,828
 107,868
Income tax receivables 272,699
 373,245
Prepaid expenses 172,547
 172,559
 352,331
 198,951
OREO 130,777
 116,705
Deferred tax asset, net 771,652
 989,767
Accrued interest receivable 563,607
 599,321
Equity method investments 194,434
 255,344
Miscellaneous assets and receivables 696,134
 567,327
 629,654
 686,969
Total other assets $3,632,427
 $3,795,525
 $4,204,216
 $3,653,336

Income tax receivables
132

Income tax receivables consists primarily of accrued federal tax receivables.


NOTE 9. OTHER ASSETS (continued)

DerivativeOperating lease ROU assets at fair value

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, ATMs, vehicles and certain equipment leases. Real estate leases may include one or more options to renew, with renewal terms that can extend the lease term generally from one to five years. 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.

At December 31, 2019, operating lease ROU assets were $656.5 million and operating lease liabilities were $711.7 million. Operating lease ROU assets are included in Other assets in the Company’s Consolidated Balance Sheets. Lease liabilities are included in Accrued expenses and payables in the Company’s Consolidated Balance Sheets.

For the year ended December 31, 2019, operating lease expenses were $145.5 million and sublease income was $4.1 million, respectively, and are reported within Occupancy and equipment expenses in the Company’s Consolidated Statements of Operations.

Supplemental balance sheet information related to leases was as follows:
Maturity of Lease Liabilities at December 31, 2019 Total Operating leases
  (in thousands)
2020 $139,597
2021 130,132
2022 120,284
2023 105,878
2024 91,799
Thereafter 206,847
Total lease liabilities $794,537
Less: Interest (82,871)
Present value of lease liabilities $711,666


The remaining obligations under lease commitments required under operating leases as of December 31, 2018, prior to the date of adoption and as defined by the previous lease accounting guidance, with noncancellable lease terms at December 31, 2018 were as follows:
Maturity of Lease Liabilities at December 31, 2018 Total Operating leases Future Minimum Expected Sublease Income Net Payments
2019 $146,108
 $(4,660) $141,448
2020 116,871
 (2,527) 114,344
2021 96,784
 (675) 96,109
2022 83,028
 (550) 82,478
2023 70,158
 (562) 69,596
Thereafter 169,046
 (535) 168,511
Total $681,995
 $(9,509) $672,486

Operating Lease Term and Discount RateDecember 31, 2019
Weighted-average remaining lease term (years)7.1
Weighted-average discount rate3.1%

Other Information December 31, 2019
  (in thousands)
Operating cash flows from operating leases(1)
 $(136,510)
Leased assets obtained in exchange for new operating lease liabilities $841,718
(1) Activity is included within the net change in other liabilities on the Consolidated SCF.

133




NOTE 9. OTHER ASSETS (continued)

The Company made approximately $3.9 million in payments during the year ending December 31, 2019 to Santander for rental of certain office space. The related ROU asset and lease liability were approximately $13.3 million on December 31, 2019.

The remainder of Other assets is comprised of:

Deferred tax asset, net - Refer to Note 15 of these Consolidated Financial Statements for more information on tax-related activities.
Derivative assets at fair value represent the net amount of derivatives presented in the Consolidated Financial Statements, including the impact of amounts offsetting recognized assets.- Refer to the offsetting"Offsetting of financial assetsFinancial Assets" table in Note 14 to these Consolidated Financial Statements for the detail of these amounts.

MSRs

The Company maintains an MSR asset for sold residential real estate loans serviced for others. At December 31, 2017, 2016 and 2015, the balance of these loans serviced for others accounted for at fair value was $14.9 billion, $15.4 billion and $15.9 billion, respectively. The Company accounts for a majority of its residential MSRs using the FVO. Changes in fair value are recorded through the Mortgage banking income, net line of the Consolidated Statements of Operations. The fair value of the MSRs at December 31, 2017, 2016 and 2015 were $146.0 million, $146.6 million and $147.2 million, respectively. See further discussion on the valuation of the MSRs in Note 18. 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 14 to these Consolidated Financial Statements. The remainder of MSRs not accounted for using the FVO are accounted for at lower of cost or market.


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NOTE 9. OTHER ASSETS (continued)

For the year ended December 31, 2017, 2016 and 2015, the Company recorded net changes in the fair value of MSRs due to valuation totaling $2.0 million, $3.9 million and $3.9 million, respectively.

The following table presents a summary of activity for the Company's residential MSRs that are included in the Consolidated Balance Sheets.
  Year ended
(in thousands) December 31, 2017 December 31, 2016 December 31, 2015
Fair value at beginning of period(1)
 $146,589
 $147,233
 $145,047
Mortgage servicing assets recognized 15,788
 20,256
 22,964
Principal reductions (18,351) (24,787) (24,726)
Change in fair value due to valuation assumptions 1,967
 3,887
 3,948
Fair value at end of period(1)
 $145,993
 $146,589
 $147,233
(1)
The Company had total MSRs of $149.2 million, $150.3 million and $151.5 million as of December 31, 2017,2016 and 2015, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or market and are not presented within this table.

Fee income and gain on sale of mortgage loans

Included in Mortgage banking income, net on the Consolidated Statements of Operations was mortgage servicing fee income of $41.3 million, $43.0 million and $45.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. The Company had gains on sales of mortgage loans included in Mortgage banking income, net on the Consolidated Statements of Operations of $28.5 million, $35.7 million and $49.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Other repossessed assets and OREO

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

Deferred tax assets, net

The Company recorded $771.7 million of deferred tax assets, net as of December 31, 2017, compared to $989.8 million at December 31, 2016.

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")NMTC and Community Reinvestment Act ("CRA")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.

As a resultMSRs - See further discussion on the valuation of the enactmentMSRs in Note 16.
Income tax receivables - Refer to Note 15 of these Consolidated Financial Statements for more information on tax-related activities.
Prepaid Expenses increased $153.4 million from 2018 to 2019. This increase includes the $60 million upfront payment SC made to FCA in connection with SC's execution of the TCJA,sixth amendment to the Company recorded a $27.1 million impairment of its investmentsChrysler agreement in certain equity method investments that are accounted for under the hypothetical liquidation at book value method, a form of equity method accounting typically applied for windfarm/solar power investments which have complex capital and distribution structures. For these investments, the tax equity partners typically share in virtually all of the project’s revenues, expenses and tax benefits until a pre-determined internal rate of return is achieved.

Miscellaneous assets and receivables

June 2019.
Miscellaneous assets and receivables includes subvention receivables in connection with the agreement with Chrysler, Agreement, investment and capital market receivables, derivatives trading receivables, and unapplied payments. Miscellaneous assets and receivables increased $128.8 million for the year ended December 31, 2017 compared to 2016 due to increases in unsettled derivative trades, vehicle receivables and investment proceeds receivables, partially offset by a decrease in subvention receivables.


167





NOTE 10. DEPOSITS AND OTHER CUSTOMER ACCOUNTS

Deposits and other customer accounts are summarized as follows:
 December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
(Dollars in thousands) Balance Percent of total deposits Balance Percent of total deposits
(dollars in thousands) Balance Percent of total deposits Balance Percent of total deposits
Interest-bearing demand deposits $8,784,597
 14.4% $11,284,881
 16.8% $10,301,133
 15.3% $8,827,704
 14.4%
Non-interest-bearing demand deposits 15,402,235
 25.3% 15,413,609
 22.9% 14,922,974
 22.2% 14,420,450
 23.4%
Savings 5,903,897
 9.7% 5,988,852
 8.9% 5,632,164
 8.4% 5,875,787
 9.6%
Customer repurchase accounts 802,119
 1.4% 868,544
 1.3% 407,477
 0.6% 654,843
 1.1%
Money market 24,530,661
 40.3% 24,511,906
 36.5% 26,687,677
 39.6% 24,263,929
 39.4%
CDs 5,407,594
 8.9% 9,172,898
 13.6% 9,375,281
 13.9% 7,468,667
 12.1%
Total Deposits (1)
 $60,831,103
 100.0% $67,240,690
 100.0%
Total deposits (1)
 $67,326,706
 100.0% $61,511,380
 100.0%
(1)Includes foreign deposits, as defined by the FRB, of $9.1$8.9 billion and $10.7$8.4 billion at December 31, 20172019 and December 31, 2016,2018, respectively.

Deposits collateralized by investment securities, loans, and other financial instruments totaled $2.3$3.5 billion and $3.0$2.7 billion at December 31, 20172019 and December 31, 2016,2018, respectively.

Demand deposit overdrafts that have been reclassified as loan balances were $38.9$79.2 million and $42.3$50.0 million at December 31, 20172019 and December 31, 2016,2018, respectively.

Interest expense on deposits and other customer accounts is summarized as follows:
      
 YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
(in thousands) 2017 2016 2015 2019 2018 2017
Interest-bearing demand deposits $21,628
 $40,262
 $54,348
 $82,152
 $41,481
 $21,628
Savings 11,004
 12,723
 14,389
 13,132
 12,325
 11,004
Customer repurchase accounts 1,932
 1,750
 1,979
 1,643
 1,761
 1,932
Money market 132,993
 126,418
 127,576
 317,299
 245,794
 132,993
CDs 73,487
 95,869
 90,853
 160,245
 87,767
 73,487
Total Deposits $241,044
 $277,022
 $289,145
 $574,471
 $389,128
 $241,044

134




NOTE 10. DEPOSITS AND OTHER CUSTOMER ACCOUNTS (continued)

The following table sets forth the maturity of the Company's CDs of $100,000 or more at December 31, 20172019 as scheduled to mature contractually:
  
 (in thousands) (in thousands)
Three months or less $837,779
 $803,808
Over three through six months 125,850
 286,608
Over six through twelve months 428,018
 802,378
Over twelve months 1,370,572
 1,194,122
Total $2,762,219
 $3,086,916

The following table sets forth the maturity of all the Company's CDs at December 31, 20172019 as scheduled to mature contractually:
 (in thousands)  
2018 $2,677,395
2019 1,262,098
 (in thousands)
2020 512,349
 $7,067,203
2021 689,215
 1,882,601
2022 259,801
 328,150
2023 59,170
2024 32,970
Thereafter 6,736
 5,187
Total $5,407,594
 $9,375,281

At December 31, 20172019 and 2016,December 31, 2018, the Company had $1.3$1.5 billion and $1.8$1.9 billion of CDs greater than $250 thousand.

168





NOTE 11. BORROWINGS

Total borrowings and other debt obligations at December 31, 20172019 were $39.0$50.7 billion, compared to $43.5$45.0 billion at December 31, 2016.2018. The Company's debt agreements impose certain limitations on dividends other payments and transactions. The Company is currently in compliance with these limitations.

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

Bank

DuringThe Bank had no new securities issuances during the first quarter of 2017, the Bank repurchased $881.0 million of its 2.00% senior notes due 2018years ended December 31, 2019 and senior floating rate notes dueDecember 31, 2018.

During the second quarter of 2017,year ended December 31, 2019, the Bank repurchased $14.2the following borrowings and other debt obligations:
$27.9 million of its real estate investment trust ("REIT") preferred debt.subordinated notes due August 2022.

During the fourth quarter of 2017, the Bank repurchased $307.9$21.2 million of its 8.75% subordinated notes due 2018. The Bank recorded loss on debt extinguishment related to this repurchase of $14.0 million. The Bank also repurchased $119.0 million of its 2.00% senior notes due 2018 and senior floating rate notes due 2018.REIT preferred debt.

The Bank did not repurchase any outstanding borrowings in the open market during the year ended December 31, 2016.2018.

SHUSA

During the first quarter of 2017,year ended December 31, 2019, the Company issued $1.0$3.8 billion in aggregate principal amountof debt, consisting of:
$1.0 billion of its 3.70%3.50% senior notes due March 2022. The proceeds of these notes were primarily used for general corporate purposes.2024,

During the second quarter of 2017, the Company issued $759.7$720.9 million in aggregate principal amount of its senior floating rate notes in two separate private offerings. These notes have a floating rate equal to the three-month London Interbank Offered Rate (“LIBOR") plus 100 basis points.The proceeds of these notes were used for general corporate purposes.due 2022.

During the third quarter of 2017, the Company issued $1.24 billion in aggregate principal amount of its senior notes, comprised of an additional $440.0 million of 3.70% senior notes due March 2022 and $800.0 million of 4.40% senior notes due May 2027. The Company also repurchased $255.4$750.0 million of its 3.45%2.88% senior fixed rate notes due August 2018. In addition, the Company redeemed and extinguished $70.3 million and $10.02024 with Santander, an affiliate.
$907.8 million of its Sovereign Capital Trust VI junior subordinated debentures3.244% senior fixed rate notes due June 2036.2026.

During the fourth quarter of 2017, the Company issued $302.6$439.0 million in aggregate principal amount of its senior floating rate notes. Thesenotes due 2023.

During 2018, the Company issued $1.4 billion of debt consisting of:
$427.9 million of its senior floating rate notes have a floating rate equal to the three-month LIBOR plus 100 basis points, with a maturitynotes.
$1.0 billion of January 2020. The proceeds of these notes were used for general corporate purposes. In addition, the Company issued £85.8 million, approximately $115.9 million, in aggregate principal amount ofits 4.45% senior floating rate notes due 2020, $1.0 billion in aggregate principal amount of 3.40% senior unsecured notes due 2023, and $250.0 million in aggregate principal amount of 4.40% senior unsecured notes due 2027.2021.

135




NOTE 11. BORROWINGS (continued)

During February 2018,the year ended December 31, 2019, the Company repurchased $63.2 million of its 3.45% senior notes due 2018the following borrowings and $336.8other 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.
$592.1 million of its 3.70% senior notes due 2022 through a public debt exchange.
$394.0 million of its 4.450% senior notes due 2021 through a public debt exchange.
$302.6 million of its senior floating rate notes due January 2020.
$40.1 million of 2.00% subordinated debt of a subsidiary of the Company.

TheDuring 2018, the Company did not repurchase any outstandingrepurchased the following borrowings in the open market during the year ended December 31, 2016.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 at SHUSAof $2.7 million and the Bank of $30.3$3.5 million in total for the yearyears ended December 31, 2017. During the year ended December 31, 2016, the Company recorded loss on debt extinguishment related to the termination of FHLB advances of $114.2 million.


169




NOTE 11. BORROWINGS (continued)2019 and 2018, respectively.

Parent Company and other IHC EntitiesSubsidiary 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:
  December 31, 2017 December 31, 2016
(dollars in thousands) Balance 
Effective
Rate
 Balance 
Effective
Rate
Parent Company        
Senior notes, due November 2017 $
 % $599,206
 2.67%
3.45% senior notes, due August 2018 244,317
 3.62% 498,604
 3.62%
2.70% senior notes, due May 2019 998,349
 2.82% 997,207
 2.82%
2.65% senior notes, due April 2020 996,238
 2.82% 994,672
 2.82%
3.70% senior notes, due March 2022 (1)
 1,440,044
 3.74% 
 %
3.40% senior notes, due January 2023 993,662
 3.54% 
 %
4.50% senior notes, due July 2025 1,095,449
 4.56% 1,094,955
 4.56%
4.40% senior notes, due July 2027 (2)
 1,049,787
 4.40% 
 %
Junior subordinated debentures - Sovereign Capital Trust VI , due June 2036 (3)
 
 % 69,798
 7.91%
Common securities - Sovereign Capital Trust VI (3)
 
 % 10,000
 7.91%
Junior subordinated debentures - Sovereign Capital Trust IX, due July 2036 149,462
 3.14% 149,434
 2.49%
Common securities - Sovereign Capital Trust IX 4,640
 3.14% 4,640
 2.49%
Senior notes, due July 2019 (4)
 388,565
 2.31% 
 %
Senior notes, due September 2019 (4)
 370,754
 2.34% 
 %
Senior notes, due January 2020 (4)
 302,494
 2.40% 
 %
Senior notes, due September 2020 (5)
 115,804
 3.32% 
 %
Other IHC Entities        
Overnight funds purchase, due within one year, due October 2017 
 % 830
 0.50%
 2.00% subordinated debt, maturing through 2042 40,842
 2.00% 40,457
 2.00%
Short-term borrowings, due within one year, due January 2018 24,000
 1.38% 54,000
 0.63%
Total due to others overnight, due within one year, due January 2018 10,000
 1.38% 17,000
 0.63%
Short-term borrowings, due within one year, January 2018 37,546
 0.25% 207,173
 0.25%
Short-term borrowings, due within one year, maturing through 2018 7,123
 0.83% 
 %
Total Parent Company and other subsidiaries' borrowings and other debt obligations $8,269,076
 3.45% $4,737,976
 3.21%
  December 31, 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 999,502
 2.82% 997,848
 2.82%
4.45% senior notes due December 2021 604,172
 4.61% 995,540
 4.61%
3.70% senior notes due March 2022 849,465
 3.74% 1,440,063
 3.74%
3.40% senior notes due January 2023 996,043
 3.54% 994,831
 3.54%
3.50% senior notes due June 2024 995,797
 3.60% 
 %
4.50% senior notes due July 2025 1,096,508
 4.56% 1,095,966
 4.56%
4.40% senior notes due July 2027 1,049,813
 4.40% 1,049,799
 4.40%
2.88% senior notes due January 2024 (4)
 750,000
 2.88% 
 %
3.24% senior notes due November 2026 907,844
 3.97% 
 %
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)
 
 % 302,619
 3.22%
Senior notes due September 2020 (2)
 112,358
 3.36% 108,888
 3.17%
Senior notes due June 2022(1)
 427,889
 3.47% 427,850
 3.38%
Senior notes due January 2023 (3)
 720,861
 3.29% 
 %
Senior notes due July 2023 (3)
 438,962
 2.48% 
 %
Subsidiaries        
 2.00% subordinated debt maturing through 2020 602
 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 January 2020 1,831
 0.38% 15,900
 0.38%
Total Parent Company and subsidiaries' borrowings and other debt obligations $9,951,647
 3.68% $8,452,288
 3.76%
(1) During the first quarter of 2017, the Company issued $1.0 billion in aggregate principal amount of its 3.70% senior notes due March 2022. During the third quarter of 2017, the Company issued an additional $440.0 million of 3.70% senior notes due March 2022.
(2) During the third quarter of 2017, the Company issued $800.0 million of 4.40% senior notes due 2027. During the fourth quarter of 2017, the Company issued an additional $250.0 million in aggregate principal amount of 4.40% senior notes due 2027.
(3) The Company redeemed and extinguished $70.3 million and $10.0 million of its Capital Trust VI junior subordinated debentures and common securities due June 2036.
(4) These notes bear interest at a rate equal to the three-month LIBOR plus 100 basis points per annum.
(5) These notes(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 105110 basis points per annum.

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

170136




NOTE 11. BORROWINGS (continued)

Bank Borrowings and Debt Obligations

The following table presents information regarding the Bank's borrowings and other debt obligations at the dates indicated:
  December 31, 2017 December 31, 2016
(dollars in thousands) Balance 
Effective
Rate
 Balance 
Effective
Rate
2.00% senior notes, due January 2018(1)
 $
 % $748,143
 2.24%
Senior notes, due January 2018(1)
 
 % 249,705
 1.99%
8.750% subordinated debentures, due May 2018 (2)
 192,019
 8.92% 498,882
 8.92%
Subordinated term loan, due February 2019 111,883
 7.12% 122,313
 6.78%
FHLB advances, maturing through July 2019 1,950,000
 1.53% 5,950,000
 0.85%
Securities sold under repurchase agreements 150,000
 1.56% 
 %
REIT preferred, due May 2020 (3)
 144,167
 13.35% 156,457
 13.46%
Subordinated term loan, due August 2022 27,911
 8.89% 29,202
 8.35%
     Total Bank borrowings and other debt obligations $2,575,980
 3.07% $7,754,702
 1.92%
  December 31, 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 7,035,000
 2.15% 4,850,000
 2.74%
REIT preferred, callable May 2020 125,943
 13.17% 145,590
 13.22%
Subordinated term loan, due August 2022 
 % 26,770
 9.95%
     Total Bank borrowings and other debt obligations $7,160,943
 2.34% $5,121,762
 3.18%
(1)During the first and fourth quarters of 2017, the Bank repurchased $881.0 million and $119.0 million, respectively, of its 2.00% senior notes due 2018 and senior floating rate notes due 2018.
(2)On October 18, 2017, the Bank repurchased $307.9 million of its 8.75% subordinated notes due 2018.
(3)During the second quarter of 2017, the Bank repurchased $14.2 million of the REIT preferred notes.

The Bank had outstanding irrevocable letters of credit totaling $780.6$875.9 million from the FHLB of Pittsburgh at December 31, 2017,2019, used to secure uninsured deposits placed with the Bank by state and local governments and their political subdivisions.

Revolving Credit Facilities

The following tables present information regarding SC's credit facilities as of December 31, 20172019 and December 31, 2016:2018, respectively:
  December 31, 2017
(dollars in thousands) Balance Committed Amount 
Effective
Rate
 Assets Pledged Restricted Cash Pledged
Warehouse line, maturing on various dates(1)
 $339,145
 $1,250,000
 2.53% $461,353
 $12,645
Warehouse line, due November 2019 435,220
 500,000
 1.92% 521,365
 16,866
Warehouse line, due August 2019(2)
 2,044,843
 3,900,000
 2.96% 2,929,890
 53,639
Warehouse line, due October 2019 226,577
 1,800,000
 4.95% 311,336
 6,772
Warehouse line, due October 2019 81,865
 400,000
 4.09% 114,021
 3,057
Warehouse line, due January 2018(3)
 336,484
 500,000
 2.87% 473,208
 
Warehouse line, due November 2019 403,999
 1,000,000
 2.66% 546,782
 14,729
Warehouse line, due October 2018 235,700
 300,000
 2.84% 289,634
 10,474
Warehouse line, due December 2018 
 300,000
 1.49% 
 
Repurchase facility, maturing on various dates(4)(5)
 325,775
 325,775
 3.24% 
 13,842
Repurchase facility, due April 2018(5)
 202,311
 202,311
 2.67% 
 
Repurchase facility, due March 2018(5)
 147,500
 147,500
 3.91% 
 
Repurchase facility, due March 2018(5)
 68,897
 68,897
 3.04% 
 
Line of credit with related party, due December 2018(6)
 
 1,000,000
 3.09% 
 
Line of credit with related party, due December 2018(6)
 750,000
 750,000
 1.33% 
 
     Total SC revolving credit facilities $5,598,316
 $12,444,483
 2.73% $5,647,589
 $132,024
  December 31, 2019
(dollars in thousands) Balance Committed Amount 
Effective
Rate
 Assets Pledged Restricted Cash Pledged
Warehouse line due March 2021 $516,045
 $1,250,000
 3.10% $734,640
 $1
Warehouse line due November 2020 471,320
 500,000
 2.69% 505,502
 186
Warehouse line due July 2021 500,000
 500,000
 3.64% 761,690
 302
Warehouse line due October 2021 896,077
 2,100,000
 3.44% 1,748,325
 7
Warehouse line due June 2021 471,284
 500,000
 3.32% 675,426
 
Warehouse line due November 2020 970,600
 1,000,000
 2.57% 1,353,305
 
Warehouse line due June 2021 53,900
 600,000
 7.02% 62,601
 94
Warehouse line due October 2021(1)
 1,098,443
 5,000,000
 4.43% 1,898,365
 1,756
Repurchase facility due January 2020(2)
 273,655
 273,655
 3.80% 377,550
 
Repurchase facility due March 2020(2)
 100,756
 100,756
 3.04% 151,710
 
Repurchase facility due March 2020(2)
 47,851
 47,851
 3.15% 69,945
 
     Total SC revolving credit facilities $5,399,931
 $11,872,262
 3.44% $8,339,059
 $2,346
(1)As of December 31, 2017, half of the outstanding balance on this facility will mature in March 2018 and half matures in March 2019.
(2)This line is held exclusively for financing of Chrysler Capital leases.
(3)(2)On February 14, 2018, the maturity of this warehouse line was extended to August 2019.
(4) The maturity of this repurchase facility ranges from February 2018 to July 2018.
(5)These repurchase facilities are collateralized by securitization notes payable retained by SC. No portionAs the borrower, SC is exposed to liquidity risk due to changes in the market value of these facilities is unsecured. These facilities have rolling maturities of upretained 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 January 2020, was extended to one year.
(6)These lines are also collateralized by securitization notes payable and residuals retained by SC. As of December 31, 2017, no portion of these facilities was unsecured.April 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
171(1), (2) See corresponding footnotes to the December 31, 2019 credit facilities table above.




NOTE 11. BORROWINGS (continued)

  December 31, 2016
(dollars in thousands) Balance Committed Amount Effective
Rate
 Assets Pledged Restricted Cash Pledged
Warehouse line, maturing on various dates(1)
 $462,085
 $1,250,000
 2.52% $653,014
 $14,916
Warehouse line, due August 2018(2)
 534,220
 780,000
 1.98% 608,025
 24,520
Warehouse line, due August 2018(3)
 3,119,943
 3,120,000
 1.91% 4,700,774
 70,991
Warehouse line, due October 2018(5)
 702,377
 1,800,000
 2.51% 994,684
 23,378
Warehouse line, due October 2018 202,000
 400,000
 2.22% 290,867
 5,435
Warehouse line, due January 2018 153,784
 500,000
 3.17% 213,578
 
Warehouse line, due November 2018 578,999
 1,000,000
 1.56% 850,758
 17,642
Warehouse line, due October 2017 243,100
 300,000
 2.38% 295,045
 9,235
Warehouse line, due November 2018 
 500,000
 2.07% 
 
Repurchase facility, due December 2017(4)
 507,800
 507,800
 2.83% 
 22,613
Repurchase facility, due April 2017(4)
 235,509
 235,509
 2.04% 
 
Line of credit with related party, due December 2017(5)
 1,000,000
 1,000,000
 2.86% 
 
Line of credit with related party, due December 2017(5)
 500,000
 500,000
 3.04% 
 
Line of credit with related party, due December 2018(5)
 175,000
 500,000
 3.87% 
 
Line of credit with related party, due December 2018(5)
 1,000,000
 1,000,000
 2.88% 
 
     Total SC revolving credit facilities $9,414,817
 $13,393,309
 2.36% $8,606,745
 $188,730
(1) Half of the outstanding balance on this facility had matured in March 2017The warehouse lines and half will mature in March 2018.
(2) This line is held exclusively for financing of Chrysler Capital loans.
(3) This line is held exclusively for financing of Chrysler Capital leases.
(4) These repurchase facilities are fully collateralized by securitization notes payable retained by SC. Noa designated portion of these facilities are unsecured. These facilities have rolling maturities of up to one year.
(5) These lines are also collateralized bySC's RICs, leased vehicles, securitization notes payable and residuals retained by SC. As of December 31, 2016, $1.3 billion of the aggregate outstanding balances on these credit facilities was unsecured.

137




NOTE 11. BORROWINGS (continued)

Secured Structured Financings

The following tables present information regarding SC's secured structured financings as of December 31, 20172019 and December 31, 2016:2018, respectively:
 December 31, 2017 December 31, 2019
(dollars in thousands) Balance Initial Note Amounts Issued Initial Weighted Average Interest Rate Range Collateral Restricted Cash Balance 
Initial Note Amounts Issued(3)
 Initial Weighted Average Interest Rate Range 
Collateral(2)
 Restricted Cash
SC public securitizations, maturing on various dates(1)(2)
 $14,995,304
 $36,800,642
 0.89% - 2.80% $19,873,621
 $1,470,459
SC privately issued amortizing notes, maturing on various dates(1)
 7,564,637
 12,278,282
 0.88% - 4.09% 9,232,658
 377,300
SC public securitizations maturing on various dates between April 2021 and February 2027(1)
 $18,807,773
 $43,982,220
  1.35% - 3.42% $24,697,158
 $1,606,646
SC privately issued amortizing notes maturing on various dates between July 2019 and September 2024 (4)
 9,334,112
 10,397,563
  1.05% - 3.90% 12,048,217
 20,878
Total SC secured structured financings $22,559,941
 $49,078,924
 0.88% - 4.09% $29,106,279
 $1,847,759
 $28,141,885
 $54,379,783
  1.05% - 3.90% $36,745,375
 $1,627,524
(1) SC has entered into various securitization transactions involving its retail automobile installment loans and leases. These transactions are accounted for as secured financings and therefore both the securitized RICs and the related securitization debt issued by SPEs remain on the Consolidated Balance Sheets. The maturity of this debt is based on the timing of repayments from the securitized assets.
(2) Securitizations executed under Rule 144A of the Securities Act of 1933 (the “Securities Act”) are included within this balance.

(2) Secured structured financings may be collateralized by SC's collateral overages of other issuances.
172(3) Excludes securitizations which no longer have outstanding debt and excludes any incremental borrowings.




NOTE 11. BORROWINGS (continued)

(4) The maturity of the note maturing in July 2019 was extended to June 2021.
 December 31, 2016 December 31, 2018
(dollars in thousands) Balance Initial Note Amounts Issued Initial Weighted Average Interest Rate Range Collateral Restricted Cash Balance Initial Note Amounts Issued Initial Weighted Average Interest Rate Range Collateral Restricted Cash
SC public securitizations, maturing on various dates(1)(2)
 $13,444,543
 $32,386,082
  0.89% - 2.46% $17,474,524
 $1,423,599
SC privately issued amortizing notes, maturing on various dates(1)
 8,172,407
 14,085,991
  0.88% - 2.86% 12,021,887
 500,868
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 $21,616,950
 $46,472,073
  0.88% - 2.86% $29,496,411
 $1,924,467
 $26,901,520
 $52,686,320
 0.88% - 3.53% $35,296,170
 $1,576,915
(1)SC has entered into various securitization transactions involving its retail automobile installment loans and leases. These transactions are accounted for as secured financings and therefore both the securitized RICs and the related securitization debt issued by SPEs remain on the Consolidated Balance Sheets. The maturity of this debt is based on the timing of repayments from the securitized assets.
(2)Securitizations executed under Rule 144A of the Securities Act are included within this balance.

Most of SC's secured structured financings are in the form of public, SEC-registered securitizations. The CompanySC also executes private securitizations under Rule 144A of the Securities Act, and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company'sSC's securitizations and private issuances are collateralized by vehicle RICs and loans or leases. As of December 31, 2019 and December 31, 2018, SC had private issuances of notes backed by vehicle leases.leases outstanding totaling $10.2 billion and $7.8 billion, respectively.

The following table sets forth the maturities of the Company's consolidated borrowings and debt obligations at December 31, 2017:2019:
 (in thousands)
2018$4,526,472
20198,106,993
20205,994,171
20218,100,435
20224,745,592
Thereafter7,529,650
Total$39,003,313
  


NOTE 12. STOCKHOLDER'S EQUITY

On November 15, 2017, Santander contributed 34,598,506 shares of SC Common Stock purchased from DDFS LLC (“DDFS”) which reduced NCI and increased additional paid-in capital by $707.6 million. Refer to Note 21 for additional details on the purchase of the SC shares.

Additional transactions with Santander that are disclosed within the Consolidated Statements of Stockholder's Equity that are shown net are disclosed within the table below:
  Impact to common stock and paid in capital
  (in thousands)
March 2017 cash contribution $9,000
December 2017 contribution(1)
 15,317
December 2017 return of capital(1)
 (12,570)
Net contribution from shareholder $11,747
(1) - The December contribution was utilized to purchase certain assets and liabilities from other Santander subsidiaries. The fair value of the net assets acquired exceeded their carrying value by $12.6 million, which is recorded as a return of capital. Refer to Note 21 for additional details.

At December 31, 2017, the Company had 530,391,043 shares of common stock outstanding.

 (in thousands)
2020$9,044,365
20216,075,600
202211,001,670
20238,522,579
20246,813,680
Thereafter9,196,512
Total$50,654,406
  

173




NOTE 12. STOCKHOLDER'S EQUITY (continued)

In April 2006, the Company’s Board of Directors authorized 8,000 shares of Series C Preferred Stock, and granted the Company authority to issue fractional shares of the Series C Preferred Stock. Dividends on each share of Series C Preferred Stock are payable quarterly, on a non-cumulative basis, at an annual rate of 7.30%, when and if declared by the Company's Board of Directors. In May 2006, the Company issued 8,000,000 depository shares of Series C Preferred Stock for net proceeds of $195.4 million. Each depository share represents 1/1000th ownership interest in a share of Series C Preferred Stock. As a holder of depository shares, the depository shareholder is entitled to all proportional rights and preferences of the Series C Preferred Stock. The Company’s Board of Directors declared cash dividends to preferred stockholders totaling $14.6 million for the years ended December 31, 2017, 2016 and 2015.

The shares of Series C Preferred Stock are redeemedable in whole or in part for cash, at the Company’s option, at a redemption price of $25,000 per share (equivalent to $25 per depository share), subject to the prior approval of the OCC. As of December 31, 2017, no shares of the Series C Preferred Stock had been redeemed.

During August 2010, Banco Santander Puerto Rico issued 3,000,000 shares of Series B preferred stock, $25 par value, for, designated as the 8.75% noncumulative preferred stock, Series B, to an affiliate. Dividends on Banco Santander Puerto Rico's preferred stock were payable when, as and if declared by Banco Santander Puerto Rico's Board of Directors. Banco Santander Puerto Rico declared cash dividends of $2.19 for the year ended December 31, 2015 for dividends to preferred stockholders of $6.6 million.

The shares of Series B Preferred Stock were redeemable in whole or in part for cash on or after September 30, 2015 with the consent of the FDIC and any applicable regulatory authority. On December 14, 2015, Banco Santander Puerto Rico received notice of approval from the Office of the Commissioner of Financial Institutions of Puerto Rico to redeem the shares of Series B preferred stock.

On January 29, 2016, Banco Santander Puerto Rico redeemed the outstanding shares of Series B preferred stock. In accordance with the notice of full redemption, each preferred stock was redeemed at the redemption price, corresponding to $25.00 per preference share, plus unpaid dividends in respect of the most recent dividend period in the amount of $0.5 million.

174138




NOTE 13.12. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)
The following table presents the components of accumulated other comprehensive income/(loss), net of related tax, for the yearyears ended December 31, 20172019, 2018, and 2016,2017 respectively.
            
  Total Other
Comprehensive Income/(Loss)
 Total Accumulated
Other Comprehensive (Loss)/Income
  Year Ended December 31, 2017 December 31, 2016 
 December 31, 2017
(in thousands) Pretax
Activity
 Tax
Effect
 Net Activity Beginning
Balance
 Net
Activity
 Ending
Balance
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments $10,620
 $7,508
 $18,128
      
Reclassification adjustment for net (gains) on cash flow hedge derivative financial instruments(1) (15,005) (2,786) (17,791)      
Net unrealized (losses) on cash flow hedge derivative financial instruments (4,385) 4,722
 337
 $(6,725) $337
 $(6,388)
             
Change in unrealized (losses) on investment securities AFS (17,972) 6,694
 (11,278)      
Reclassification adjustment for net losses included in net income/(expense) on non-OTTI securities (2) 2,444
 (910) 1,534
      
Net unrealized (losses) on investment securities AFS (15,528) 5,784
 (9,744) (130,754) (9,744) (140,498)
             
Pension and post-retirement actuarial gain(3) 4,954
 (770) 4,184
 (55,729) 4,184
 (51,545)
             
As of December 31, 2017 $(14,959)
$9,736

$(5,223)
$(193,208)
$(5,223)
$(198,431)
(1)Net (losses)/gains reclassified into Interest on borrowings and other debt obligations in the 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 Consolidated Statements of Operations for the sale of AFS securities.
(3)Included in the computation of net periodic pension costs.

175




NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)
 
  Total Other
Comprehensive Income/(Loss)
 Total Accumulated
Other Comprehensive (Loss)/Income
  Year Ended December 31, 2016 December 31, 2015   December 31, 2016
(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 $1,203
 $(130) $1,073
      
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1) 9,848
 (1,065) 8,783
      
Net unrealized gains on cash flow hedge derivative financial instruments 11,051
 (1,195) 9,856
 $(16,581) $9,856
 $(6,725)
             
Change in unrealized gains on investment securities AFS 4,040
 (1,459) 2,581
      
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities (2) (57,771) 20,350
 (37,421)      
Reclassification adjustment for net losses included in net income/(expense) on OTTI securities (3) 44
 (16) 28
      
Reclassification adjustment for net (gains) included in net income (57,727) 20,334
 (37,393)      
Net unrealized (losses) on investment securities AFS (53,687) 18,875
 (34,812) (95,942) (34,812) (130,754)
             
Pension and post-retirement actuarial gain(4) 3,768
 (1,490) 2,278
 (58,007) 2,278
 (55,729)
As of December 31, 2016 $(38,868) $16,190
 $(22,678) $(170,530) $(22,678) $(193,208)
  Total OCI/(Loss) Total Accumulated
Other Comprehensive (Loss)/Income
  Year Ended December 31, 2019 December 31, 2018 
 December 31, 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 $14,372
 $(14,910) $(538)      
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1)
 344
 (107) 237
      
Net unrealized gains on cash flow hedge derivative financial instruments 14,716
 (15,017) (301) $(19,813) $(301) $(20,114)
             
Change in unrealized gains on investments in debt securities 303,208
 (75,962) 227,246
      
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities (2)
 (5,816) 1,457
 (4,359)      
Net unrealized gains on investments in debt securities 297,392
 (74,505) 222,887
 (245,767) 222,887
 (22,880)
Pension and post-retirement actuarial gain(3)
 10,280
 579
 10,859
 (56,072) 10,859
 (45,213)
As of December 31, 2019 $322,388

$(88,943)
$233,445

$(321,652)
$233,445

$(88,207)
(1)Net gains/(losses) reclassified into Interest on borrowings and other debt obligations in the 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 Consolidated Statements of Operations for the sale of available-for-sale securities.debt securities AFS.
(3)Unrealized losses/(gains) previously recognized in accumulated other comprehensive income on securities for which OTTI was recognized during the period. See further discussion in Note 3 to the Consolidated Financial Statements.
(4)Included in the computation of net periodic pension costs.


176139




NOTE 13.12. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)

  Total Other
Comprehensive Income/(Loss)
 Total Accumulated
Other Comprehensive (Loss)/Income
  For the Year Ended December 31, 2015 December 31, 2014   December 31, 2015
(in thousands) Pretax
Activity
 Tax
Effect
 Net Activity Beginning
Balance
 Net
Activity
 Ending
Balance
Change in accumulated comprehensive income on cash flow hedge derivative financial instruments $(15,073) $5,013
 $(10,060)      
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1) 11,595
 (3,856) 7,739
      
Net unrealized (losses) on cash flow hedge derivative financial instruments (3,478) 1,157
 (2,321) $(14,260) $(2,321) $(16,581)
Change in unrealized (losses) on investment securities available-for-sale (54,134) 20,542
 (33,592)      
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities (2) (18,095) 6,910
 (11,185)      
Reclassification adjustment for net losses included in net income/(expense) on OTTI securities (3) 1,092
 (417) 675
      
Reclassification adjustment for net (gains) included in net income (17,003) 6,493
 (10,510)      
Net unrealized (losses) on investment securities available-for-sale (71,137) 27,035
 (44,102) (51,840) (44,102) (95,942)
Pension and post-retirement actuarial gain(4) 7,041
 (2,881) 4,160
 (62,167) 4,160
 (58,007)
As of December 31, 2015 $(67,574) $25,311
 $(42,263) $(128,267) $(42,263) $(170,530)
(1)Net gains/(losses) reclassified into Interest on borrowings and other debt obligations in the Consolidated Statement of Operations for settlements of interest rate swap contracts designated as cash flow hedges.
(2)Net (gains)/losses reclassified into Net gain on sale of investment securities sales in the Consolidated Statement of Operations for the sale of available-for-sale securities.
(3)Unrealized losses/(gains) previously recognized in accumulated other comprehensive income on securities for which OTTI was recognized during the period. See further discussion in Note 3 to the Consolidated Financial Statements.
(4)Included in the computation of net periodic pension costs.
  Total OCI/(Loss) Total Accumulated
Other Comprehensive (Loss)/Income
  Year Ended December 31, 2018 December 31, 2017   December 31, 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 $(6,225) $(848) $(7,073)      
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1)
 4,781
 (1,504) 3,277
      
Net unrealized (losses) on cash flow hedge derivative financial instruments (1,444) (2,352) (3,796) $(6,388) $(3,796) 

Cumulative impact of adoption of new ASUs (4)
         (9,629)  
Net unrealized (losses) on cash flow hedge derivative financial instruments upon adoption         (13,425) (19,813)
             
Change in unrealized (losses) on investment securities (84,316) (3,577) (87,893)      
Reclassification adjustment for net losses included in net income/(expense) on non-OTTI securities (2)
 6,717
 285
 7,002
      
Net unrealized (losses) on investment securities (77,599) (3,292) (80,891) (140,498) (80,891) 

Cumulative impact of adoption of new ASU(4)
         (24,378)  
Net unrealized (losses) on investments in debt securities         (105,269) (245,767)
Pension and post-retirement actuarial gain(3)
 7,527
 (6,967) 560
 (51,545) 560
 

Cumulative impact of adoption of new ASUs (4)
         (5,087)  
Pension and post-retirement actuarial gain upon adoption         (4,527) (56,072)
             
As of December 31, 2018 $(71,516) $(12,611) $(84,127) $(198,431) $(123,221) $(321,652)
             
  Total OCI/(Loss) Total Accumulated
Other Comprehensive (Loss)/Income
  Year Ended December 31, 2017 December 31, 2016   December 31, 2017
(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 $10,620
 $7,508
 $18,128
      
Reclassification adjustment for net (gains) on cash flow hedge derivative financial instruments(1)
 (15,005) (2,786) (17,791)      
Net unrealized (losses) on cash flow hedge derivative financial instruments (4,385) 4,722
 337
 $(6,725) $337
 $(6,388)
Change in unrealized (losses) on investment securities AFS (17,972) 6,694
 (11,278)      
Reclassification adjustment for net losses included in net income/(expense) on non-OTTI securities (2)
 2,444
 (910) 1,534
      
Net unrealized (losses) on investment securities AFS (15,528) 5,784
 (9,744) (130,754) (9,744) (140,498)
Pension and post-retirement actuarial gain(4)
 4,954
 (770) 4,184
 (55,729) 4,184
 (51,545)
As of December 31, 2017 $(14,959) $9,736
 $(5,223) $(193,208) $(5,223) $(198,431)
(1) Net (losses)/gains reclassified into Interest on borrowings and other debt obligations in the 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 Consolidated Statements of Operations for the sale of debt securities AFS.
(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.

140




NOTE 13. STOCKHOLDER'S EQUITY

At December 31, 2019, the Company had 530,391,043 shares of common stock outstanding. Additional transactions with Santander that are disclosed within the Consolidated Statements of Stockholder's Equity that are shown net are disclosed within the table below:
  Impact to common stock and paid in capital
  (in thousands)
March 2019 contribution $34,330
May 2019 contribution 41,571
July 2019 contribution 13,026
2019 Net contribution from shareholder $88,927
   
Deferred tax asset on purchased assets $3,156
Adjustment to book value of assets purchased on January 1 277
February 2018 contribution 5,741
October 2018 contribution 45,846
December 2018 contribution 33,448
2018 net contribution from shareholder $88,468


During the years ended December 31, 2019, 2018, and 2017, SC repurchased $338.0 million, $182.6 million and zero of SC Common Stock.

On January 30, 2020, SC commenced a tender offer to purchase for cash up to $1 billion of shares of SC Common Stock, at a range of between $23 and $26 per share. The tender offer expired on February 27, 2020 and was closed on March 4, 2020. In connection with the completion of the tender offer, SC acquired approximately 17.5 million shares of SC Common Stock for approximately $455.4 million. After the completion of the tender offer, SHUSA's ownership in SC increased to approximately 76.3%.

In April 2006, the Company’s Board of Directors authorized 8,000 shares of Series C Preferred Stock, and granted the Company authority to issue fractional shares of the Series C Preferred Stock. Dividends on each share of Series C Preferred Stock were payable quarterly, on a non-cumulative basis, at an annual rate of 7.30%, when and if declared by the Company's Board of Directors. In May 2006, the Company issued 8,000,000 depository shares of Series C Preferred Stock for net proceeds of $195.4 million. Each depository share represented 1/1000th ownership interest in a share of Series C Preferred Stock. As a holder of depository shares, the depository shareholder was entitled to all proportional rights and preferences of the Series C Preferred Stock. The Company’s Board of Directors declared cash dividends to preferred stockholders of zero, $11.0 million and $14.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The shares of Series C Preferred Stock were redeemable in whole or in part for cash, at the Company’s option, at a redemption price of $25,000 per share (equivalent to $25 per depository share), subject to the prior approval of the OCC. On August 15, 2018, the Company redeemed all outstanding shares of its Series C Preferred Stock.

On November 15, 2017, Santander contributed 34,598,506 shares of SC Common Stock purchased from DDFS to SHUSA, which reduced NCI and increased additional paid-in capital by $707.6 million.


141




NOTE 14. DERIVATIVES

General

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity and credit risk, as well as to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities, and often provides commercial loan customers the option to purchase derivative products to hedge interest rate risk associated with loans made by the Bank. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes. The fair value of all derivative balances is recorded within Other assets and Other liabilities on the Consolidated Balance Sheet.

See Note 18 for discussion of the valuation methodology for derivative instruments.


177




NOTE 14. DERIVATIVES (continued)

Derivatives represent contracts between parties that usually require little or no initial net investment and result in one partyor 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 derivative contract. The Company controls the credit risk of its derivative contracts through credit approvals, limits and monitoring procedures. The underlying asset is typically a referenced interest rate (commonly the Overnight Indexed Swap ("OIS")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 16 to these Consolidated Financial Statements 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")ISDA Master Agreements if the Company's ratings fall below a specified level, typically investment grade. As of December 31, 2017,2019, derivatives in this category had a fair value of $2.1$1.0 million. The credit ratings of the Company and the Bank are currently considered investment grade. During the fourth quarter of 2017,2019, no additional collateral would be required if there were a further 1- or 2- notch downgrade by either Standard & Poor's ("S&P")&P or Moody's Investor Services ("Moody's").Moody's.

As of December 31, 20172019 and December 31, 2016,2018, 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 $10.4$7.8 million and $27.0$9.5 million,, respectively. The Company had $15.7$8.6 million and $28.3$11.5 million in cash and securities collateral posted to cover those positions as of December 31, 20172019 and December 31, 2016,2018, 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 and forward sale or purchase commitments.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.

Fair Value Hedges

During the three-month period ended June 30, 2017, the Company entered into interest rate swaps to hedge the interest rate risk on certain fixed-rate borrowings. These derivatives were designated as fair value hedges at inception of the hedge relationship. The Company included all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the year ended December 31, 2017. The Company terminated the interest rate swap during the three-month period ended September 30, 2017.

Cash Flow Hedges

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


178




NOTE 14. DERIVATIVES (continued)hedged item.

The last of the hedges is scheduled to expire in December 2030.March 2024. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the years ended December 31, 2017 and 2016. As of December 31, 2017,2019, the Company expected $16.8$6.7 million of gains/losses recorded in accumulated other comprehensive loss to be reclassified to earnings during the subsequent twelve months as the future cash flows occur.

142




NOTE 14. DERIVATIVES (continued)

Derivatives Designated in Hedge Relationships – Notional and Fair Values

Derivatives designated as accounting hedges at December 31, 20172019 and December 31, 20162018 included:
(dollars in thousands) 
Notional
Amount
 Asset Liability 
Weighted Average Receive
Rate
 
Weighted Average Pay
Rate
 
Weighted Average Life
(Years)
December 31, 2017            
Cash flow hedges:            
Pay fixed — receive variable interest rate swaps $5,183,511
 $46,422
 $4,458
 0.05% 0.14% 2.12
Pay variable - receive fixed interest rate swaps 4,000,000
 
 80,453
 1.41% 1.42% 3.02
Interest Rate Floor $1,000,000
 $3,020
 $
 % % 2.64
Total $10,183,511
 $49,442
 $84,911
 0.58% 0.63% 2.53
             
December 31, 2016            
Cash flow hedges:            
Pay fixed — receive variable interest rate swaps (1)
 $8,124,172
 $45,681
 $5,083
 0.83% 1.13% 2.57
Pay variable - receive fixed interest rate swaps (1)
 2,000,000
 
 54,729
 1.19% 0.62% 4.79
Total $10,124,172
 $45,681
 $59,812
 0.91% 1.03% 3.01
(1)The prior period amounts have been revised. The revision had no impact on the Company's Consolidated Balance Sheets or its results of operations.

During the third quarter of 2017, the Company terminated fair value hedges with a notional of $650.0 million. The fair value mark of the previously hedged debt will be amortized into interest expense over the remaining term of the debt. The amounts previously deferred in Accumulated OCI will be amortized into interest expense as the hedged cash flows impact interest expense.
(dollars in thousands) 
Notional
Amount
 Asset Liability Weighted Average Receive Rate 
Weighted Average Pay
Rate
 
Weighted Average Life
(Years)
December 31, 2019            
Cash flow hedges:            
Pay fixed — receive variable interest rate swaps $2,650,000
 $2,807
 $39,128
 1.85% 1.91% 1.86
Pay variable - receive fixed interest rate swaps 7,570,000
 7,462
 29,209
 1.43% 1.73% 2.39
Interest rate floor 3,800,000
 18,762
 
 0.19% % 1.28
Total $14,020,000
 $29,031
 $68,337
 1.17% 1.29% 1.99
             
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

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

Other Derivative Activities

The Company also enters into derivatives that are not designated as accounting hedges under GAAP. The majority of these derivatives are customer-related derivatives relating to foreign exchange and lending arrangements, as well as derivatives to hedge interest rate risk on SC's secured structured financings and the borrowings under its revolving credit facilities. SC uses both interest rate swaps and interest rate caps to satisfy these requirements and to hedge the variability of cash flows on securities issued by Trusts and borrowings under its warehouse facilities. In addition, derivatives are used to manage risks related to residential and commercial mortgage banking and investing activities. Although these derivatives are used to hedge risk and are considered economic hedges, they are not designated as accounting hedges because the contracts they are hedging are 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.


179




NOTE 14. DERIVATIVES (continued)

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

Customer-related derivatives

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

143




NOTE 14. DERIVATIVES (continued)

Other derivative instruments primarily include forward contracts related to certain investment securities sales, an overnight indexed swap,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 December 31, 20172019 and December 31, 20162018 included:
 Notional 
Asset derivatives
Fair value
 
Liability derivatives
Fair value
 Notional 
Asset derivatives
Fair value
 
Liability derivatives
Fair value
(in thousands) December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Mortgage banking derivatives:                        
Forward commitments to sell loans $311,852
 $693,137
 $3
 $8,577
 $459
 $
 $452,994
 $329,189
 $18
 $4
 $360
 $4,821
Interest rate lock commitments 126,194
 253,568
 2,105
 2,316
 
 
 167,423
 133,680
 3,042
 2,677
 
 
Mortgage servicing 330,000
 295,000
 193
 838
 2,092
 1,635
 510,000
 455,000
 15,134
 1,575
 2,547
 8,953
Total mortgage banking risk management 768,046
 1,241,705
 2,301
 11,731
 2,551
 1,635
 1,130,417
 917,869
 18,194
 4,256
 2,907
 13,774
                        
Customer related derivatives:            
Customer-related derivatives:            
Swaps receive fixed 9,328,079
 9,646,151
 72,912
 127,123
 70,348
 49,642
 11,225,376
 11,335,998
 375,541
 92,542
 12,330
 120,185
Swaps pay fixed 9,576,893
 9,785,170
 110,109
 85,877
 51,380
 97,759
 11,975,313
 11,825,804
 23,271
 163,673
 336,361
 72,662
Other 1,834,962
 1,611,342
 19,971
 3,421
 18,308
 1,989
 3,532,959
 2,162,302
 3,457
 11,151
 4,848
 14,294
Total customer related derivatives 20,739,934
 21,042,663
 202,992
 216,421
 140,036
 149,390
Total customer-related derivatives 26,733,648
 25,324,104
 402,269
 267,366
 353,539
 207,141
                        
Other derivative activities:                        
Foreign exchange contracts 2,764,999
 3,366,483
 24,932
 56,742
 25,521
 46,430
 3,724,007
 3,635,119
 33,749
 47,330
 34,428
 37,466
Interest rate swap agreements 1,749,349
 1,064,289
 9,596
 2,075
 1,631
 2,647
 1,290,560
 2,281,379
 
 11,553
 11,626
 3,264
Interest rate cap agreements 10,932,707
 9,491,468
 135,942
 76,387
 32,109
 
 9,379,720
 7,758,710
 62,552
 128,467
 
 
Options for interest rate cap agreements 10,906,081
 9,463,935
 32,165
 
 135,824
 76,281
 9,379,720
 7,741,765
 
 
 62,552
 128,377
Total return settlement 
 658,471
 
 
 
 30,618
Other 824,786
 1,265,583
 5,874
 12,293
 5,228
 16,325
 1,087,986
 1,038,558
 10,536
 4,527
 13,025
 7,137
Total $48,685,902
 $47,594,597
 $413,802
 $375,649
 $342,900
 $323,326
 $52,726,058
 $48,697,504
 $527,300
 $463,499
 $478,077
 $397,159




180144




NOTE 14. DERIVATIVES (continued)

The Company purchased price holdback payments and total return settlement payments that were considered to be derivatives, collectively referred to herein as total return settlement, and accordingly were marked to fair value each reporting period. The Company was obligated to make purchase price holdback payments on a periodic basis to a third-party originator of loans that the Company has purchased, when losses are lower than originally expected. The Company also was obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased loans are greater than originally expected. All purchase price holdback payments and all total return settlement payments due in 2016 and 2017 have been made and as of December 31, 2017, the derivative instrument has been settled.

Gains (Losses) on All Derivatives

The following Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the years ended December 31, 20172019, 2018 and 2016:2017:
   Year Ended December 31,
(in thousands)   Year Ended December 31,
Derivative Activity(1)
 Line Item 2017 2016 2015 Line Item 2019 2018 2017
 (in thousands)    
Fair value hedges:            
Cross-currency swaps (2)
 Miscellaneous income $
 $174
 $62
Interest rate swaps Miscellaneous income 2,397
 1,959
 (1,412) Net interest income $
 $
 $2,397
Cash flow hedges:      
        
  
Pay fixed-receive variable interest
rate swaps
 Net interest income (10,152) (9,848) (11,595) Interest expense on borrowings 36,920
 33,881
 (10,152)
Pay variable receive-fixed interest rate swap Net interest income 9,104
 2,353
 
 Interest income on loans (40,827) (24,346) 9,104
Other derivative activities:      
  Other derivative activities:    
  
Forward commitments to sell loans Mortgage banking income (9,033) 8,028
 2,963
 Miscellaneous income, net 4,477
 (4,362) (9,033)
Interest rate lock commitments Mortgage banking income (211) (224) (522) Miscellaneous income, net 365
 572
 (211)
Mortgage servicing Mortgage banking income (1,103) 2,027
 (2,806) Miscellaneous income, net 24,244
 (7,560) 2,075
Customer related derivatives Miscellaneous income (3,802) 23,770
 1,100
Customer-related derivatives Miscellaneous income, net 2,538
 34,987
 16,703
Foreign exchange Miscellaneous income 5,634
 7,526
 6,705
 Miscellaneous income, net 32,565
 2,259
 6,520
Interest rate swaps, caps, and options Miscellaneous income 10,897
 4,450
 13,593
 Miscellaneous income, net (14,092) 11,901
 10,897
Net interest income 6,060
 51,862
 78,640
Interest expense 
 
 6,060
      
Total return settlement Other administrative expenses 
 (4,365) (10,973)
Other Miscellaneous income 4,285
 (1,018) (1,129) Miscellaneous income, net (408) (4,030) 1,747
(1)Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.
(2)Cross currency swaps designated as hedges matured in the first quarter of 2016.

The net amount of change recognized in OCI for cash flow hedge derivatives were losses of $0.5 million and $7.1 million, net of tax, for the years ended December 31, 2019 and December 31, 2018, respectively, and a gain of $18.1 million, net of tax, for the year ended December 31, 2017.

The net amount of changes reclassified from OCI into earnings for cash flow hedge derivatives were losses of $0.2 million and $3.3 million, net of tax, for the years ended December 31, 2019 and December 31, 2018, respectively, and a gain of $17.8 million, net of tax, for the year ended December 31, 2017.

Disclosures about Offsetting Assets and Liabilities

The Company enters into legally enforceable master netting agreements, which reduce risk by permitting netting of transactions with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment and in a single currency. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in the ISDA master agreement.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 Consolidated Balance Sheet.Sheets.

The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master nettingnettable 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 offsetAmounts Not Offset in the Consolidated Balance Sheet”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 offsetAmounts Offset in the Consolidated Balance Sheet"Sheets" section of the tables below.

181145




NOTE 14. DERIVATIVES (continued)

Information about financial assets and liabilities that are eligible for offset on the Consolidated Balance SheetSheets as of December 31, 20172019 and December 31, 2016,2018, 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 Financial Instruments Cash Collateral Received Net Amount
December 31, 2017            
Cash flow hedges $49,442
 $
 $49,442
 $
 $3,076
 $46,366
Other derivative activities(1)
 411,697
 6,731
 404,966
 2,021
 77,975
 324,970
Total derivatives subject to a master netting arrangement or similar arrangement 461,139
 6,731
 454,408
 2,021
 81,051
 371,336
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
 2,105
 
 2,105
 
 
 2,105
Total Derivative Assets $463,244
 $6,731
 $456,513
 $2,021
 $81,051
 $373,441
             
             
December 31, 2016            
Cash flow hedges $45,681
 $
 $45,681
 $
 $21,690
 $23,991
Other derivative activities(1)
 374,052
 7,551
 366,501
 4,484
 39,474
 322,543
Total derivatives subject to a master netting arrangement or similar arrangement 419,733
 7,551
 412,182
 4,484
 61,164
 346,534
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
 1,597
 
 1,597
 
 
 1,597
Total Derivative Assets $421,330
 $7,551
 $413,779
 $4,484
 $61,164
 $348,131
(1)Includes customer-related and other derivatives.
(2)Includes mortgage banking derivatives.

182




NOTE 14. DERIVATIVES (continued)

 Offsetting of Financial Liabilities Offsetting of Financial Assets
       Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet       Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands) Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Condensed Consolidated Balance Sheet Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet Financial Instruments Cash Collateral Pledged Net Amount Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets Presented in the Consolidated Balance Sheets 
Collateral Received (3)
 Net Amount
December 31, 2017            
Cash flow hedges (3)
 $84,911
 $
 $84,911
 $
 $622
 $84,289
December 31, 2019          
Cash flow hedges $29,031
 $
 $29,031
 $17,790
 $11,241
Other derivative activities(1)(4)
 342,752
 16,236
 326,516
 
 165,716
 160,800
 524,258
 435
 523,823
 51,437
 472,386
Total derivatives subject to a master netting arrangement or similar arrangement 427,663
 16,236
 411,427
 
 166,338
 245,089
 553,289
 435
 552,854
 69,227
 483,627
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
 148
 
 148
 
 
 148
 3,042
 
 3,042
 
 3,042
Total Derivative Liabilities $427,811
 $16,236
 $411,575
 $
 $166,338
 $245,237
Total Derivative Assets $556,331
 $435
 $555,896
 $69,227
 $486,669
                      
December 31, 2016            
Cash flow hedges (3)
 $59,812
 $
 $59,812
 $
 $110,856
 $
          
December 31, 2018          
Cash flow hedges $54,986
 $
 $54,986
 $22,451
 $32,535
Other derivative activities(1)
 292,708
 34,197
 258,511
 
 95,138
 163,373
 460,822
 6,570
 454,252
 117,582
 336,670
Total derivatives subject to a master netting arrangement or similar arrangement 352,520
 34,197
 318,323
 
 205,994
 163,373
 515,808
 6,570
 509,238
 140,033
 369,205
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
 30,618
 
 30,618
 
 
 30,618
 2,677
 
 2,677
 
 2,677
Total Derivative Liabilities $383,138
 $34,197
 $348,941
 $
 $205,994
 $193,991
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 Consolidated Balance Sheets. Financial instruments that are pledged to the Company are not reflected in the accompanying Consolidated Balance Sheets since the Company does not control or have the ability to re-hypothecate these instruments.
(4)Balance includes $25.3 million of derivative assets due from an affiliate.

146




NOTE 14. DERIVATIVES (continued)

  Offsetting of Financial Liabilities
        Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands) Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities Presented in the Consolidated Balance Sheets 
Collateral Pledged (3)
 Net Amount
December 31, 2019          
Cash flow hedges $68,337
 $
 $68,337
 $68,337
 $
Other derivative activities(1)(4)
 477,717
 9,406
 468,311
 436,301
 32,010
Total derivatives subject to a master netting arrangement or similar arrangement 546,054
 9,406
 536,648
 504,638
 32,010
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
 360
 
 360
 273
 87
Total Derivative Liabilities $546,414
 $9,406
 $537,008
 $504,911
 $32,097
           
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 Consolidated Balance Sheets. In certain instances, the Company is over-collateralized since the actual amount of cashcollateral pledged as collateral exceeds the associated financial liability. As a result, the actual amount of cash collateral pledged that is reported in Other Liabilitiesassets may be greater than the amount shown. The prior period have been revisedshown in the table above.
(4)Balance includes $25.3 million of derivative liabilities due to conform with current period presentation.an affiliate.


NOTE 15. INCOME TAXES

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.

On December 22, 2017, the TCJA, was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. At December 31, 2017, the Company recorded a one-time tax benefit of $427.3 million, primarily due to the re-valuation of its net deferred tax liability at the lower 21% rate.


183147




NOTE 15. INCOME TAXES (continued)

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

Income Taxes from Continuing Operations

The provision for income taxes in the Consolidated StatementStatements of Operations is comprised of the following components:
 Year Ended December 31, Year Ended December 31,
(in thousands) 2017 2016 2015 2019 2018 2017
      
Current:            
Foreign $7,288
 $30,983
 $26,042
 $491
 $13,183
 $7,288
Federal 24,335
 71,429
 160,107
 40,964
 (68,160) 24,335
State 7,951
 (2,646) 44,712
 91,592
 64,002
 7,951
Total current 39,574
 99,766
 230,861
 133,047
 9,025
 39,574
            
Deferred: 
     
    
Foreign (15,065) (36,039) (5,878) 38,471
 16,882
 (15,065)
Federal (189,903) 143,494
 (755,630) 263,970
 360,780
 (193,837)
State 13,060
 106,494
 (69,111) 36,711
 39,213
 12,288
Total deferred (191,908) 213,949
 (830,619) 339,152
 416,875
 (196,614)
Total income tax provision/(benefit) $(152,334) $313,715
 $(599,758) $472,199
 $425,900
 $(157,040)

Reconciliation of Statutory and Effective Tax Rate

The following is a reconciliation of the U.S. federal statutory rate of 35.0%21.0% for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 to the Company's effective tax rate for each of the years indicated:
 Year Ended December 31,
 Year Ended December 31, 2019 2018 2017
 2017 2016 2015      
Federal income tax at statutory rate 35.0 % 35.0 % 35.0 % 21.0 % 21.0 % 35.0 %
Increase/(decrease) in taxes resulting from:            
Valuation allowance 0.9 % (5.0)% (0.1)% 2.4 % 4.6 % 0.9 %
Tax-exempt income (1.8)% (1.6)% 0.5 % (0.9)% (0.8)% (1.9)%
Section 162(m) limitation 0.2 % 0.2 %  %
Non-deductible FDIC insurance premiums 0.8 % 0.8 %  %
BOLI (2.8)% (2.1)% 0.6 % (0.9)% (0.9)% (2.8)%
State income taxes, net of federal tax benefit 2.5 % 5.7 % (1.8)% 6.1 % 5.9 % 2.6 %
General business tax credits (2.0)% (2.1)% 0.3 % (1.6)% (1.7)% (2.1)%
Electric vehicle credits (2.9)% (2.7)% 0.8 % (0.4)% (0.7)% (3.0)%
Basis in SC 3.4 % 3.1 % 26.6 % 3.4 % 3.0 % 3.4 %
Nondeductible goodwill impairment  %  % (45.7)%
Uncertain tax position reserve (0.4)% 3.3 % (2.9)% (0.1)% (0.3)% (0.4)%
Tax reform (52.1)%  %  %  %  % (53.3)%
Other 1.6 % (0.7)% 3.1 % 1.2 % (1.0)% 2.0 %
Effective tax rate (18.6)% 32.9 % 16.4 % 31.2 % 30.1 % (19.6)%

184148




NOTE 15. INCOME TAXES (continued)

Deferred Tax Assets and Liabilities

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented below:
 At December 31, At December 31,
(in thousands) 2017 2016 2019 2018
Deferred tax assets:        
    
ALLL $214,873
 $255,221
 $176,304
 $208,507
Internal Revenue Code ("IRC") Section 475 mark to market adjustment 512,177
 474,366
IRC Section 475 mark-to-market adjustment 169,224
 296,145
Unrealized loss on available-for-sale securities 57,324
 80,958
 2,209
 76,915
Unrealized loss on derivatives 13,217
 6,512
 9,639
 11,340
Held to maturity 4,618
 5,901
Capital loss carryforwards 28,873
 35,770
 22,547
 22,661
Net operating loss carry forwards 924,871
 1,441,368
Net operating loss carryforwards 2,098,447
 1,836,767
Non-solicitation payments 237
 643
 
 87
Employee benefits 112,206
 152,324
 104,788
 98,735
General business credit & other tax credit carry forwards 627,969
 564,011
General business credit & other tax credit carryforwards 535,694
 670,502
Broker commissions paid on originated mortgage loans 11,179
 15,665
 10,520
 11,073
Minimum tax credit carry forwards 164,661
 162,956
Minimum tax credit carryforwards 30,903
 87,822
Goodwill Amortization 34,504
 38,338
Accrued Expenses 83,271
 
Recourse reserves 5,143
 10,812
 6,854
 5,346
Deferred interest expense 55,552
 80,421
 73,271
 66,146
Depreciation and amortization 470,965
 111,438
Other 120,450
 146,911
 188,921
 153,370
Total gross deferred tax assets 2,848,732
 3,427,938
 4,022,679
 3,701,093
Valuation allowance (235,920) (124,953) (371,457) (338,922)
Total deferred tax assets 2,612,812
 3,302,985
 3,651,222
 3,362,171
        
Deferred tax liabilities:        
Purchase accounting adjustments 82,217
 123,518
 87,444
 81,151
Deferred income 20,562
 31,231
 42,811
 38,448
Originated MSR 38,775
 58,754
Change in Control deferred gain 345,014
 396,600
Originated MSRs 37,164
 42,625
SC basis difference 413,915
 375,573
Leasing transactions 2,076,602
 2,622,331
 3,855,255
 3,270,042
Depreciation and amortization 122,417
 297,314
Unremitted foreign earnings 
 67,720
Other 125,569
 136,065
 231,985
 141,782
Total gross deferred tax liabilities 2,811,156
 3,733,533
 4,668,574
 3,949,621
        
Net deferred tax (liability) $(198,344) $(430,548) $(1,017,352) $(587,450)

Due to jurisdictional netting, the net deferred tax liability of $1.0 billion is classified on the balance sheet as a deferred tax liability of $1.5 billion and a deferred tax asset included in Other assets of $503.7 million.

The IRC Section 475 mark to marketmark-to-market adjustment deferred tax asset is related to SC's business as a dealer, which is required to be recognized under IRC Section 475 for net gains that have been recognized for tax purposes on loans that are required to be marked to market for tax purposes but not book purposes. The leasing transactions deferred tax liability is primarily related to accelerated tax depreciation on leasing transactions. The Change in ControlSC basis difference deferred gaintax liability is the book over tax basis difference in the Company's investment in SC. The deferred tax liability would be realized upon the Company's disposition of its interest in SC or through dividends received from SC. If the Company were to reach 80% or more ownership of SC, SC would be consolidated with the Company for tax filing purposes, facilitating certain offsets of SC’s taxable income, and the capital planning benefit of netting SC’s net deferred tax liability against the Company’s net deferred tax asset. In addition, the SC basis difference DTL would be released as a reduction to income tax expense.


149




NOTE 15. INCOME TAXES (continued)

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. If, based on the available evidence in future periods, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, a deferred tax valuation allowance would be established. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets.

185




NOTE 15. INCOME TAXES (continued)

Items considered in this evaluation include historical financial performance, the expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry-forwardcarryforward periods, experience with operating loss and tax credit carryforwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. The Company's evaluation is based on current tax laws, as well as its expectations of future performance. As of December 31, 2017,2019, the Company maintainsmaintained a valuation allowance of $235.9$371.5 million, compared to $338.9 million as of December 31, 2018, related to deferred tax assets subject to carryforward periods for which the Company has determined it is more likely than not that these deferred tax assets will remain unused after the carry-forwardcarryforward periods have expired. The $32.6 million increase year-over-year was primarily driven by increased losses of subsidiaries in Puerto Rico for which the related deferred tax assets are not expected to be realized in future periods.

The deferred tax asset realization analysis is updated at each year-endquarter-end using the most recent forecasts. An assessment is made quarterly as to whether the forecasts and assumptions used in the deferred tax asset realization analysis should be revised in light of any changes that have occurred or are expected to occur that would significantly impact the forecasts or modeling assumptions. At December 31, 2017,2019, the Company has recorded a deferred tax asset of $800.2 million related to federal and Puerto Rico net operating loss carryforwards, which may be offset against future taxable income. If not utilized in future years, thesethe following:
(in thousands) Gross Deferred Tax Balance Valuation Allowance 
Final Expiration Year (1)
       
Net operating loss carryforwards $1,979,357
 $165,687
 2037
State net operating loss carryforwards 119,089
 6,916
 2039
General business credit carryforward 535,694
 78,427
 2038
Minimum tax credit carryforward 30,903
 
 N/A
Capital loss carryforward 22,547
 22,547
 2023
Deferred tax timing differences 1,335,089
 97,880
 N/A
Total $4,022,679
 $371,457
  
(1) These will expire in varying amounts through 2037. The Company has recorded a deferred tax asset of $124.7 million related to state net operating loss carryforwards, which may be used against future taxable income. If not utilized in future years, these will expire in varying amounts through 2037. The Company has recorded a deferred tax asset of $28.9 million related to capital loss carryforwards, which may be used against future capital gain income. If not utilized in future years, these will expire in varying amounts through 2020. The Company also has recorded a deferred tax asset of $628.0 million related to tax credit carryforwards, which may be offset against future taxable income. If not utilized in future years, these will expire in varying amounts through 2037. The Company has concluded that it is more likely than not that $101.2 million of the deferred tax asset related to the federal and Puerto Rico net operating loss carryforwards, $5.5 million of the deferred tax asset related to state net operating loss carryforwards, $23.9 million of the deferred tax asset related to capital loss carryforwards, $74.5 million of the deferred tax asset related to tax credit carryforwards and $30.8 million of the deferred tax timing differences will not be realized and correspondingly has established a valuation allowance.final expiration year.

With the exception of one subsidiary, asAs of December 31, 2017,2019, the Company’s intention to permanently reinvest unremitted earnings of certain foreign subsidiaries (with the exception of one subsidiary) in accordance with ASC 740-30 (formerly Accounting Principles Board Opinion No. 23) remains unchanged. This will continue to be evaluated as the Company’s business needs and requirements evolve. While the TCJA includesincluded a transition tax, which amounts to a deemed repatriation of foreign earnings and a one-time inclusion of these earnings in U.S. taxable income, there could be additional costs of actual repatriation of the foreign earnings, such as state taxes and foreign withholding taxes, which are inherently difficult to quantify. With respect toAdditionally, the subsidiary for which the Company did make a decision to no longer permanently reinvest its unremitted earnings, a $55.7 million tax liability was initially recorded in the three months ended December 31, 2017 to reflect the applicable deferred taxes. With the enactment of the TCJA transition tax, this liability was reduced to $25.1 million by year-end.

The TCJA also requires a U.S. shareholdersale of a controlled foreign corporation ("CFC")subsidiary could result in a gain that is subject to include in income, as a deemed dividend, the global intangible low-taxed income ("GILTI") of the CFC. This provision is effective for taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. The Company has elected to treat taxes due on future U.S. inclusions in taxable income under the GILTI provision as a current period expense when incurred.tax.

The Company has not provided deferred income taxes of $28.8$28.7 million on approximately $112.1 million of the Bank's existing pre-1988 tax bad debt reserve at December 31, 2017,2019, due to the indefinite nature of the recapture provisions. Certain rules under sectionSection 593 of the Internal Revenue CodeIRC govern when the Company may be subject to tax on the recapture of the existing base year tax bad debt reserve, such as distributions by the Bank in excess of certain earnings and profits, the redemption of the Bank’s stock, or a liquidation. The Company does not expect any of those events to occur. 


186150




NOTE 15. INCOME TAXES (continued)

Changes in Liability Related to Uncertain Tax Positions

At December 31, 2017,2019, the Company had reserves related to tax benefits from uncertain tax positions of $84.6$51.3 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in thousands) Unrecognized Tax Benefits Accrued Interest and Penalties Total Unrecognized Tax Benefits Accrued Interest and Penalties Total
Gross unrecognized tax benefits at January 1, 2015 $155,716
 $24,621
 $180,337
Additions based on tax positions related to 2015 2,752
 31
 2,783
Additions for tax positions of prior years 105,526
 3,677
 109,203
Reductions for tax positions of prior years (15) (9) (24)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations (4,116) (2,061) (6,177)
Gross unrecognized tax benefits at December 31, 2015 259,863
 26,259
 286,122
Additions based on tax positions related to 2016 17,323
 1,505
 18,828
      
Gross unrecognized tax benefits at January 1, 2017 $55,756
 $43,373
 $99,129
Additions based on tax positions related to 2017 987
 
 987
Additions for tax positions of prior years 4,644
 37,508
 42,152
 2,728
 1,877
 4,605
Reductions for tax positions of prior years (218,994) (18,828) (237,822) (784) (1,926) (2,710)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations (4,194) (43) (4,237) (9,999) (1,526) (11,525)
Settlements (2,886) (3,028) (5,914) 
 
 
Gross unrecognized tax benefits at December 31, 2016 55,756
 43,373
 99,129
Gross unrecognized tax benefits at December 31, 2017 48,688
 41,798
 90,486
Additions based on tax positions related to 2018 1,005
 
 1,005
Additions for tax positions of prior years 2,030
 1,527
 3,557
Reductions for tax positions of prior years (1,545) (65) (1,610)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations (4,813) (764) (5,577)
Settlements (62) (29) (91)
Gross unrecognized tax benefits at December 31, 2018 45,303
 42,467
 87,770
Additions based on tax positions related to the current year 987
 
 987
 270
 
 270
Additions for tax positions of prior years 2,728
 1,877
 4,605
 12,716
 1,779
 14,495
Reductions for tax positions of prior years (784) (1,926) (2,710) (4,652) (35,554) (40,206)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations (9,999) (1,526) (11,525) (3,900) (2,134) (6,034)
Gross unrecognized tax benefits at December 31, 2017 $48,688
 $41,798
 $90,486
Gross net unrecognized tax benefits that if recognized would impact the effective tax rate at December 31, 2017 $48,688
 $41,798
  
Settlements 
 
 
Gross unrecognized tax benefits at December 31, 2019 $49,737
 $6,558
 $56,295
Gross net unrecognized tax benefits that if recognized would impact the effective tax rate at December 31, 2019 $49,737
 $6,558
  
            
Less: Federal, state and local income tax benefits     (5,927)     (5,023)
Net unrecognized tax benefit reserves     $84,559
     $51,272

Tax positions will initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. 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 relevant governmental taxing authorities. In establishing an income tax provision, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company recognizes penalties and interest accrued related to unrecognized tax benefits within Income tax provision on the Consolidated Statements of Operations.

The Company filed a lawsuit againstOn September 5, 2019, the United States in 2009 in 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. As a result of these financing transactions,billion that was previously disclosed within its Form 10-K for 2018. That stipulated judgment resolved the Company paid foreign taxes of $264.0 million duringCompany’s tax liability for the years 2003 through 2007 and claimed a corresponding foreign2005 tax credit for foreign taxes paid during those years which the Internal Revenue Service ("IRS") disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million.with no material effect on net income. The Company has paid the taxes, penalties and interest associatedagreed with the IRS adjustmentsto resolve the treatment of the same financing transactions for allthe 2006 and 2007 tax years, subject to review by the Congressional Joint Committee on Taxation and final IRS approval. That anticipated resolution with the lawsuit will determine whetherIRS is consistent with the Company is entitled to a refund of the amounts paid.September 5, 2019, stipulated judgment and would have no material effect on net income.


187151




NOTE 15. INCOME TAXES (continued)

In November 2015, the Federal District Court granted the Company’s motions for summary judgment and later ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed that judgment and the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court, finding that the Company is not entitled to claim the foreign tax credits it claimed but will be allowed to exclude from income $132.0 million (representing half of the U.K. taxes the Company paid) and will be allowed to claim the interest expense deductions. The case has been remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.8 million tax reserve in relation to items that have not yet been determined by the courts, including potential penalties. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $36.8 million to no change.

With few exceptions, the Company is no longer subject to federal state and non-U.S. income tax examinations by tax authorities for years prior to 2011 and state income tax examinations 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.


NOTE 16. FAIR VALUE

General

A portion of the Company’s assets and liabilities are carried at fair value, including investments in debt securities AFS 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 DCF models incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using broker quotes and/or DCF models are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.

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

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

The Company'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.


152




NOTE 16. FAIR VALUE (continued)

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 years ended December 31, 2019 or 2018 for any assets or liabilities valued at fair value on a recurring basis.

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 December 31, 2019 and December 31, 2018.
(in thousands) Level 1 Level 2 Level 3 Balance at
December 31, 2019
 Level 1 Level 2 Level 3 Balance at
December 31, 2018
Financial assets:                
U.S. Treasury securities $
 $4,090,938
 $
 $4,090,938
 $526,364
 $1,278,381
 $
 $1,804,745
Corporate debt 
 139,713
 
 139,713
 
 160,114
 
 160,114
ABS 
 75,165
 63,235
 138,400
 
 109,638
 327,199
 436,837
State and municipal securities 
 9
 
 9
 
 16
 
 16
MBS 
 9,970,698
 
 9,970,698
 
 9,231,275
 
 9,231,275
Investment in debt securities AFS(3)
 
 14,276,523
 63,235
 14,339,758
 526,364
 10,779,424
 327,199
 11,632,987
Other investments - trading securities 379
 718
 
 1,097
 4
 6
 
 10
RICs HFI(4)
 
 17,634
 84,334
 101,968
 
 
 126,312
 126,312
LHFS (1)(5)
 
 289,009
 
 289,009
 
 209,506
 
 209,506
MSRs (2)
 
 
 130,855
 130,855
 
 
 149,660
 149,660
Other assets - derivatives (3)
 
 553,222
 3,109
 556,331
 
 515,781
 2,704
 518,485
Total financial assets (6)
 $379
 $15,137,106
 $281,533
 $15,419,018
 $526,368
 $11,504,717
 $605,875
 $12,636,960
Financial liabilities:                
Other liabilities - derivatives (3)
 
 543,560
 2,854
 546,414
 
 496,593
 838
 497,431
Total financial liabilities $
 $543,560
 $2,854
 $546,414
 $
 $496,593
 $838
 $497,431
(1)LHFS disclosed on the 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 $132.7 million and $152.1 million as of December 31, 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 14 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 $281.5 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 1.8% of total assets measured at fair value on a recurring basis and approximately 0.2% of total consolidated assets.

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:

Investments in debt securities AFS

Investments in debt securities 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.

153




NOTE 16. 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 which 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 reported in LHFI, net, the Company has elected the FVO. For certain of these loans, the Company has used the most recent purchase price as the fair value and hence has classified these amounts as Level 2. The fair value of the remaining RICs HFI are estimated using a 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, these remaining RICs HFI 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 Consolidated Statements of Operations through Miscellaneous income, net. See further discussion below in the section captioned "FVO for Financial Assets and Financial Liabilities."


154




NOTE 16. 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 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 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 $5.6 million and $10.8 million, respectively, at December 31, 2019.
A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $4.2 million and $8.3 million, respectively, at December 31, 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).

155




NOTE 16. FAIR VALUE (continued)

Gains and losses related to derivatives affect various line items in the Consolidated Statements of Operations. See Note 14 to these Consolidated Financial Statements for a discussion of derivatives activity.

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 years ended December 31, 2019 and 2018, respectively, for those assets and liabilities measured at fair value on a recurring basis.
  Year Ended December 31, 2019 Year Ended December 31, 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 (2,535) 
 
 
 (2,535) (3,323) 
 
 
 (3,323)
Gains/(losses) in earnings 
 11,433
 (27,862) (2,610) (19,039) 
 17,018
 7,906
 (1,324) 23,600
Additions/Issuances 
 2,079
 26,816
 
 28,895
 
 6,631
 12,778
 
 19,409
Settlements(1)
 (261,429) (55,490) (17,759) 999
 (333,679) (19,730) (83,808) (17,017) 1,676
 (118,879)
Balances, end of period $63,235
 $84,334
 $130,855
 $255
 $278,679
 $327,199
 $126,312
 $149,660
 $1,866
 $605,037
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period $
 $11,433
 $(27,862) $(2,975) $(19,404) $
 $17,018
 $7,906
 $(1,896) $23,028
(1)Settlements include charge-offs, prepayments, paydowns and maturities.

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
December 31, 2019
 Level 1 Level 2 Level 3 Balance at
December 31, 2018
Impaired commercial LHFI $
 $133,640
 $356,220
 $489,860
 $5,182
 $150,208
 $219,258
 $374,648
Foreclosed assets 
 17,168
 51,080
 68,248
 
 16,678
 81,208
 97,886
Vehicle inventory 
 346,265
 
 346,265
 
 342,617
 
 342,617
LHFS(1)
 
 
 1,131,214
 1,131,214
 
 
 1,073,795
 1,073,795
Auto loans impaired due to bankruptcy 
 200,504
 503
 201,007
 
 189,114
 
 189,114
MSRs 
 
 8,197
 8,197
 
 
 9,386
 9,386
(1)These amounts include $1.0 billion and $1.1 billion of personal LHFS that were impaired as of December 31, 2019 and December 31, 2018, respectively.

Valuation Processes and Techniques - Nonrecurring Fair Value Assets and Liabilities

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 $448.8 million and $479.4 million at December 31, 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.

156




NOTE 16. FAIR VALUE (continued)

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 RIC 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 Consolidated Statements of Operations relating to assets held at period-end:
   Year Ended December 31,
(in thousands)Statement of Operations Location 2019 2018 2017
Impaired LHFIProvision for credit losses $(15,495) $(58,818) $(73,925)
Foreclosed assets
Miscellaneous income, net (1)
 (13,648) (12,137) (13,505)
LHFSProvision for credit losses 
 (387) (3,700)
LHFS
Miscellaneous income, net (1)
 (404,606) (382,298) (386,422)
Auto loans impaired due to bankruptcyProvision for credit losses (9,106) (93,277) (75,194)
Goodwill impairmentImpairment of goodwill 
 
 (10,536)
MSRs
Miscellaneous income, net (1)
 (633) (743) (549)
(1)Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.




157




NOTE 16. FAIR VALUE (continued)

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 December 31, 2019 and December 31, 2018, respectively:
(dollars in thousands) Fair Value at December 31, 2019 Valuation Technique Unobservable Inputs Range
(Weighted Average)
Financial Assets:  
ABS        
Financing bonds $51,001
 DCF 
Discount rate (1)
  1.64% - 1.64% (1.64% )
Sale-leaseback securities 12,234
 
Consensus pricing (2)
 
Offered quotes (3)
 103.00%
RICs HFI 84,334
 DCF 
CPR (4)
 6.66%
      
Discount rate (5)
  9.50% - 14.50% (13.16%)
      
Recovery rate (6)
  25% - 43% (41.12%)
Personal LHFS (10)
 1,007,105
 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)
 130,855
 DCF 
CPR (7)
  7.83% - 100.00% (11.97%)
      
Discount rate (8)
 9.63%
(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. The Company owns one sale-leaseback 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 securities23,975
 
Consensus pricing (2)
 
Offered quotes (3)
 110.28%
RICs HFI126,312
 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 December 31, 2019 Level 3 significant inputs table above.


158




NOTE 16. FAIR VALUE (continued)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:
  December 31, 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 $7,644,372
 $7,644,372
 $7,644,372
 $
 $
 $7,790,593
 $7,790,593
 $7,790,593
 $
 $
Investments in debt securities AFS 14,339,758
 14,339,758
 
 14,276,523
 63,235
 11,632,987
 11,632,987
 526,364
 10,779,424
 327,199
Investments in debt securities HTM 3,938,797
 3,957,227
 
 3,957,227
 
 2,750,680
 2,676,049
 
 2,676,049
 
Other investments - trading securities 1,097
 1,097
 379
 718
 
 10
 10
 4
 6
 
LHFI, net 89,059,251
 90,490,760
 
 1,142,998
 89,347,762
 83,148,738
 83,415,697
 5,182
 150,208
 83,260,307
LHFS 1,420,223
 1,420,295
 
 289,009
 1,131,286
 1,283,278
 1,283,301
 
 209,506
 1,073,795
Restricted cash 3,881,880
 3,881,880
 3,881,880
 
 
 2,931,711
 2,931,711
 2,931,711
 
 
MSRs(1)
 132,683
 139,052
 
 
 139,052
 152,121
 159,046
 
 
 159,046
Derivatives 556,331
 556,331
 
 553,222
 3,109
 518,485
 518,485
 
 515,781
 2,704
                     
Financial liabilities:  
  
    
  
          
Deposits (2)
 9,375,281
 9,384,994
 
 9,384,994
 
 7,468,667
 7,416,420
 
 7,416,420
 
Borrowings and other debt obligations 50,654,406
 51,232,798
 
 36,114,404
 15,118,394
 44,953,784
 45,083,518
 
 31,494,126
 13,589,392
Derivatives 546,414
 546,414
 
 543,560
 2,854
 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.
(2) This line item excludes deposit liabilities with no defined or contractual maturities in accordance with ASU 2016-01.

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 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.


159




NOTE 16. FAIR VALUE (continued)

Investments in debt securities HTM

Investments in debt 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.

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

For deposits with no stated maturity, such as non-interest-bearing and interest-bearing demand deposit accounts, savings accounts and certain money market accounts, the carrying value approximates fair values. The fair value of fixed-maturity deposits is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities and have been classified as 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.


160




NOTE 16. FAIR VALUE (continued)

RICs HFI

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs HFI. These loans consisted primarily of SC’s RICs accounted for by SC under ASC 310-30 and non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of December 31, 2019 and December 31, 2018:
  December 31, 2019 December 31, 2018
(in thousands) Fair Value Aggregate UPB Difference Fair Value Aggregate UPB Difference
LHFS(1)
 $289,009
 $284,111
 $4,898
 $209,506
 $204,061
 $5,445
RICs HFI 101,968
 113,863
 (11,895) 126,312
 142,882
 (16,570)
Nonaccrual loans 10,616
 12,917
 (2,301) 7,630
 10,427
 (2,797)
(1)LHFS disclosed on the 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 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 December 31, 2019 and December 31, 2018, the balance of these loans serviced for others accounted for at fair value was $15.0 billion and $14.4 billion, respectively. Changes in fair value are recorded through Miscellaneous income, net on the 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 14 to these 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 17. NON-INTEREST INCOME AND OTHER EXPENSES

The following table presents the details of the Company's Non-interest income for the following periods:
  Year Ended December 31,
(in thousands) 2019 2018 
2017 (1)
Non-interest income:      
Consumer and commercial fees $548,846
 $568,147
 $616,438
Lease income 2,872,857
 2,375,596
 2,017,775
Miscellaneous income, net      
Mortgage banking income, net 44,315
 34,612
 56,659
BOLI 62,782
 58,939
 66,784
Capital market revenue 197,042
 165,392
 195,906
Net gain on sale of operating leases 135,948
 202,793
 127,156
Asset and wealth management fees 175,611
 165,765
 147,749
Loss on sale of non-mortgage loans (397,965) (351,751) (370,289)
Other miscellaneous income, net 83,865
 31,532
 45,519
Net gains/(losses) on sale of investment securities 5,816
 (6,717) (2,444)
Total Non-interest income $3,729,117
 $3,244,308
 $2,901,253
(1) - Prior period amounts have not been adjusted under the modified retrospective method. For further information on the adoption of ASU 2014-09, see Note 1 to these Consolidated Financial Statements.

161




NOTE 17. 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:
  Year Ended December 31,
(in thousands) 2019 2018 
2017 (1)
Non-interest income:      
In-scope of revenue from contracts with customers:      
Depository services(2)
 $241,167
 $236,381
 $242,995
Commission and trailer fees(3)
 160,665
 143,733
 136,497
Interchange income, net(3)
 67,524
 60,258
 58,525
Underwriting service fees(3)
 97,211
 71,536
 97,143
Asset and wealth management fees(3)
 145,515
 138,108
 112,533
Other revenue from contracts with customers(3)
 39,885
 36,692
 40,722
Total in-scope of revenue from contracts with customers 751,967
 686,708
 688,415
Out-of-scope of revenue from contracts with customers:      
Consumer and commercial fees(4)
 256,412
 294,371
 347,216
Lease income 2,872,857
 2,375,596
 2,017,775
Miscellaneous loss(4)
 (157,935) (105,650) (149,709)
Net gains/(losses) on sale of investment securities 5,816
 (6,717) (2,444)
Total out-of-scope of revenue from contracts with customers 2,977,150
 2,557,600
 2,212,838
Total non-interest income $3,729,117
 $3,244,308
 $2,901,253
(1) Prior period amounts have not been adjusted under the modified retrospective method. For further information on the adoption of this standard, see Note 1.
(2) Primarily recorded in the Company's Consolidated Statements of Operations within Consumer and commercial fees.
(3) Primarily recorded in the Company's Consolidated Statements of Operations within Miscellaneous income, net.
(4) The balance presented excludes certain revenue streams that are considered in-scope and presented above.

Arrangements with Multiple Performance Obligations

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

Practical Expedients

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

162




NOTE 17. NON-INTEREST INCOME AND OTHER EXPENSES (continued)

Other Expenses

The following table presents the Company's other expenses for the following periods:
  Year Ended December 31,
(in thousands) 
2019(1)
 2018 2017
Other expenses:      
Amortization of intangibles $58,993
 $60,650
 $61,491
Deposit insurance premiums and other expenses 64,734
 61,983
 70,661
Loss on debt extinguishment 2,735
 3,470
 30,349
Impairment of goodwill 
 
 10,536
Other administrative expenses 518,138
 461,291
 484,992
Other miscellaneous expenses 42,830
 21,595
 21,128
Total Other expenses $687,430
 $608,989
 $679,157
(1) The year ended December 31, 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 18. STOCK-BASED COMPENSATION

SC Stock Compensation Plans

Prior to its expiration on January 31, 2015, SC granted stock options to certain executives, other employees, and independent directors under the 2011 Management Equity Plan (the "SC Plan").The SC Plan was administered by SC's Board and enabled SC to make stock awards up to a total of approximately 29.4 million common shares (net of shares canceled or forfeited). No further awards will be made under this plan. In December 2013, the SC Board established an Omnibus Incentive Plan (the "Omnibus Incentive Plan"), amended and restated as of June 2016, which enables SC to grant awards of nonqualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units ("RSUs"), and other awards that may be settled in or based upon the value of SC Common Stock, up to a total of 5,192,641 common shares.

Stock options granted have an exercise price based on the estimated fair market value of SC Common Stock on the grant date. The stock options expire after ten years and include both time vesting options and performance vesting options. The fair value of the stock options is amortized into income over the vesting period as time and performance vesting conditions are met. Under a management shareholder agreement (the "Management Shareholder Agreement") entered into by certain employees, no shares obtained through exercise of stock options could be transferred until the later of December 31, 2016, and SC's execution of the IPO (the later date of which is referred to as the Lapse Date). Until the Lapse Date, if an employee were to leave SC, SC would have the right to repurchase any or all of the stock obtained by the employee through option exercise. If the employee were terminated for cause (as defined in the SC Plan) or voluntarily left SC without good reason (as defined in the SC Plan), in each case, prior to the Lapse Date the repurchase price would be the lower of the strike price or fair market value at the date of repurchase. If the employee were terminated without cause or voluntarily left SC with good reason, in each case, prior to the Lapse Date the repurchase price would be the fair market value at the date of repurchase. Management believes SC's repurchase right caused the IPO to constitute an implicit vesting condition and therefore did not record any stock compensation expense until the date of the IPO.

On December 28, 2013, the SC Board approved certain changes to the SC Plan and the Management Shareholder Agreement, including acceleration of vesting for certain employees, removal of transfer restrictions for shares underlying a portion of the options outstanding under the SC Plan, and addition of transfer restrictions for shares underlying another portion of the outstanding options. All of the changes were contingent on, and effective upon, SC's execution of the IPO and, accordingly, became effective upon pricing of the IPO on January 22, 2014. In addition, on December 28, 2013, SC granted 583,890 shares of restricted stock to certain executives under its Omnibus Incentive Plan (the “Omnibus Incentive Plan”). Compensation expense related to this restricted stock is recognized over a five-year vesting period, with $5.5 million, $0.7 million and $8.9 million recorded for the years ended December 31, 2017, 2016 and 2015, respectively.


188




NOTE 16. STOCK-BASED COMPENSATION (continued)

Also in connection with the IPO, SC granted additional stock options under the SC Plan to certain executives, other employees, and an independent director with a grant date fair value of $10.2 million, which is being recognized over the awards' vesting period of five years for the employees and three years for the director. Additional stock option grants were made during the year ended December 31, 2016 to employees, and the estimated compensation costs associated with these additional grants was $0.7 million, which will also be recognized over the vesting periods of the awards. The grant date fair values of these stock option awards were determined using the Black-Scholes option valuation model. No stock option grants were made during the year ended December 31, 2017.

A summary of SC's stock options and related activity as of and for the year ended December 31, 2017 is as follows:
 SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
  (in whole dollars) (in 000's)
Options outstanding at January 1, 20174,295,830
$12.70
5.6$12,982
Granted

 
Exercised(1,435,606)9.51
 8,047
Expired(470,276)20.28
 
Forfeited(694,940)14.94
 
Options outstanding at December 31, 20171,695,008
$12.39
4.7$12,058
Options exercisable at December 31, 20171,455,170
$10.91
4.3$11,851
Options expected to vest after December 31, 2017239,838
$21.35
6.7 

In connection with compensation restrictions imposed on certain executive officers and other employees by the European Central Bank under the Capital Requirements Directive IV (the "CRD IV") prudential rules, which require a portion of such officers' and employees' variable compensation to be paid in the form of equity, SC RSUs in February and April 2015. Pursuant to the applicable award agreements under the Omnibus Incentive Plan, a portion of the RSUs vested immediately upon grant, and a portion will vest annually over the next 3 years. In June 2015, as part of a separate grant under the Omnibus Incentive Plan, SC granted certain officers RSUs that vest over a three-year period, with vesting dependent on Santander's performance over that time. After vesting, stock obtained by employees and officers through RSUs must be held for 1 year. In October 2015, SC granted certain directors RSUs under the Omnibus Incentive Plan that vest upon the earlier of the first anniversary of the grant date or the first annual shareholders' meeting following the grant date. In December 2015, SC granted a new officer RSUs that will vest in equal portions on each of the first three anniversaries of the grant date.

In February, June and November 2016, SC granted certain new employees RSUs that will vest annually over a three-year period. In March, April and November 2016, RSUs that vest annually over a three-year period were granted to certain officers and employees as retention awards. The RSUs granted as retention awards to officers and employees whose variable compensation is subject to the provisions of CRD IV must be held for one year after vesting. Further, in accordance with the provisions of CRD IV, in April 2016, SC granted RSUs to certain officers and employees, a portion of which vested immediately upon grant and a portion that vest annually over a three-year period, and all of which must be held for one year after vesting. In addition, in November 2016, SC granted certain officers RSUs that vest over a three-year period, with vesting dependent on Santander performance over that time and which must be held for one year after vesting. In November and December 2016, SC granted certain directors RSUs that vest upon the earlier of the first anniversary of grant date or the first annual shareholders' meeting following the grant date. All RSU grants during 2016 were made under the Omnibus Incentive Plan.

In March, May, August, and October 2017, SC granted to certain employees subject to CRD IV RSUs that vest annually over three-year periods. In March 2017, SC granted RSUs to certain officers and employees in connection with their 2016 annual bonuses. For the RSUs granted to officers and employees subject to CRD IV, except for SC's CEO, 60% of the RSUs vested immediately upon grant and 40% of the RSUs will vest ratably over three-year periods, all of which must be held for one year after vesting. For the RSUs granted to SC's CEO, half of the RSUs vested immediately upon grant and half of the RSUs will vest ratably over a five-year period, subject to the achievement of certain performance conditions. For employees not subject to CRD IV, the RSUs will vest ratably over three-year periods. In June 2017, SC granted certain directors RSUs that vest upon the earlier of the first anniversary of the grant date or the first annual shareholders' meeting following the grant date. All RSU grants during 2017 were made under the Omnibus Incentive Plan.


189




NOTE 16. STOCK-BASED COMPENSATION (continued)

On November 15, 2017, Mr. Dundon (the former Chairman of SC's Board and its CEO), the Company, SC, Santander Consumer USA Inc., Santander and DDFS LLC (an affiliate of Mr. Dundon) entered into a settlement agreement, the (“Settlement Agreement”) that, among other things, amended the terms of a prior settlement agreement among the parties in connection with Mr. Dundon’s departure from SC. Pursuant to the Settlement Agreement, among other things, Mr. Dundon received payments from SC totaling $66.1 million, of which $52.8 million was paid in satisfaction of Mr. Dundon’s previous exercise of certain stock options that was the subject of the Separation Agreement entered into by Mr. Dundon in connection with his departure from SC. The Settlement Agreement also modifies the terms of certain equity-based awards previously granted to Mr. Dundon. Please refer to Note 21 of these Consolidated Financial Statements and the section of the MD&A captioned “Employment and Other Agreements.”

A summary of the status and changes of SC's non-vested stock option shares as of and for the year ended December 31, 2017, is presented below:
 SharesWeighted Average Grant Date Fair Value
Non-vested at January 1, 20171,151,067
$7.02
Granted

Vested(216,289)7.66
Forfeited or expired(694,940)6.73
Non-vested at December 31, 2017239,838
$7.29

At December 31, 2017, total unrecognized compensation expense for non-vested stock options granted was $1.2 million, which is expected to be recognized over a weighted average period of 2.2 years.

There were no stock options granted to employees in 2017. The following summarizes the assumptions used in estimating the fair value of stock options granted under the Management Equity Plan to employees for the years ended December 31, 2016 and 2015.
For the year ended December 31, 2016For the year ended December 31, 2015
Assumption:
Risk-free interest rate1.79%1.64% - 1.97%
Expected life (in years)6.56.0 - 6.5
Expected volatility33%32% - 48%
Dividend yield3.69%1.6% - 2.7%
Weighted average grant date fair value$3.14$6.92 - $9.67
Fair Value Adjustments

The Company hasfollowing table presents the same fair value basis with that of SC for any stock option awards after the IPO date.


NOTE 17.OTHER EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

All employees of the Bank are eligible to participateincreases and decreases in the 401(k) Plan, sponsored by the Company, following their completion of one month of service. There is no age requirement to join the 401(k) Plan. The Bank matches 100% of employee contributions up to 3% of their compensation and then 50% of employee contributions between 3% and 5% of their compensation. The Bank's match is immediately vested and is allocated to the employee’s various 401(k) Plan investment options in the same percentages as the employee’s own contributions. The Bank recognized expense for contributions to the 401(k) Plan of $20.6 million, $21.1 million and $20.4 million during 2017, 2016 and 2015, respectively, within the Compensation and benefits line on the Consolidated Statements of Operations.

SC sponsors a defined contribution plan offered to qualifying employees. Employees participating in the plan may contribute up to 75% of their base salary, subject to federal limitations on absolute amounts contributed. SC matches 100% of employee contributions up to 6% of their base salary. The total amount contributed by SC in 2017, 2016 and 2015 was $12.4 million, $11.8 million and $9.5 million, respectively.


190




NOTE 17.OTHER EMPLOYEE BENEFIT PLANS (continued)

Defined Benefit Plans and Other Post Retirement Benefit Plans

The Company sponsors several defined benefit plans and other post retirement benefit plans that cover certain employees. All of the plans are frozen and therefore closed to new entrants; all benefits are fully vested, and therefore the plans ceased accruing benefits. The Company complies with minimum funding requirements in all countries. The Company also sponsors several supplemental executive retirement plans and other unfunded post-retirement benefit plans that provide health care to certain retired employees.

The Company recognizes the funded status of its defined benefit pension plans and other post-retirement benefit plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, within Other liabilities on the Consolidated Balance Sheets. The Company has accrued liabilities of $65.9 million and $74.0 million related to its total defined benefit pension plans and other post-retirement benefit plans. The net unfunded status related to actuarially-valued defined benefit pension plans and other post-retirement plans was $50.5 million and $58.0 million at December 31, 2017 and December 31, 2016, respectively.


NOTE 18. FAIR VALUE

General

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

As of December 31, 2017, $15.4 billion of the Company’s total assets consisted of financial instruments measured at fair value on a recurring basis, including financial instruments for which the Company elected the FVO. Approximately $139.6 million of these financial assets were measured using quoted market prices for identical instruments, or Level 1 inputs. Approximately $14.6 billion of these financial assets were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $684.8 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 4.4% of total assets measured at fair value on a recurring basis and approximately 0.5% of total consolidated assets.

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

Level 1 - Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments.
Level 2 - Assets and liabilities valued based on observable market data for similar instruments. Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly.
Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market, and instruments valued based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require. Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing services, pricing models with internally developed assumptions, DCF methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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


191




NOTE 18. 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 transfers between Levels 1, 2 or 3 during the years ended December 31, 2017 and 2016 for any assets or liabilities valued at fair value on a recurring basis.

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 recurringnonrecurring basis by major product category andfor which a fair value hierarchy asadjustment has been included in the Consolidated Statements of December 31, 2017 and December 31, 2016.Operations relating to assets held at period-end:
(in thousands) Level 1 Level 2 Level 3 Balance at
December 31, 2017
 Level 1 Level 2 Level 3 Balance at
December 31, 2016
Financial assets:                
U.S. Treasury securities $139,615
 $858,497
 $
 $998,112
 $224,506
 $1,632,351
 $
 $1,856,857
Debentures of FHLB, FNMA and FHLMC 
 
 
 
 
 
 
 
Corporate debt 
 11,660
 
 11,660
 
 
 
 
ABS 
 156,910
 350,252
 507,162
 
 396,157
 814,567
 1,210,724
Equity securities(1)
 
 
 
 
 544
 
 
 544
State and municipal securities 
 23
 
 23
 
 30
 
 30
MBS 
 12,885,412
 
 12,885,412
 
 13,945,463
 
 13,945,463
Investment securities AFS(1)(4)
 139,615
 13,912,502
 350,252
 14,402,369
 225,050
 15,974,001
 814,567
 17,013,618
Trading securities 1
 
 
 1
 214
 1,416
 
 1,630
RICs held-for-investment 
 
 186,471
 186,471
 
 
 217,170
 217,170
LHFS (2)
 
 197,691
 
 197,691
 
 453,293
 
 453,293
MSRs (3)
 
 
 145,993
 145,993
 
 
 146,589
 146,589
Derivatives (4)
 
 461,139
 2,105
 463,244
 
 419,012
 2,318
 421,330
Total financial assets $139,616
 $14,571,332
 $684,821
 $15,395,769
 $225,264
 $16,847,722
 $1,180,644
 $18,253,630
Financial liabilities:                
Derivatives (4)
 
 427,217
 594
 427,811
 
 351,820
 31,318
 383,138
Total financial liabilities $
 $427,217
 $594
 $427,811
 $
 $351,820
 $31,318
 $383,138
   Year Ended December 31,
(in thousands)Statement of Operations Location 2019 2018 2017
Impaired LHFIProvision for credit losses $(15,495) $(58,818) $(73,925)
Foreclosed assets
Miscellaneous income, net (1)
 (13,648) (12,137) (13,505)
LHFSProvision for credit losses 
 (387) (3,700)
LHFS
Miscellaneous income, net (1)
 (404,606) (382,298) (386,422)
Auto loans impaired due to bankruptcyProvision for credit losses (9,106) (93,277) (75,194)
Goodwill impairmentImpairment of goodwill 
 
 (10,536)
MSRs
Miscellaneous income, net (1)
 (633) (743) (549)
(1)Investment securities AFSGains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.




157




NOTE 16. FAIR VALUE (continued)

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 December 31, 2019 and December 31, 2018, respectively:
(dollars in thousands) Fair Value at December 31, 2019 Valuation Technique Unobservable Inputs Range
(Weighted Average)
Financial Assets:  
ABS        
Financing bonds $51,001
 DCF 
Discount rate (1)
  1.64% - 1.64% (1.64% )
Sale-leaseback securities 12,234
 
Consensus pricing (2)
 
Offered quotes (3)
 103.00%
RICs HFI 84,334
 DCF 
CPR (4)
 6.66%
      
Discount rate (5)
  9.50% - 14.50% (13.16%)
      
Recovery rate (6)
  25% - 43% (41.12%)
Personal LHFS (10)
 1,007,105
 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)
 130,855
 DCF 
CPR (7)
  7.83% - 100.00% (11.97%)
      
Discount rate (8)
 9.63%
(1)Based on the Consolidated Balance Sheets at December 31, 2017applicable term and December 31, 2016, respectively, included $10.8 million and $10.6 million of equity securities valued using net asset value as a practical expedient that are not presented within this table.discount index.
(2)LHFS disclosed on the Consolidated Balance Sheets also includes LHFSConsensus pricing refers to fair value estimates that are held at the lower of costgenerally developed using information such as dealer quotes or fair value and are not presented within this table.other third-party valuations or comparable asset prices.
(3)Based on the nature of the input, a range or weighted average does not exist. The Company has total MSRsowns one sale-leaseback security.
(4)Based on the analysis of $149.2 millionavailable data from a comparable market securitization of similar assets.
(5)Based on the cost of funding of debt issuance and $150.3 million as of December 31, 2017.and December 31, 2016, respectively. 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 securities23,975
 
Consensus pricing (2)
 
Offered quotes (3)
 110.28%
RICs HFI126,312
 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 December 31, 2019 Level 3 significant inputs table above.


158




NOTE 16. FAIR VALUE (continued)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:
  December 31, 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 $7,644,372
 $7,644,372
 $7,644,372
 $
 $
 $7,790,593
 $7,790,593
 $7,790,593
 $
 $
Investments in debt securities AFS 14,339,758
 14,339,758
 
 14,276,523
 63,235
 11,632,987
 11,632,987
 526,364
 10,779,424
 327,199
Investments in debt securities HTM 3,938,797
 3,957,227
 
 3,957,227
 
 2,750,680
 2,676,049
 
 2,676,049
 
Other investments - trading securities 1,097
 1,097
 379
 718
 
 10
 10
 4
 6
 
LHFI, net 89,059,251
 90,490,760
 
 1,142,998
 89,347,762
 83,148,738
 83,415,697
 5,182
 150,208
 83,260,307
LHFS 1,420,223
 1,420,295
 
 289,009
 1,131,286
 1,283,278
 1,283,301
 
 209,506
 1,073,795
Restricted cash 3,881,880
 3,881,880
 3,881,880
 
 
 2,931,711
 2,931,711
 2,931,711
 
 
MSRs(1)
 132,683
 139,052
 
 
 139,052
 152,121
 159,046
 
 
 159,046
Derivatives 556,331
 556,331
 
 553,222
 3,109
 518,485
 518,485
 
 515,781
 2,704
                     
Financial liabilities:  
  
    
  
          
Deposits (2)
 9,375,281
 9,384,994
 
 9,384,994
 
 7,468,667
 7,416,420
 
 7,416,420
 
Borrowings and other debt obligations 50,654,406
 51,232,798
 
 36,114,404
 15,118,394
 44,953,784
 45,083,518
 
 31,494,126
 13,589,392
Derivatives 546,414
 546,414
 
 543,560
 2,854
 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 and are not presented within this table.value.
(4)Refer to Note 3 for the fair value of investment securities and to Note 14 for the fair values of derivative assets and liabilities, on a further disaggregated basis.
(2) This line item excludes deposit liabilities with no defined or contractual maturities in accordance with ASU 2016-01.

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 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.


192159




NOTE 18.16. FAIR VALUE (continued)

AssetsInvestments in debt securities HTM

Investments in debt 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.

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
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
December 31, 2017
 Level 1 Level 2 Level 3 Balance at
December 31, 2016
Impaired commercial LHFI $
 $226,832
 $356,343
 $583,175
 $13,147
 $244,986
 $265,664
 $523,797
Foreclosed assets 
 20,011
 106,581
 126,592
 
 30,792
 79,721
 110,513
Vehicle inventory 
 325,203
 
 325,203
 
 315,651
 
 315,651
LHFS(1)
 
 
 2,324,830
 2,324,830
 
 
 2,133,040
 2,133,040
Auto loans impaired due to bankruptcy 
 121,578
 
 121,578
 
 
 
 
MSRs 
 
 9,273
 9,273
 
 
 10,287
 10,287
(1)These amounts include $1.1 billion and $1.1 billion of personal loans held for sale that are impaired as of December 31, 2017 and December 31, 2016, respectively.

Valuation Processes and TechniquesBasis" above.

Impaired commercial LHFI inLHFS

The Company's LHFS portfolios that are accounted for at the table above represents the recorded investmentlower of impaired commercial loans for which the Company measures impairment during the period based on thecost or market primarily consists of RICs HFS. The estimated fair value of the underlying collateral supportingRICs HFS is based on prices obtained in recent market transactions or expected to be obtained in the loan. Written offers to purchase a specific impaired loan are considered observablesubsequent sales for similar assets.

Deposits

For deposits with no stated maturity, such as non-interest-bearing and interest-bearing demand deposit accounts, savings accounts and certain money market inputs, which are considered Level 1 inputs. Appraisals are obtained to supportaccounts, the carrying value approximates fair values. The fair value of fixed-maturity deposits is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities and have been classified as Level 2.

Borrowings and other debt obligations

Fair value is estimated by discounting cash flows using rates currently available to the collateralCompany for other borrowings with similar terms and incorporate measures suchremaining 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 recent sales prices for comparable properties and are considered Level 2 inputs. Loans for which the value2. A certain portion of the underlying collateraldebt relating to revolving credit facilities is determined using a combination of real estate appraisals, field examinations and internal calculations are classified as Level 3. The inputs inManagement believes that 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 valueterms of these loans was $491.5 millioncredit agreements approximate market terms for similar credit agreements and, $449.5 million at December 31, 2017 and December 31, 2016, respectively. Loans previously impaired which were not markedtherefore, they are considered to fair value during the periods presented are excluded from this table.be Level 3.

Foreclosed assets represent the recorded investment in assets taken during the period presented in foreclosure of defaulted loans,FVO for Financial Assets 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.Financial Liabilities

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.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.


160




NOTE 16. FAIR VALUE (continued)

RICs HFI

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs HFI. These loans consisted primarily of SC’s RICs accounted for by SC under ASC 310-30 and non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a nonrecurringrecurring basis primarily consistas of personal, commercial,December 31, 2019 and December 31, 2018:
  December 31, 2019 December 31, 2018
(in thousands) Fair Value Aggregate UPB Difference Fair Value Aggregate UPB Difference
LHFS(1)
 $289,009
 $284,111
 $4,898
 $209,506
 $204,061
 $5,445
RICs HFI 101,968
 113,863
 (11,895) 126,312
 142,882
 (16,570)
Nonaccrual loans 10,616
 12,917
 (2,301) 7,630
 10,427
 (2,797)
(1)LHFS disclosed on the 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 LHFS.HFI is recognized when earned based on their respective contractual rates in Interest income on loans in the Consolidated Statements of Operations. The estimatedaccrual 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 December 31, 2019 and December 31, 2018, the balance of these loans serviced for others accounted for at fair value for these LHFS is calculated basedwas $15.0 billion and $14.4 billion, respectively. Changes in fair value are recorded through Miscellaneous income, net on a combinationthe Consolidated Statements of estimated market rates for similar loans with similar credit risks and a DCF analysis in whichOperations. As deemed appropriate, the Company uses significant unobservable inputseconomically hedges MSRs using interest rate swaps and forward contracts to purchase MBS. See further discussion on key assumptions, including historical default rates and adjustmentsthese derivative activities in Note 14 to reflect voluntary prepayments, prepayment rates, discount rates reflectivethese Consolidated Financial Statements. The remainder of the cost of funding, and credit loss expectations. TheMSRs are accounted for using the lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net changeare presented above 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 ratessection captioned "Assets and current market levels of used car prices.

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


NOTE 17. NON-INTEREST INCOME AND OTHER EXPENSES
193
The following table presents the details of the Company's Non-interest income for the following periods:
  Year Ended December 31,
(in thousands) 2019 2018 
2017 (1)
Non-interest income:      
Consumer and commercial fees $548,846
 $568,147
 $616,438
Lease income 2,872,857
 2,375,596
 2,017,775
Miscellaneous income, net      
Mortgage banking income, net 44,315
 34,612
 56,659
BOLI 62,782
 58,939
 66,784
Capital market revenue 197,042
 165,392
 195,906
Net gain on sale of operating leases 135,948
 202,793
 127,156
Asset and wealth management fees 175,611
 165,765
 147,749
Loss on sale of non-mortgage loans (397,965) (351,751) (370,289)
Other miscellaneous income, net 83,865
 31,532
 45,519
Net gains/(losses) on sale of investment securities 5,816
 (6,717) (2,444)
Total Non-interest income $3,729,117
 $3,244,308
 $2,901,253
(1) - Prior period amounts have not been adjusted under the modified retrospective method. For further information on the adoption of ASU 2014-09, see Note 1 to these Consolidated Financial Statements.

161




NOTE 17. 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:
  Year Ended December 31,
(in thousands) 2019 2018 
2017 (1)
Non-interest income:      
In-scope of revenue from contracts with customers:      
Depository services(2)
 $241,167
 $236,381
 $242,995
Commission and trailer fees(3)
 160,665
 143,733
 136,497
Interchange income, net(3)
 67,524
 60,258
 58,525
Underwriting service fees(3)
 97,211
 71,536
 97,143
Asset and wealth management fees(3)
 145,515
 138,108
 112,533
Other revenue from contracts with customers(3)
 39,885
 36,692
 40,722
Total in-scope of revenue from contracts with customers 751,967
 686,708
 688,415
Out-of-scope of revenue from contracts with customers:      
Consumer and commercial fees(4)
 256,412
 294,371
 347,216
Lease income 2,872,857
 2,375,596
 2,017,775
Miscellaneous loss(4)
 (157,935) (105,650) (149,709)
Net gains/(losses) on sale of investment securities 5,816
 (6,717) (2,444)
Total out-of-scope of revenue from contracts with customers 2,977,150
 2,557,600
 2,212,838
Total non-interest income $3,729,117
 $3,244,308
 $2,901,253
(1) Prior period amounts have not been adjusted under the modified retrospective method. For further information on the adoption of this standard, see Note 1.
(2) Primarily recorded in the Company's Consolidated Statements of Operations within Consumer and commercial fees.
(3) Primarily recorded in the Company's Consolidated Statements of Operations within Miscellaneous income, net.
(4) The balance presented excludes certain revenue streams that are considered in-scope and presented above.

Arrangements with Multiple Performance Obligations

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

Practical Expedients

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

162




NOTE 18. FAIR VALUE17. NON-INTEREST INCOME AND OTHER EXPENSES (continued)

Other Expenses

The following table presents the Company's other expenses for the following periods:
  Year Ended December 31,
(in thousands) 
2019(1)
 2018 2017
Other expenses:      
Amortization of intangibles $58,993
 $60,650
 $61,491
Deposit insurance premiums and other expenses 64,734
 61,983
 70,661
Loss on debt extinguishment 2,735
 3,470
 30,349
Impairment of goodwill 
 
 10,536
Other administrative expenses 518,138
 461,291
 484,992
Other miscellaneous expenses 42,830
 21,595
 21,128
Total Other expenses $687,430
 $608,989
 $679,157
(1) The year ended December 31, 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 18. STOCK-BASED COMPENSATION

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 Consolidated Statements of Operations relating to assets held at period-end:
 Year Ended December 31, Year Ended December 31,
(in thousands)Statement of Operations Location 2017 2016 2015Statement of Operations Location 2019 2018 2017
Impaired LHFIProvision for credit losses $(73,925) $(99,082) $(30,287)Provision for credit losses $(15,495) $(58,818) $(73,925)
Foreclosed assets
Miscellaneous income(1)
 (13,505) (8,339) (8,001)
Miscellaneous income, net (1)
 (13,648) (12,137) (13,505)
LHFSProvision for credit losses (3,700) 
 (323,514)Provision for credit losses 
 (387) (3,700)
LHFS
Miscellaneous income(1)
 (386,422) (424,121) (243,047)
Miscellaneous income, net (1)
 (404,606) (382,298) (386,422)
Auto loans impaired due to bankruptcyProvision for credit losses (75,194) 
 
Provision for credit losses (9,106) (93,277) (75,194)
Goodwill impairment
Impairment of goodwill(2)
 (10,536) 
 (4,507,095)Impairment of goodwill 
 
 (10,536)
Indefinite lived intangiblesAmortization of intangibles 
 
 (3,500)
MSRsMortgage banking income, net (549) 503
 1,505
Miscellaneous income, net (1)
 (633) (743) (549)
(1)These amounts reduce Miscellaneous income.
(2)InGains are disclosed as positive numbers while losses are shown as a negative number regardless of the year ended December 31, 2015, goodwill totaling $5.5 billion attributed to the SC Reporting Unit was written down to its implied fair value of $1.0 billion, resulting in a goodwill impairment charge of $4.5 billion. In the year ended December 31, 2017, the $10.5 million of goodwill attributed to the Santander BanCorp reporting unit was impaired in connection with the Company's annual impairment test.line item being affected.

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 years ended December 31, 2017 and 2016, respectively, for those assets and liabilities measured at fair value on a recurring basis.
  Year Ended December 31, 2017 Year Ended December 31, 2016
(in thousands) Investments
AFS
 
RICs Held for Investment(2)
 MSRs Derivatives Total Investments
AFS
 RICs Held for Investment MSRs Derivatives Total
Balances, beginning of period $814,567
 $217,170
 $146,589
 $(29,000) $1,149,326
 $1,360,240
 $335,425
 $147,233
 $(51,278) $1,791,620
Losses in other comprehensive income (9,570) 
 
 
 (9,570) 8,779
 
 
 
 8,779
Gains/(losses) in earnings 
 54,363
 1,967
 (1,002) 55,328
 
 98,494
 3,887
 (5,295) 97,086
Additions/Issuances 
 21,671
 15,788
 
 37,459
 509,006
 36,623
 20,256
 
 565,885
Settlements(1)
 (454,745) (106,733) (18,351) 31,516
 (548,313) (1,063,458) (253,372) (24,787) 27,573
 (1,314,044)
Balances, end of period $350,252
 $186,471
 $145,993
 $1,514
 $684,230
 $814,567
 $217,170
 $146,589
 $(29,000) $1,149,326
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period $
 $54,363
 $1,967
 $(791) $55,539
 $
 $98,494
 $3,887
 $(5,071) $97,310
(1)Settlements include charge-offs, prepayments, pay downs and maturities.
(2)
Includes additions of $21.7 million of NPL acquired by SC under optional clean up calls from its non-consolidated Trusts.

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


194157




NOTE 18.16. FAIR VALUE (continued)

Valuation Processes and Techniques - Recurring Fair Value Assets and Liabilities

The following is a description of the valuation techniques used for instruments measured at fair value on a recurring basis:

Securities AFS and Trading Securities

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

The classification of securities within the fair value hierarchy is based upon the activity level in the market for the security type and the observability of the inputs used to determine their fair values. Trading securities and certain of the Company's U.S. Treasury securities are valued utilizing observable market quotes. The Company obtains vendor trading platform data (actual prices) from a number of live data sources, including active market makers and interdealer brokers. These certain investment securities are, therefore, classified as Level 1.

Actively traded quoted market prices for the majority of the investment securities 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.

Equity securities of $10.8 million, which are comprised primarily of shares of registered mutual funds, are priced using net asset value per share practical expedient, which is validated with a sufficient level of observable activity. In accordance with GAAP, these equity securities are not presented within the fair value hierarchy. The remainder of the Company's equity securities are valued at quoted market prices and are, therefore, classified as Level 1.

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

RICs held-for-investment

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


195




NOTE 18. FAIR VALUE (continued)

LHFS

The Company's LHFS portfolios that are measured at fair value on a recurring basis consists primarily of residential mortgage LHFS. The fair values of LHFS are estimated using published forward agency prices to agency buyers such as FNMA and FHLMC. The majority of the residential mortgage LHFS portfolio is sold to these two agencies. The fair value is determined using current secondary market prices for portfolios with similar characteristics, adjusted for servicing values and market conditions.

These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans as well as the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation, and are not significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. Gains and losses on residential mortgage LHFS are recognized in the Consolidated Statements of Operations through Miscellaneous income. See further discussion below in the section captioned "FVO for Financial Assets and Financial Liabilities."

MSRs

The model to value MSRs estimates the present value of the future net cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue, offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential MSRs include changes in anticipated loan prepayment rates ("CPRs") and the discount rate, reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market-based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates, both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rates and servicing costs result in lower valuations of MSRs. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of MSRs. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing MSRs and are derived and/or benchmarked against independent public sources. Accordingly, MSRs are classified as Level 3. Gains and losses on MSRs are recognized on the Consolidated Statements of Operations through Mortgage banking income, net. See further discussion on MSRs in Note 9.

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

A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $4.7 million and $9.1 million, respectively, at December 31, 2017.
A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $4.7 million and $9.1 million, respectively, at December 31, 2017.

Significant increases (decreases) in any of those inputs in isolation would result in significantly (lower) higher fair value measurements. These sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase, and decrease when market interest rates decline and/or credit and liquidity conditions improve.

Derivatives

The valuation of these instruments is determined using widely accepted valuation techniques, including DCF analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount the Company would receive or pay to terminate the contract or agreement, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.

196




NOTE 18. FAIR VALUE (continued)

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

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

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

Gains and losses related to derivatives affect various line items in the Consolidated Statements of Operations. See Note 14 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 December 31, 20172019 and 2016.December 31, 2018, respectively:
(Dollars in thousands) Fair Value at December 31, 2017 Valuation Technique Unobservable Inputs Range
(Weighted Average)
Financial Assets:  
ABS        
Financing bonds $304,727
 DCF 
Discount Rate (1)
  2.16% - 2.90% (2.28%)
Sale-leaseback securities $45,525
 
Consensus Pricing (2)
 
Offered quotes (3)
 120.19%
RICs held for investment $186,471
 DCF 
Prepayment rate (CPR) (4)
 6.66%
      
Discount Rate (5)
  9.50% - 14.50% (12.37%)
      
Recovery Rate (6)
  25.00% - 43.00% (41.51%)
Personal loans held for sale $1,062,090
 Lower of Market or Income Approach Market Participant View 70.00% - 80.00%
      Discount Rate 15.00% - 20.00%
      Default Rate 30.00% - 40.00%
      Net Principal Payment Rate 50.00% - 70.00%
      Loss Severity Rate 90.00% - 95.00%
RICs held for sale $1,101,049
 DCF Discount Rate 3.00% - 6.00%
      Default Rate 3.00% - 4.00%
      Prepayment Rate 15.00% - 20.00%
      Loss Severity Rate 50.00% - 60.00%
MSRs $145,993
 DCF 
Prepayment rate ("CPR") (7)
  0.06% - 46.95% (9.80%)
      
Discount Rate (8)
 9.90%
Mortgage banking interest rate lock commitments $2,105
 DCF 
Pull through percentage (9)
 76.98%
      
MSR value (10)
  0.73% - 1.03% (0.95%)
(dollars in thousands) Fair Value at December 31, 2019 Valuation Technique Unobservable Inputs Range
(Weighted Average)
Financial Assets:  
ABS        
Financing bonds $51,001
 DCF 
Discount rate (1)
  1.64% - 1.64% (1.64% )
Sale-leaseback securities 12,234
 
Consensus pricing (2)
 
Offered quotes (3)
 103.00%
RICs HFI 84,334
 DCF 
CPR (4)
 6.66%
      
Discount rate (5)
  9.50% - 14.50% (13.16%)
      
Recovery rate (6)
  25% - 43% (41.12%)
Personal LHFS (10)
 1,007,105
 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)
 130,855
 DCF 
CPR (7)
  7.83% - 100.00% (11.97%)
      
Discount rate (8)
 9.63%
(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, theThe Company owns one sale-leaseback 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 and maturity.rate.
(8)Based on the nature of the input, a range or weighted average does not exist.Average discount rate from collateral stratified by loan type and note rate.
(9)Historical weighted average basedExcludes MSR valued on principal balance calculated as the percentage of loans originateda non-recurring basis for sale divided by total commitments less outstanding commitments. which we do not consider there to be significant unobservable assumptions.
(10)MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance.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 securities23,975
 
Consensus pricing (2)
 
Offered quotes (3)
 110.28%
RICs HFI126,312
 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 December 31, 2019 Level 3 significant inputs table above.


197158




NOTE 18.16. FAIR VALUE (continued)

 Fair Value at December 31, 2016 Valuation Technique Unobservable Inputs Range
(Weighted Average)
 (in thousands)      
Financial Assets: 
ABS       
Financing bonds$764,196
 Discounted Cash Flow Discount Rate (1) 1.42% - 2.69% (1.82%)
Sale-leaseback securities$50,371
 Consensus Pricing (2) Offered quotes (3) 128.27%
RICs held-for-investment$217,170
 Discounted Cash Flow Prepayment rate (CPR) (4) 6.66%
     Discount Rate (5) 9.50% - 14.50% (9.99%)
     Recovery Rate (6) 25.00% - 43.00% (28.78%)
Personal loans held for sale$1,077,601
 Lower of Market or Income Approach Market Participant View 70.00% - 80.00%
     Discount Rate 15.00% - 20.00%
     Default Rate 30.00% - 40.00%
     Net Principal Payment Rate 50.00% - 70.00%
     Loss Severity Rate 90.00% - 95.00%
RICs held for sale$924,748
 DCF Discount Rate 3.00% - 6.00%
     Default Rate 3.00% - 4.00%
     Prepayment Rate 15.00% - 20.00%
     Loss Severity Rate 50.00% - 60.00%
MSRs$146,589
 Discounted Cash Flow Prepayment rate (CPR) (7) 0.29% - 38.80% (9.36%)
     Discount Rate (8) 9.90%
Mortgage banking interest rate lock commitments$2,316
 Discounted Cash Flow Pull through percentage (9) 78.71%
     MSR value (10) 0.73% - 1.03% (0.95%)
Financial Liabilities:       
Total return settlement$30,618
 Discounted Cash Flow Discount Rate (4) 6.50%
(1) Based on the applicable term and discount index.
(2) Consensus pricing refers to fair value estimates that are generally developed using information such as dealer quotes or other third-party valuations or comparable asset prices.
(3) Based on the nature of the input, a range or weighted average does not exist. For sale-leaseback securities, the Company owns one security.
(4) Based on the analysis of available data from a comparable market securitization of similar assets.
(5) Based on the cost of funding of debt issuance and recent historical equity yields.
(6) Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool.
(7) Average CPR projected from collateral stratified by loan type, note rate and maturity.
(8) Based on the nature of the input, a range or weighted average does not exist.
(9) Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments. 
(10) MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance.


198




NOTE 18. 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:
 December 31, 2017 December 31, 2016 December 31, 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 Carrying Value Fair Value Level 1 Level 2 Level 3 Carrying Value Fair Value Level 1 Level 2 Level 3
Financial assets:                                        
Cash and amounts due from depository institutions $6,519,967
 $6,519,967
 $6,519,967
 $
 $
 $10,035,859
 $10,035,859
 $10,035,859
 $
 $
Investment securities AFS(1)
 14,402,369
 14,402,369
 139,615
 13,912,502
 350,252
 17,013,618
 17,013,618
 225,050
 15,974,001
 814,567
Investment securities HTM 1,799,808
 1,773,938
 
 1,773,938
 
 1,658,644
 1,635,413
 
 1,635,413
 
Trading securities 1
 1
 1
 
 
 1,630
 1,630
 214
 1,416
 
Cash and cash equivalents $7,644,372
 $7,644,372
 $7,644,372
 $
 $
 $7,790,593
 $7,790,593
 $7,790,593
 $
 $
Investments in debt securities AFS 14,339,758
 14,339,758
 
 14,276,523
 63,235
 11,632,987
 11,632,987
 526,364
 10,779,424
 327,199
Investments in debt securities HTM 3,938,797
 3,957,227
 
 3,957,227
 
 2,750,680
 2,676,049
 
 2,676,049
 
Other investments - trading securities 1,097
 1,097
 379
 718
 
 10
 10
 4
 6
 
LHFI, net 76,829,277
 78,579,144
 
 136,832
 78,442,312
 82,005,321
 81,955,122
 13,147
 244,986
 81,696,989
 89,059,251
 90,490,760
 
 1,142,998
 89,347,762
 83,148,738
 83,415,697
 5,182
 150,208
 83,260,307
LHFS 2,522,486
 2,522,521
 
 197,691
 2,324,830
 2,586,308
 2,586,333
 
 453,293
 2,133,040
 1,420,223
 1,420,295
 
 289,009
 1,131,286
 1,283,278
 1,283,301
 
 209,506
 1,073,795
Restricted cash 3,818,807
 3,818,807
 3,818,807
 
 
 3,016,948
 3,016,948
 3,016,948
 
 
 3,881,880
 3,881,880
 3,881,880
 
 
 2,931,711
 2,931,711
 2,931,711
 
 
MSRs(2)(1)
 149,197
 155,266
 
 
 155,266
 150,343
 156,876
 
 
 156,876
 132,683
 139,052
 
 
 139,052
 152,121
 159,046
 
 
 159,046
Derivatives 463,244
 463,244
 
 461,139
 2,105
 421,330
 421,330
 
 419,012
 2,318
 556,331
 556,331
 
 553,222
 3,109
 518,485
 518,485
 
 515,781
 2,704
                                        
Financial liabilities:  
  
    
  
            
  
    
  
          
Deposits(2) 60,831,103
 60,864,110
 55,456,511
 5,407,599
 
 67,240,690
 67,141,041
 58,067,792
 9,073,249
 
 9,375,281
 9,384,994
 
 9,384,994
 
 7,468,667
 7,416,420
 
 7,416,420
 
Borrowings and other debt obligations 39,003,313
 39,335,087
 
 23,281,166
 16,053,921
 43,524,445
 43,770,267
 830
 26,132,197
 17,637,240
 50,654,406
 51,232,798
 
 36,114,404
 15,118,394
 44,953,784
 45,083,518
 
 31,494,126
 13,589,392
Derivatives 427,811
 427,811
 
 427,217
 594
 383,138
 383,138
 
 351,820
 31,318
 546,414
 546,414
 
 543,560
 2,854
 497,431
 497,431
 
 496,593
 838
(1)Investment securities AFS disclosed on the Consolidated Balance Sheets at December 31, 2017 and December 31, 2016 included $10.8 million and $10.6 million, respectively, of equity securities valued using net asset value as a practical expedient that are not presented within these tables.
(2)The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value.
(2) This line item excludes deposit liabilities with no defined or contractual maturities in accordance with ASU 2016-01.

Valuation Processes and Techniques - Financial Instruments

The preceding tables present disclosures about the fair value of the Company's financial instruments. Those fair values for certain instruments are presented based upon subjective estimates of relevant market conditions at a specific point in time and information about each financial instrument. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties resulting in variability in estimates affected by changes in assumptions and risks of the financial instruments at a certain point in time. Therefore, the derived fair value estimates presented above for certain instruments cannot be substantiated by comparison to independent markets. In addition, the fair values do not reflect any premium or discount that could result from offering for sale at one time an entity’s entire holding of a particular financial instrument, nor does itdo 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 Consolidated Balance Sheets:

Cash, cash equivalents and amounts due from depository institutionsrestricted 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.


199159




NOTE 18.16. FAIR VALUE (continued)

Held-to-maturity investmentInvestments in debt securities HTM

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

LHFI, net

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

LHFS

The Company's LHFS portfolios that are accounted for at the lower of cost or market primarily consists of RICs held-for-sale.HFS. The estimated fair value of the RICs held-for-saleHFS 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 ofFor deposits with no stated maturity, such as non-interest-bearing demand deposits,and 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 significantcarrying value of the cost advantage and stability of the Company’s long-term relationships with depositors.approximates fair values. The fair value of fixed-maturity CDsdeposits is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities. The related fair value measurementsmaturities and have generally been classified as Level 1 for core deposits, since the carrying value approximates fair value due to the short-term nature of the liabilities. All other deposits are considered to be Level 2.

Borrowings and other debt obligations

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

Commitments to extend credit and standby letters of credit

Commitments to extend credit and standby letters of credit include the value of unfunded lending commitments and standby letters of credit, as well as the recorded liability for probable losses. The Company’s pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company’s loan commitments and letters of credit are competitive with those of other financial institutions operating in markets served by the Company.

The liability for probable losses is estimated by analyzing unfunded lending commitments and standby letters of credit for commercial customers and segregating by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, result in the estimation of the reserve for probable losses.

These instruments and the related reserve are classified as Level 3. The Company believes that the carrying amounts, which are included in Other liabilities, are reasonable estimates of fair value for these financial instruments.

200




NOTE 18. FAIR VALUE (continued)

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 onfor residential mortgage loans classified as held-for-saleHFS 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.


160




NOTE 16. FAIR VALUE (continued)

RICs held for investmentHFI

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs held for investment.HFI. These loans consisted primarily of SC’s RICs accounted for by SC under ASC 310-30 as well as all of SC’s RICs that were more than 60 days past due at the date of the Change in Control, which collectively had an aggregate outstanding UPB of $2.6 billion with a fair value of $1.9 billion at that date. The balance also includesand non-performing loans acquired by SC under optional clean up calls from its non-consolidated securitization Trusts.

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of December 31, 20172019 and December 31, 2016.2018:
 December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
(in thousands) Fair Value Aggregate Unpaid Principal Balance Difference Fair Value Aggregate Unpaid Principal Balance Difference Fair Value Aggregate UPB Difference Fair Value Aggregate UPB Difference
LHFS(1)
 $197,691
 $194,928
 $2,763
 $453,293
 $459,378
 $(6,085) $289,009
 $284,111
 $4,898
 $209,506
 $204,061
 $5,445
RICs held-for-investment 186,471
 211,580
 (25,109) 217,170
 279,004
 (61,834)
RICs HFI 101,968
 113,863
 (11,895) 126,312
 142,882
 (16,570)
Nonaccrual loans 15,023
 19,836
 (4,813) 27,731
 39,390
 (11,659) 10,616
 12,917
 (2,301) 7,630
 10,427
 (2,797)
(1)LHFS disclosed on the 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 held for investmentHFI is recognized when earned based on their respective contractual rates in Interest income on loans in the Consolidated Statements of Operations. The accrual of interest is discontinued and reversed once the loans become more than 90 days past dueDPD for LHFS and more than 60 days past dueDPD for RICs held for investment.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 December 31, 2019 and December 31, 2018, the balance of these loans serviced for others accounted for at fair value was $15.0 billion and $14.4 billion, respectively. Changes in fair value are recorded through Miscellaneous income, net on the 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 14 to these 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 17. NON-INTEREST INCOME AND OTHER EXPENSES

The following table presents the details of the Company's residential MSRsNon-interest income for the following periods:
  Year Ended December 31,
(in thousands) 2019 2018 
2017 (1)
Non-interest income:      
Consumer and commercial fees $548,846
 $568,147
 $616,438
Lease income 2,872,857
 2,375,596
 2,017,775
Miscellaneous income, net      
Mortgage banking income, net 44,315
 34,612
 56,659
BOLI 62,782
 58,939
 66,784
Capital market revenue 197,042
 165,392
 195,906
Net gain on sale of operating leases 135,948
 202,793
 127,156
Asset and wealth management fees 175,611
 165,765
 147,749
Loss on sale of non-mortgage loans (397,965) (351,751) (370,289)
Other miscellaneous income, net 83,865
 31,532
 45,519
Net gains/(losses) on sale of investment securities 5,816
 (6,717) (2,444)
Total Non-interest income $3,729,117
 $3,244,308
 $2,901,253
(1) - Prior period amounts have not been adjusted under the modified retrospective method. For further information on the adoption of ASU 2014-09, see Note 1 to these Consolidated Financial Statements.

161




NOTE 17. 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:
  Year Ended December 31,
(in thousands) 2019 2018 
2017 (1)
Non-interest income:      
In-scope of revenue from contracts with customers:      
Depository services(2)
 $241,167
 $236,381
 $242,995
Commission and trailer fees(3)
 160,665
 143,733
 136,497
Interchange income, net(3)
 67,524
 60,258
 58,525
Underwriting service fees(3)
 97,211
 71,536
 97,143
Asset and wealth management fees(3)
 145,515
 138,108
 112,533
Other revenue from contracts with customers(3)
 39,885
 36,692
 40,722
Total in-scope of revenue from contracts with customers 751,967
 686,708
 688,415
Out-of-scope of revenue from contracts with customers:      
Consumer and commercial fees(4)
 256,412
 294,371
 347,216
Lease income 2,872,857
 2,375,596
 2,017,775
Miscellaneous loss(4)
 (157,935) (105,650) (149,709)
Net gains/(losses) on sale of investment securities 5,816
 (6,717) (2,444)
Total out-of-scope of revenue from contracts with customers 2,977,150
 2,557,600
 2,212,838
Total non-interest income $3,729,117
 $3,244,308
 $2,901,253
(1) Prior period amounts have not been adjusted under the modified retrospective method. For further information on the adoption of this standard, see Note 1.
(2) Primarily recorded in the Company's Consolidated Statements of Operations within Consumer and commercial fees.
(3) Primarily recorded in the Company's Consolidated Statements of Operations within Miscellaneous income, net.
(4) The balance presented excludes certain revenue streams that are accounted for at fair value had an aggregate fair valueconsidered 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 $146.0 millionbenefit 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 $146.6 million at December 31, 2017 and 2016, respectively. Changes in fair value totaling a gain of $2.0 million and a gain of $3.9 million were recorded in Mortgage banking income, net inbenefits within the Consolidated Statements of Operations duringOperations.

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.

162




NOTE 17. NON-INTEREST INCOME AND OTHER EXPENSES (continued)

Other Expenses

The following table presents the Company's other expenses for the following periods:
  Year Ended December 31,
(in thousands) 
2019(1)
 2018 2017
Other expenses:      
Amortization of intangibles $58,993
 $60,650
 $61,491
Deposit insurance premiums and other expenses 64,734
 61,983
 70,661
Loss on debt extinguishment 2,735
 3,470
 30,349
Impairment of goodwill 
 
 10,536
Other administrative expenses 518,138
 461,291
 484,992
Other miscellaneous expenses 42,830
 21,595
 21,128
Total Other expenses $687,430
 $608,989
 $679,157
(1) The year ended December 31, 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 18. STOCK-BASED COMPENSATION

SC Stock Compensation Plans

SC granted stock options to certain executives, other employees, and independent directors under SC's 2011 MEP, which enabled SC to make stock awards up to a total of approximately 29.4 million common shares (net of shares canceled and forfeited). The MEP expired in January 2015 and SC will not grant any further awards under the MEP. SC has granted stock options, restricted stock awards and RSUs under its Omnibus Incentive Plan (the "Plan"), which was established in 2013 and enables SC to grant awards of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, RSUs, and other awards that may be settled in or based upon the value of SC Common Stock, up to a total of 5,192,641 common shares. The Plan was amended and restated as of June 16, 2016.

Stock options granted under the MEP and the Plan have an exercise price based on the estimated fair market value of SC Common Stock on the grant date. The stock options expire ten years after grant date and include both time vesting options and performance vesting options. The fair value of the stock options is amortized into income over the vesting period as time and performance vesting conditions are met.

In 2013, the SC Board approved certain changes to the MEP, including acceleration of vesting for certain employees, removal of transfer restrictions for shares underlying a portion of the options outstanding, and addition of transfer restrictions for shares underlying another portion of the outstanding options. All of the changes were contingent on, and effective upon, SC's execution of an IPO and, as such, became effective upon pricing of SC's IPO on January 22, 2014.

Compensation expense related to 583,890 shares of restricted stock that SC has issued to certain executives is recognized over a five-year vesting period, with zero, zero, and $5.5 million recorded for the years ended December 31, 20172019, 2018 and 2016,2017, respectively. SC recognized $8.6 million, $7.7 million and $13.0 million related to stock options and RSUs within compensation expense for the years ended December 31, 2019, 2018 and 2017, respectively. In addition, SC recognizes forfeitures of awards as they occur.

Also in connection with its IPO, SC granted additional stock options under the MEP to certain executives, other employees, and an independent director with an estimated compensation cost of $10.2 million, which is being recognized over the awards' vesting period of five years for the employees and three years for the director. Additional stock option grants were made to employees under the Plan during the year ended December 31, 2016. The estimated compensation cost associated with these additional grants was $0.7 million and will be recognized over the vesting periods of the awards. The grant date fair values of these stock option awards were determined using the Black-Scholes option valuation model.

201163




NOTE 18. STOCK-BASED COMPENSATION (continued)

A summary of SC's stock options and related activity as of and for the year ended December 31, 2019, is as follows:
 SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
  (in whole dollars) (in 000's)
Options outstanding at January 1, 2019645,376
$13.15
4.0$3,682
Granted

 
Exercised(356,183)12.72
 4,266
Expired(1,480)9.21
 
Forfeited(15,456)24.36
 
Other1,480
9.21
  
Options outstanding at December 31, 2019273,737
$13.09
3.1$2,867
Options exercisable at December 31, 2019243,786
$12.57
2.8$2,674
Options expected to vest after December 31, 201929,951
$17.26
5.8$193

A summary of the status and changes of SC's nonvested stock options as of and for the year ended December 31, 2019, is presented below:
 SharesWeighted Average Grant Date Fair Value
   
Non-vested at January 1, 201987,821
$6.55
Granted

Vested(42,414)7.08
Forfeited(15,456)8.09
Non-vested at December 31, 201929,951
$5.01

At December 31, 2019, total unrecognized compensation expense for nonvested stock options was $72.0 thousand, which is expected to be recognized over a weighted average period of 0.8 years.

There were no stock options were granted to employees in 2019 or 2018.

The Company has the same fair value basis with that of SC for any stock option awards after the IPO date.

In connection with compensation restrictions imposed on certain executive officers and other employees by the European Central Bank under the CRD IV prudential rules, which require a portion of such officers' and employees' variable compensation to be paid in the form of equity and deferred, SC periodically grants RSUs. Under the Plan, a portion of these RSUs vested immediately upon grant, and a portion will vest annually over the following three or five years subject to the achievement of certain performance conditions as and where applicable. After the shares subject to the RSUs vest and are settled, they are subject to transfer and sale restrictions for one year. RSUs are valued based upon the fair market value on the date of the grant.

A summary of the Company’s RSUs and performance stock units and related activity as of and for the year ended December 31, 2019 is as follows:
 SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
  (in whole dollars) (in 000's)
Outstanding at January 1, 2019698,799
$14.53
1.1$12,292
Granted473,325
20.46
  
Vested(563,427)16.69
 11,882
Forfeited/cancelled(110,398)16.34
  
Unvested at December 31, 2019498,299
$17.41
0.9$11,645

164




NOTE 19.OTHER EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

All employees of the Bank are eligible to participate in the 401(k) Plan, sponsored by the Company, following their completion of one month of service. There is no age requirement to join the 401(k) Plan. Beginning January 2019, the Bank matched 100% of employee contributions up to 5% of their compensation. Prior to 2019, the Bank matched 100% of employee contributions up to 4% of the employee's compensation and then 50% of employee contributions between 3% and 5% of their compensation. The Bank's match is immediately vested and is allocated to the employee’s various 401(k) Plan investment options in the same percentages as the employee’s own contributions. The Bank recognized expense for contributions to the 401(k) Plan of $33.7 million, $26.8 million and $20.6 million during 2019, 2018 and 2017, respectively, within the Compensation and benefits line on the Consolidated Statements of Operations. Beginning January 2020, the Bank will match 100% of employee contributions up to 6% of the employee's compensation.

SC sponsors a defined contribution plan offered to qualifying employees. Employees participating in the plan may contribute up to 75% of their eligible compensation, subject to federal limitations on absolute amounts contributed. SC will match up to 6% of their eligible compensation, with matching contributions of up to 100% of employee contributions. The total amount contributed by SC under this plan in 2019, 2018 and 2017 was $14.0 million, $14.0 million and $12.4 million, respectively.

Defined Benefit Plans and Other Post Retirement Benefit Plans

The Company sponsors several defined benefit plans and other post-retirement benefit plans that cover certain employees. All of these plans are frozen and therefore closed to new entrants; all benefits are fully vested, and therefore the plans ceased accruing benefits. The Company complies with minimum funding requirements in all countries. The Company also sponsors several supplemental executive retirement plans and other unfunded post-retirement benefit plans that provide health care to certain retired employees.

The Company recognizes the funded status of its defined benefit pension plans and other post-retirement benefit plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, within Other liabilities on the Consolidated Balance Sheets. The Company has accrued liabilities of $31.5 million and $29.0 million related to its total defined benefit pension plans and other post-retirement benefit plans at December 31, 2019 and December 31, 2018, respectively. The net unfunded status related to actuarially-valued defined benefit pension plans and other post-retirement plans was $14.5 million and $13.5 million at December 31, 2019 and December 31, 2018, respectively.

BSI and SIS are participating employers in a defined benefit pension plan sponsored by Santander's New York branch, covering certain active and former BSI and SIS employees. Effective December 31, 2012, the defined benefit pension plan was frozen. The amounts representing BSI and SIS's share of the pension liability are recorded within Other liabilities on the Consolidated Balance Sheet as of December 31, 2019 and December 31, 2018. This plan currently has an unfunded liability of $47.0 million, of which $28.5 million is BSI and SIS's share of the liability.


NOTE 19.20. 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 Consolidated Balance Sheet.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 14 to these Consolidated Financial Statements for discussion of all derivative contract commitments.

165




NOTE 20. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

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

Other Commitments December 31, 2017 December 31, 2016 December 31, 2019 December 31, 2018
 (in thousands) (in thousands)
Commitments to extend credit $29,475,864
 $28,889,904
 $30,685,478
 $30,269,311
Letters of credit 1,559,297
 2,071,089
 1,592,726
 1,488,714
Commitments to sell loans 21,341
 875
Unsecured revolving lines of credit 27,938
 30,547
 24,922
 28,145
Recourse exposure on sold loans 46,572
 69,877
 53,667
 49,733
Commitments to sell loans 19,477
 49,121
Total commitments $31,129,148
 $31,110,538
 $32,378,134
 $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.

Included within the reported balances for Commitments to extend credit at December 31, 20172019 and December 31, 20162018 are $6.4$5.7 billion and $6.3$5.7 billion, respectively, of commitments that can be canceled by the Company without notice.

The following table details the amount of commitments to extend credit expiring per period as of the dates indicated:
(in thousands) December 31, 2017 December 31, 2016
1 year or less $5,858,236
 $5,656,552
Over 1 year to 3 years 5,381,113
 5,265,685
Over 3 years to 5 years 4,478,320
 4,680,057
Over 5 years (1)
 13,758,195
 13,287,610
Total $29,475,864
 $28,889,904
(1)Includes certain commitments to extend credit that do not have a contractual maturity date, but are expected to be outstanding more than 5 years.

Unsecured Revolving Lines of Credit

Such commitments, included in the Commitments to extend credit table above, arise primarily from agreements with customers for unused lines of credit on unsecured revolving accounts and credit cards, provided there is no violation of conditions in the underlying agreement. These commitments, substantially all of whichalso include amounts committed by the Company can terminate at any timeto fund its investments in CRA, LIHTC, and other equity method investments in which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualifications.it is a limited partner.


202




NOTE 19. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Letters of Credit

The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments at December 31, 20172019 was 16.716.8 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 December 31, 20172019 was $1.6 billion. The fees related to letters of credit are deferred and amortized over the life of the respective commitments, and were immaterial to the Company’s financial statements at December 31, 2017.2019. 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 December 31, 20172019 and December 31, 2016,2018, the liability related to these letters of credit was $18.2$4.9 million and $8.1$4.6 million, respectively, which is recorded within the reserve for unfunded lending commitments in Other liabilities on the Consolidated Balance Sheet.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 December 31, 20172019 and December 31, 2016 were2018 was the liability related to lines of credit outstanding of $90.9$84.7 million and $114.4$88.7 million, respectively.

The following table details the amountUnsecured Revolving Lines of lettersCredit

Such commitments arise primarily from agreements with customers for unused lines of credit expiring per period ason unsecured revolving accounts and credit cards, provided there is no violation of conditions in the dates indicated:
(in thousands) December 31, 2017 December 31, 2016
1 year or less $918,191
 $1,360,495
Over 1 year to 3 years 286,505
 399,866
Over 3 years to 5 years 312,881
 283,975
Over 5 years 41,720
 26,753
Total $1,559,297
 $2,071,089
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. The UPB outstanding of loans sold in these programs was $136.0 million as of December 31, 2017 and $341.7 million as of December 31, 2016. As a result of its agreement with FNMA, the Company retained a 100% first loss position on each multifamily loan sold to FNMA until the earlier to occur of (i) the aggregate approved losses on multifamily loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole of $12.2 million as of December 31, 2017 and $34.4 million as of December 31, 2016, or (ii) the time when such loans sold to FNMA under this program are fully paid off. Any losses sustained as a result of impediments in standard representations and warranties would be in addition to the maximum loss exposure.

At the time of the sale, the Company established a liability which represented the fair value of the retained credit exposure and the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability is calculated as the present value of losses that the portfolio is projected to incur based upon specific internal information and an industry-based default curve with a range of estimated losses. At December 31, 2017 and December 31, 2016, the Company had $1.3 million and $3.8 million, respectively, of reserves classified in Accrued expenses and payables on the Consolidated Balance Sheets related to the retained credit exposure for loans sold to the FNMA under this program. The Company's commitment will expire in March 2039 based on the maturity of the loans sold with recourse. Losses sustained by the Company may be offset, or partially offset, by proceeds resulting from the disposition of the underlying mortgaged properties. Approval from the FNMA is required for all transactions related to the liquidation of properties underlying the mortgages.
166




NOTE 20. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

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.


203




NOTE 19. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

SC Commitments

SC is party to agreements with Bluestem whereby SC is committed to purchase certain new advances on personal revolving financings originated by a third-party retailer, along with existing balances on accounts with new advances,The following table summarizes liabilities recorded for an initial term ending in April 2020commitments and renewing through April 2022 at Bluestem's option. Ascontingencies as of December 31, 2017, the total unused credit available to customers was $3.9 billion. In 2017, the Company purchased $1.2 billion of receivables out of the $4.0 billion of unused credit available to customers at December 31, 2016. In addition, SC purchased $0.3 billion of receivables related to newly-opened customer accounts in 2017. 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 December 31, 20172019 and December 31, 2016, SC was obligated to purchase $11.5 million2018, all of which are included in Accounts payable and $12.6 million, respectively,accrued expenses in receivables that had been originated by the retailer but not yet purchased by SC. SC alsoaccompanying Consolidated Balance Sheets:
Agreement or Legal Matter Commitment or Contingency December 31, 2019 December 31, 2018
    (in thousands)
Chrysler Agreement Revenue-sharing and gain/(loss), net-sharing payments $12,132
 $7,001
Agreement with Bank of America Servicer performance fee 2,503
 6,353
Agreement with CBP Loss-sharing payments 1,429
 3,708
Other contingencies Consumer arrangements 1,991
 2,138

Following is required to make a profit-sharing payment to the retailer each month if performance exceeds a specified return threshold. During the year ended December 31, 2015, SC and the third-party retailer executed an amendment that, among other provisions, increases the profit-sharing percentage retained by SC, gives the retailer the right to repurchase up to 9.99%description of the existing portfolio at any time duringagreements pursuant to which the term ofliabilities in the agreement, and, provided that the repurchase right is exercised, gives the retailer the right to retain up to 20% of new accounts subsequently originated.preceding table were recorded.

Under terms of an application transfer agreement with an original equipment manufacturer (“OEM") other than FCA, SC has the first opportunity to review for its own portfolio any credit applications turned down by the OEM's captive finance company. The agreement does not require SC to originate any loans, but for each loan originated SC will pay the OEM a referral fee.

In connection with the sale of RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of December 31, 2017, there were no loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s RIC sales agreements will not have a material adverse effect on SC’s consolidated financial position, results of operations, or cash flows.

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

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 the terms of the Chrysler Agreement,that agreement, SC must make revenue sharing payments to FCA and also must make gain-sharing payments toshare with FCA when residual gainsgains/(losses) on leased vehicles exceed a specified threshold. SC had accrued $6.6 million and $10.1 million at December 31, 2017 and December 31, 2016, respectively, related to these obligations.

The Chrysler Agreement requires, among other things, that SC bears the risk of loss on loans originated pursuant to the agreement, but also that FCA shares in any residual gains and losses from consumer leases. The agreement also requires that SC maintainsmaintain at least $5.0 billion in funding available for dealer inventory financingfloor 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. The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of its ongoing obligations under the agreement. These obligations include SC's meeting specified escalating penetration rates for the first five years of the agreement. SC has not met these penetration rates at December 31, 2017. If the Chrysler Agreement were to terminate, there could be a materially adverse impact to our and SC's business financial condition and results of operations.

Agreement with Bank of America

Until January 31, 2017, SC had a flow agreement with Bank of America whereby SC was committed to sell up to $300.0 million of eligible loans to the bank each month. On October 27, 2016, Bank of America notified SC that it was terminating the flow agreement effective January 31, 2017 and, accordingly, the flow agreement has terminated. SC retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale. Servicer performance payments are due six years from the cut-off date of each loan sale. SC had accrued $8.1 million and $9.8 million at December 31, 2017 and December 31, 2016, respectively, related to this obligation.


204




NOTE 19. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Agreement with Citizens Bank of Pennsylvania ("CBP")CBP

Until May 1, 2017, SC sold loans to CBP under terms of a flow agreement and predecessor sale agreements. Under the flow agreement, as amended, CBP's committed purchases of Chrysler Capital prime loans were a maximum of $200.0 million and a minimum of $50.0 million per quarter. SC retains servicing on the sold loans and will oweowes CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale. The Company had accrued $5.6 million and $4.6 million at December 31, 2017 and December 31, 2016, respectively, related to this obligation.

As of December 31, 2017, SC was party to a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell charged-off loan receivables in bankruptcy status on a quarterly basis until sales total at least $350.0 million. However, any sale of more than $275.0 millionis subject to a market price check. As of December 31, 2017 and December 31, 2016, the remaining aggregate commitments were $98.9 million and $166.2 million, respectively.

Other Contingencies

SC is or may be subject to potential liability under various other contingent exposures. SC had accrued $6.3$2.0 million, and $0.0$2.1 million at December 31, 20172019 and December 31, 2016,2018, respectively, for other miscellaneous contingencies.

Impact from Hurricanes
167

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


NOTE 20. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

The Company assessed the potential additional credit losses relatedAgreements

Bluestem

SC is party to its consumeragreements 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 commercial lending exposures in the greater Texas, Florida and Puerto Rico regions, and increased its allowance for loan losses by approximately $110 million recorded during the full year of 2017. However, for credit exposures in Puerto Rico, given the current state of the region, the Company has had limited information with which to estimate probable credit losses.renewing through April 2022 at Bluestem's option. As of December 31, 2017,2019 and December 31, 2018, the Company has approximately $3.5total unused credit available to customers was $3.0 billion and $3.1 billion, respectively. In 2019, SC purchased $1.2 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 $270.4 million and $304.6 million of receivables related to newly-opened customer accounts during the years ended December 31, 2019 and 2018, respectively.

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 December 31, 2019 and December 31, 2018, SC was obligated to purchase $10.6 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. SC is currently seeking a third party to assume its obligations under its agreement with Bluestem; however, SC may not be successful in finding such a party, and Bluestem may not agree to the substitution. Until SC finds a third party to assume its obligations under the agreement, there is a risk that material changes to SC’s relationship with Bluestem, or the loss or discontinuance of Bluestem’s business, would materially and adversely affect SC’s business, financial condition and results of operations.

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 exposures in Puerto Rico, consistingoriginated SC will pay Nissan a referral fee.

In connection with the sale of $1.6 billion inRICs 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 $1.9 billion in commercialpreviously sold to on- or off-balance sheet Trusts or other third parties. As of December 31, 2019, there were no loans that were the subject of a demand to repurchase or replace for breach of representations and $220warranties 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 loanscharged-off loan receivables in bankruptcy status on a quarterly basis. However, any sale of more than $275.0 millionis subject to municipalities.a market price check. The Company will continueremaining aggregate commitment as of December 31, 2019 and December 31, 2018 not subject to monitora market price check was $39.8 million and assess the impact of these hurricanes on our subsidiaries’ businesses, and may establish additional reserves for losses in future periods.$64.0 million, respectively.
See discussion under the "Puerto Rico FINRA Arbitrations" section of Note 19 below for further discussion.

Other Off-Balance Sheet Risk

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


205168




NOTE 19.20. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Legal and Regulatory Proceedings

Periodically,The Company, including its subsidiaries, is and in the Company isfuture expects to be party to, or otherwise involved in or subject to, various claims, disputes, lawsuits, investigations, regulatory matters and other legal matters and proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such dispute, lawsuit, investigation, regulatory matter and/or legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter.matters, if any. Accordingly, except as provided below, the Company is unable to reasonably estimate a range of its potential exposure, if any, to these claims, disputes, 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 claims, litigation, investigation,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 claim, dispute, 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;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 December 31, 20172019 and December 31, 2016,2018, the Company accrued aggregate legal and regulatory liabilities of $161.8$294.7 million and $98.8$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 $255approximately $144.4 million as of December 31, 2017. Descriptions2019. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject are set forth below.subject.

OCC Identity Theft Protection Product ("SIP")SHUSA Matter

On March 26, 2015, the Bank entered into a Cease21, 2017, SC and Desist Order (the "SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP, an identity theft protection product from the Bank's third party vendor. Pursuant to the SIP Consent Order, the Bank paid a civil monetary penalty ("CMP") of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of SIP. Prior to entering into the SIP Consent Order, the Bank made $37.3 million in remediation payments to customers, representing the total amount paid for product enrollment.

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

CFPB Overdraft Coverage Consent Order

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


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NOTE 19. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Other Matters

On July 2, 2015, the CompanySHUSA entered into a written agreement with the FRB of Boston. Under the terms of that written agreement, the CompanySC is required to make enhancements with respect to, among other matters, Boardenhance its compliance risk management program, board oversight of the consolidated organization, risk management capital planning and liquiditysenior management oversight of risk management.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 Chase, Chase has asserted an indemnity claim against SBNA of approximately $38.0 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

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

Securities Class Action and Shareholder Derivative Lawsuits

Deka Lawsuit: SC is a defendant in a purported securities class action lawsuit (the "Deka Lawsuit") in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit, iswhich 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 theSC's IPO, including SIS, on behalf of a class consisting of those who purchased or otherwise acquired ourSC securities between January 23, 2014 and June 12, 2014. The amended class action complaint alleges, among other things, that SC'sthe 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. OnIn December 18, 2015, SC and the individual defendants moved to dismiss the lawsuit, which was denied. OnIn December 2, 2016, the plaintiffs moved to certify the proposed classes. OnIn July 11, 2017, the court entered an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LEXIS 91938 (S.D. Tex. June 15, 2017). Plaintiffs’ motion to liftIn October 2018, the stay has been fully briefed.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.

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NOTE 20. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

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

Parmelee Lawsuit: SC is a defendant in two purported securities class actions lawsuits that were filed in March and April 2016 in the United States District Court, Northern District of Texas. The lawsuits were consolidated and are now captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783. The lawsuits were filed against SC and certain of its current and former directors and executive officers on behalf of a class consisting of all those who purchased or otherwise acquired our securities between February 3, 2015 and March 15, 2016. The complaint alleges, among other things, that SC violated federal securities laws by making false or misleading statements, as well as failing to disclose material adverse facts, in its periodic reports filed under the Exchange Act and certain other public disclosures, in connection with, among other things, SC’s change in its methodology for estimating its ACL and the correction of such ACL for prior periods. On March 14, 2017, SC filed a motion to dismiss the lawsuit. On January 3, 2018, the court granted SC’s motion as to defendant Ismail Dawood (SC’s former Chief Financial Officer) and denied the motion as to all other defendants.

Jackie888 Lawsuit: OnIn September 27, 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. # 12775 (the "Jackie888 Lawsuit"). The Jackie888 Lawsuit names as defendants current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the defendants breached their fiduciary duties in connection with SC’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. OnIn April 13, 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit.


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NOTE 19. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)On March 23, 2018, the Feldman Lawsuit and Jackie888 Lawsuit were consolidated under the caption In Re Santander Consumer USA Holdings, Inc. Derivative Litigation, Del. Ch., Consol. C.A. No. 11614-VCG. On January 21, 2020, the Company executed a Stipulation and Agreement of Settlement, Compromise and Release with the plaintiffs in the consolidated action that fully resolves all of the claims of plaintiffs on the Feldman Lawsuit and the Jackie888 Lawsuit. The Stipulation provides for the settlement of the consolidated action in return for defendants causing SC to enact and implement certain corporate governance reforms and enhancements. The settlement is subject to approval by the Court.

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 FRBB,FRB of Boston, the CFPB, 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 the Financial Institutions Reform, Recovery and Enforcement Act requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans, and also from the SEC requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and has otherwise cooperated with the DOJ and the SEC with respect to these matters.this matter.
In October 2014, May 2015, July 2015 and February 2017, SC received subpoenas and/or CIDs from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. SC has been informed that theseThese states will serve as an executive committee on behalf of a group of 3133 state Attorneys General.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 subpoenas and/or CIDs, and has otherwise cooperated with the Attorneys General with respect to this matter.
In July 2015, the CFPB notified SC that it had referred to the DOJ certain alleged violations by SC of the ECOA regarding statistical disparities in markups charged by vehicle dealers to protected groups on loans originated by those dealers and purchased by SC and the treatment of certain types of income in SC’s underwriting process. In September 2015, the DOJ notified SC that it has initiated an investigation under the ECOA of SC’s pricing of vehicle loans based on the referral from the CFPB. SC has resolved the DOJ investigation pursuant to a confidential agreement with the CFPB.
In February 2016, the CFPB issued a supervisory letter relating to its investigation of SC’s compliance systems, Board and senior management oversight, consumer complaint handling, marketing of guaranteed auto protection ("GAP") coverage and loan deferral disclosure practices. SC subsequently received a series of CIDs from the CFPB requesting information and testimony regarding SC’s marketing of GAP coverage and loan deferral disclosure practices. SC has responded to these requests within the deadlines specified in the CIDs, and has otherwise cooperated with the CFPB with respect to this matter.
In August 2017, SC received a CIDCIDs from the CFPB. The stated purpose of the CID isCIDs 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 specified in the CIDs and has otherwise cooperated with the CFPB with respect to this matter.

2017 Written Agreement with the Federal Reserve

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


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NOTE 19.20. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Mississippi Attorney General Lawsuit

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

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 Servicemember's Civil Relief Act (the "SCRA").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 servicemembersservice members consisting of $10,000 per servicememberservice member plus compensation for any lost equity (with interest) for each repossession by SC, and $5,000 per servicememberservice 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 providesprovided for monitoring by the DOJ of the SC’s SCRA compliance for a period of five years and requires SC to undertake certain additional remedial measures.

IHC Matters

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

Puerto Rico FINRA ArbitrationsArbitration

As of December 31, 2017,2019, SSLLC had received 312751 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds ("CEFs").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 245439 arbitration cases that remained pending as of December 31, 2017.

As2019. The Company has experienced a resultdecrease in the volume of the recent hurricane impacting the Puerto Rico market including declines in Puerto Rico bond and CEF prices,claims since September 30, 2019; however, it is reasonably possible that additional arbitrationit could experience an increase in claims and/or increased claim amounts may be asserted in future periods.

Puerto Rico CEF Shareholder Derivative andPutative Class Actions

Santander,Action: SSLLC, Santander BanCorp, BSPR, SSLLC, Santander Asset Management, LLC and several directors and members of senior management of these entities are defendants in a purported class action and shareholder derivative suit pending in the United States District Court for the District of the Commonwealth of Puerto Rico captioned Dionisio Trigo Gonzalez et al. v. Banco Santander, S.A. et al., No. 3:2016cv02868 (the “Trigo Lawsuit”). Brought by customers of certain CEFs, the complaint alleges misconduct including that the entities and individuals created, controlled, managed and advised certain CEFs within the First Puerto Rico Family of Funds (the “Funds”) from March 1, 2012 through the present to the detriment of the Funds and their shareholders. Brought on behalf of the Funds and Puerto-Rico-based investors, the complaint seeks unspecified damages but alleges damages to be at least tens of millions of dollars. The court denied plaintiffs’ motion to remand the case to Puerto Rico state court, and plaintiffs’ have sought reconsideration of that decision.

SSLLC, Santander BanCorp, BSPRCompany 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$180.0 million of Puerto Rico bonds and $101$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 "Ponsa-Rabell Lawsuit").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 CEFs. The court deniedopen-end funds. In May 2019, the defendants filed a motion to consolidatedismiss the Trigo Lawsuitamended 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 Ponsa-Rabell Lawsuit.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.

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NOTE 19.20. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Mexican Government Bonds Consolidated Putative Antitrust Class Action: A consolidated putative 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 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. On December 9, 2019, the plaintiffs filed an amended putative class action complaint. The amended complaint does not name the Company or SIS as defendants; the only Santander defendant named in the amended complaint is Banco Santander (Mexico).

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.

Leases
NOTE 21. RELATED PARTY TRANSACTIONS

The parties related to the Company are deemed to include, in addition to its subsidiaries, jointly controlled entities, the Company’s key management personnel (the members of its Board of Directors and certain officers at the level of senior executive vice president or above, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.

Stockholder's Equity

Contributions from Santander that impact common stock and paid in capital within the Consolidated Statements of Stockholder's Equity are disclosed within the table below:
  For the Year Ended December 31,
(in thousands) 2019 2018
Cash contribution $88,927
 $85,035
Adjustment to book value of assets purchased on January 1 
 277
Deferred tax asset on purchased assets 
 3,156
Contribution from shareholder $88,927
 $88,468

On January 1, 2018, the Company purchased certain assets and assumed certain liabilities of Produban and Isban, both affiliates of Santander. The book value and fair value of the net assets acquired were $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. During the year ended December 31, 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 IRC. The Company contributed these assets at book value of $6.2 million to SBNA, a subsidiary of the Company, on January 1, 2018.

Effective November 2, 2018, Produban was merged with and into Isban, which immediately following the merger changed its name to Santander Global Technology.

The Company is committed under various non-cancelable operating leases relatingreceived cash contribution of $88.9 million in 2019 and $85.0 million in 2018 from Santander.

Loan Sales

During 2017, SBNA sold $372.1 million of commercial loans to branch facilities having initial or remaining termsSantander. The sale resulted in excess$2.4 million of one year. Renewal options existnet gain for the majority of these lease agreements.

Future minimum annual rentals under non-cancelable operating leases and sale-leaseback leases, net of expected sublease income, atyear ended December 31, 2017, which is included in Miscellaneous income, net in the Consolidated Statements of Operations.

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NOTE 21. RELATED PARTY TRANSACTIONS (continued)

Letters of credit

In the normal course of business, SBNA provides letters of credit and standby letters of credit to affiliates. During the years ended December 31, 2019 and December 31, 2018, the average unfunded balance outstanding under these commitments was $92.5 million and $82.7 million, respectively.

Debt and Other Securities

The Company and its subsidiaries have various debt agreements with Santander. For a listing of these debt agreements, see Note 11 to these Consolidated Financial Statements. The Company has $10.1 billion of public securities consisting of various senior note obligations and trust preferred securities obligations. Santander owned approximately 0.2% of the outstanding principal of these securities as of December 31, 2019.

Derivatives

As of December 31, 2019 and 2018, the Company has entered into derivative agreements with Santander, which consist primarily of swap agreements to hedge interest rate risk and foreign currency exposure with notional values of $4.6 billion and $2.7 billion, respectively.

Service Agreements

The Company and its affiliates entered into or were subject to various service agreements with Santander and its affiliates. Each of the agreements was made in the ordinary course of business and on market terms. Those agreements include the following:

NW Services Co., a Santander affiliate doing business as Aquanima, is under contract with the Company to provide procurement services, with fees paid in 2019 in the amount of $10.2 million, $5.4 million in 2018 and $3.7 million in 2017. There were no payables in connection with this agreement for the years ended December 31, 2019 or 2018. The fees related to this agreement are summarizedrecorded in Technology, outside service, and marketing expense in the Consolidated Statements of Operations.
Geoban, S.A., a Santander affiliate, is under contract with the Company to provide administrative services, consulting and professional services, application support and back-office services, including debit card disputes and claims support, and consumer and mortgage loan set-up and review, with total fees paid in 2019 in the amount of $1.7 million, $1.8 million in 2018 and $3.3 million in 2017. The Company had no payables in connection with this agreement in 2019 or 2018. The fees related to this agreement are recorded in Technology, outside service, and marketing expense in the Consolidated Statements of Operations.
Santander Back-Offices Globales Mayoristas S.A., a Santander affiliate, is under contract with the Company to provide administrative services and back-office support for the Bank’s derivative, foreign exchange and hedging transactions and programs. Fees in the amounts of $1.4 million were paid to Santander Back-Offices Globales Mayoristas S.A. with respect to this agreement in 2019, and $1.9 million and $1.1 million in 2018 and 2017, respectively. There were no payables in connection with this agreement in 2019 or 2018. The fees related to this agreement are recorded in Technology, outside service, and marketing expense in the Consolidated Statements of Operations.
Santander Global Technology S.L. is under contract with the Company to provide information technology development, support and administration, with fees for these services paid in 2019 in the amount of $2.8 million, $38.7 million in 2018 and $77.9 million in 2017. In addition, as of December 31, 2019 and 2018, the Company had payables for these services in the amounts of $0.2 million and $0.8 million, respectively. The fees related to this agreement are capitalized in Premises and equipment, net on the Consolidated Balance Sheets.
Santander Global Technology is also under contract with the Company to provide professional services and administration and support of information technology production systems, telecommunications and internal/external applications, with fees for these services paid in 2019 in the amount of $20.9 million, $74.9 million in 2018 and $110.7 million in 2017. In addition, as of December 31, 2019 and 2018, the Company had payables for these services in the amounts of $15.6 million and $18.1 million, respectively. The fees related to this agreement are capitalized in Premises and equipment, net on the Consolidated Balance Sheets.

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NOTE 21. RELATED PARTY TRANSACTIONS (continued)

In addition, Santander Global Technology is under contract with the Company to provide information technology development, support and administration, with fees paid in the amount of $113.2 million in 2019 and $5.5 million in 2018. As of December 31, 2019 and 2018, the Company had payables with Santander Global Technology in the amounts of $5.6 million and $21.9 million for these services. The fees related to this agreement are capitalized in Premises and equipment, net on the Consolidated Balance Sheets.
During the year ended December 31, 2019 and 2018, the Company paid $15.4 million and $17.1 million to Santander for the development and implementation of global projects as part of group expense allocation.
During the year ended December 31, 2019, the Company paid $3.9 million in rental payments to Santander, compared to $3.9 million in 2018 and $11.2 million in 2017.

SC has entered into or was subject to various agreements with Santander, its affiliates or the Company. Each of the agreements was done in the ordinary course of business and on market terms. Those agreements include the following:

Revolving Agreements

SC had a committed revolving credit agreement with Santander that can be drawn on an unsecured basis. This facility was terminated during 2018. During the years ended December 31, 2019, December 31, 2018 and December 31, 2017, SC incurred interest expense, including unused fees of zero, $11.6 million and $51.7 million, respectively.

In 2015, under a new agreement with Santander, SC agreed to begin incurring a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations. SC recognized guarantee fee expense of $0.4 million, $5.0 million and $6.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019 and 2018, SC had zero and $1.9 million of fees payable to Santander under this arrangement.

Securitizations

SC entered into an MSPA with Santander, under which it had the option to sell a contractually determined amount of eligible prime loans to Santander under the SPAIN securitization platform, for a term that ended in December 2018. SC provides servicing on all loans originated under this arrangement. SC provides servicing on all loans originated under this arrangement.

Other information relating to the SPAIN securitization platform for the years ended December 31, 2019 and 2018 is as follows:
  AT DECEMBER 31, 2017
(in thousands) 
Lease
Payments
 
Future Minimum
Expected  Sublease
Income
 
Net
Payments
2018 $134,041
 $(7,513) $126,528
2019 122,957
 (6,803) 116,154
2020 97,313
 (4,021) 93,292
2021 84,376
 (1,046) 83,330
2022 71,478
 (851) 70,627
Thereafter 209,624
 (4,155) 205,469
Total $719,789
 $(24,389) $695,400
(in thousands) December 31, 2019 December 31, 2018
Servicing fee income $29,831
 $35,058
Loss (Gain) on sale, excluding lower of cost of market adjustments (if any) 
 20,736
Servicing fees receivable 1,869
 2,983
Collections due to Santander 8,180
 15,968

The Company recorded rental expenseOrigination Support Services

Beginning in 2018, SC agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of $150.0 million, $143.9retail loans, primarily from FCA dealers. In addition, SC has agreed to perform the servicing for any loans originated on SBNA’s behalf. For the years ended December 31, 2019 and 2018, SC facilitated the purchase of $7.0 billion and $1.9 billion of RICs, respectively. Under this agreement, SC recognized referral and servicing fees of $58.1 million and $155.4$15.5 million netfor the year ended December 31, 2019 and 2018, of $8.9which $2.1 million was receivable and $4.9 million was payable to SC as of December 31, 2019 and 2018, respectively.

Other related-party transactions

As of December 31, 2019, Jason A. Kulas and Thomas Dundon, both former members of SC's Board of Directors and CEOs of SC, each had a minority equity investment in a property in which SC leases approximately 373,000 square feet as its corporate headquarters. During the years ended December 31, 2019, 2018 and 2017, SC recorded $5.3 million, $4.8 million and $5.0 million, respectively, in lease expenses on this property. Future minimum lease payments over the seven-year term of the lease, which extends through 2026, total $48.5 million.

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NOTE 21. RELATED PARTY TRANSACTIONS (continued)

SC's wholly-owned subsidiary, SCI, opened deposit accounts with BSPR, an affiliated entity. As of December 31, 2019 and 2018, SCI had cash (including restricted cash) of $8.1 million and $9.4$8.9 million, respectively, on deposit with BSPR. This transaction eliminates in the consolidation of sublease income, in 2017, 2016SHUSA.
SC has certain deposit and 2015,checking accounts with SBNA. As of December 31, 2019 and 2018, SC had a balance of $33.7 million and $92.8 million, respectively, in Occupancy and equipment expensesthese accounts. These transactions eliminate in the Consolidated Statementconsolidation of Operations.SHUSA.

Entities that transferred to the IHC have entered into or were subject to various agreements with Santander or its affiliates. Each of the agreements was made in the ordinary course of business and on market terms. Those agreements include the following:

BSI enters into transactions with affiliated entities in the ordinary course of business. As of December 31, 2019, BSI had short-term borrowings from unconsolidated affiliates of $1.8 million, compared to $59.9 million as of December 31, 2018. BSI had cash and cash equivalents deposited with affiliates of $6.8 million and $46.2 million as of December 31, 2019 and December 31, 2018, respectively. BSI had foreign exchange rate forward contracts with affiliates as counterparties with notional amounts of approximately $1.9 billion and $1.5 billion as of December 31, 2019 and December 31, 2018, respectively. BSI held deposits from unconsolidated affiliates of $118.4 million and $55.7 million as of December 31, 2019 and December 31, 2018, respectively. At December 31, 2019 and 2018, loan participations of $714.2 million and $195.8 million, respectively, were sold to Santander without recourse.

SIS enters into transactions with affiliated entities in the ordinary course of business. SIS executes, clears and custodies certain of its securities transactions through various affiliates in Latin America and Europe. The balance of payables to customers due to Santander at December 31, 2019 was $1.9 billion, compared to $1.0 billion at December 31, 2018.


NOTE 20.22. REGULATORY MATTERS

The Company is subject to the regulations of certain federal, state, and foreign agencies, and undergoes periodic examinations by such regulatory authorities.

The minimum U.S. regulatory capital ratios for banks under Basel III are 4.5% for the Common equity tier 1 ("CET1")CET1 capital ratio, 6.0% for the Tier 1 capital ratio, 8.0% for the Totaltotal capital ratio, and 4.0% for the Leverageleverage ratio. To qualify as “well-capitalized,” regulators require banks to maintain capital ratios of at least 6.5% for the CET1 capital ratio, 8.0% for the Tier 1 capital ratio, 10.0% for the Totaltotal capital ratio, and 5.0% for the Leverageleverage ratio. At December 31, 20172019 and 2016,2018, the CompanyBank met the well-capitalized capital ratio requirements.

As a BHC, SHUSA is required to maintain a CET1 capital ratio of at least 4.5%, Tier 1 capital ratio of at least 6.0%, Totaltotal capital ratio of at least 8.0%, and Leverage ratio of at least 4.0%. The Company’s capital levels exceeded the ratios required for BHCs. The Company's ability to make capital distributions will depend on the Federal Reserve's accepting the Company's capital plan, the results of the stress tests described in this Form 10-K, and the Company's capital status, as well as other supervisory factors.

The DFA mandates an enhanced supervisory framework, which, among other things, means that the Company is subject to annual stress tests by theboth internal and Federal Reserve and the Company and the Bank are required to conduct semi-annual and annualrun stress tests, respectively, reporting results to the Federal Reserve and the OCC.tests. The Federal Reserve also has discretionary authority to establish additional prudential standards, on its own or at the Financial Stability Oversight Council's recommendation, regarding contingent capital, enhanced public disclosures, short-term debt limits, and otherwise as it deems appropriate.

The Company is also required to receive a notice of non-objection to its capital plans from the Federal Reserve and the OCC before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments.


210




NOTE 20. REGULATORY MATTERS (continued)

For a discussion of Basel III and the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section of the MD&A captioned "Regulatory Matters."

175




NOTE 22. REGULATORY MATTERS (continued)

The Federal Deposit Insurance Corporation Improvement Act established five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution’s capital tier depends on its capital levels in relation to various capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized or adequately-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.

Federal banking laws, regulations and policies also limit the Bank’s ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank’s total distributions to SHUSA within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) the Bank is not adequately capitalized at the time. The OCC's prior approval would be required if the Bank is notified by the OCC that it is a problem institution or in troubled condition.

Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the year,2019, 2018, and 2017 the Company paid cash dividends of $400.0 million, $410.0 million and $10.0 million, to its common shareholder while no dividends were declared or paid to its common shareholder in 2016 or 2015.respectively. During the year,2019, 2018 and 2017, the Company also paid cash dividends to preferred shareholders of $14.6 million. The Company paid cash dividends to preferred shareholders of $15.1zero, $11.0 million and $21.2$14.6 million, in 2016 and 2015, respectively. During the third quarter of 2018, SHUSA redeemed all of its outstanding preferred stock.

The following schedule summarizes the actual capital balances of the Bank and SHUSA at December 31, 20172019 and 2016:2018:
 REGULATORY CAPITAL REGULATORY CAPITAL
(Dollars in thousands) Common Equity Tier 1 Capital Ratio Tier 1 Capital
Ratio
 Total Capital
Ratio
 Leverage
Ratio
 Common Equity Tier 1 Capital Ratio Tier 1 Capital
Ratio
 Total Capital
Ratio
 Leverage
Ratio
SBNA at December 31, 2017(1):
        
        
SBNA at December 31, 2019(1):
        
Regulatory capital $10,014,774
 $10,014,774
 $10,668,635
 $10,014,774
 $10,219,819
 $10,219,819
 $10,844,218
 $10,219,819
Capital ratio 18.17% 18.17% 19.36% 13.86% 15.80% 15.80% 16.77% 12.77%
SHUSA at December 31, 2017(1):
        
SHUSA at December 31, 2019(1):
        
Regulatory capital $16,342,296
 $17,795,929
 $19,450,655
 $17,795,929
 $17,391,867
 $18,780,870
 $20,480,467
 $18,780,870
Capital ratio 16.38% 17.84% 19.50% 14.17% 14.63% 15.80% 17.23% 13.13%
                
 Common Equity Tier 1 Capital Ratio Tier 1 Capital
Ratio
 Total Capital
Ratio
 Leverage
Ratio
 Common Equity Tier 1 Capital Ratio Tier 1 Capital
Ratio
 Total Capital
Ratio
 Leverage
Ratio
SBNA at December 31, 2016(1):
        
        
SBNA at December 31, 2018(1):
        
Regulatory capital $10,005,701
 $10,005,701
 $10,759,357
 $10,005,701
 $10,179,299
 $10,179,299
 $10,819,641
 $10,179,299
Capital ratio 16.17% 16.17% 17.39% 12.34% 17.14% 17.14% 18.22% 14.08%
SHUSA at December 31, 2016(1):
        
SHUSA at December 31, 2018(1):
        
Regulatory capital $15,136,250
 $16,843,576
 $18,774,836
 $16,843,576
 $16,758,748
 $18,193,361
 $19,807,403
 $18,193,361
Capital ratio 14.51% 16.14% 18.00% 12.52% 15.53% 16.86% 18.35% 14.03%
(1)Represents transitional ratios under Basel IIIIII.

In June 2017,
NOTE 23. BUSINESS SEGMENT INFORMATION

Business Segment Products and Services

The Company’s reportable segments are focused principally around the customers the Company announced thatserves. During the Federal Reserve did not objectfourth quarter of 2018, 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 planned capital actions describedinternal management reporting in 2019 and, accordingly, beginning in the Company’s capital plan submittedfirst quarter of 2019, the prior Commercial Banking segment is now reported as parttwo separate reportable segments: C&I and CRE & VF. All prior period results have been recast to conform to the new composition of the CCAR process. That capital plan included planned capital distributions across the following categories: (1) common stock dividends from SHUSA to Santander, (2) common stock dividends from SC, (3) redemption of the remaining balance of SHUSA’s 7.908% trust preferred securities, and (4) dividends on the Company’s preferred stock and payments on its trust preferred securities.reportable segments.

211176




NOTE 21. RELATED PARTY TRANSACTIONS

The parties related to the Company are deemed to include, in addition to its subsidiaries, jointly controlled entities, the Company’s key management personnel (the members of its Board of Directors and certain officers at the level of senior executive vice president or above, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.

On March 28, 2017, SHUSA received a $9.0 million capital contribution from Santander.

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 contributed these assets at book value of $2.8 million to SBNA, an affiliate of the Company on January 1, 2018.

During 2017, SBNA sold $372.1 million of commercial loans to Santander. The sale resulted in $2.4 million of net gain for the year ended December 31, 2017, which is included in Miscellaneous (loss)/income, net(1) in the Consolidated Statements of Operations.23. BUSINESS SEGMENT INFORMATION (continued)

The Company has various debtidentified 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.
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 Santander. Forthe 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 methodologies are utilized to allocate a listingcost 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 these debt agreements, see Note 11borrowings 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 Consolidated Financial Statements.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 Company has $8.7 billionapplication and development of public securities consisting of various senior note obligations, trust preferred security obligationsmanagement reporting methodologies is a dynamic process and preferred stock issuances. Santander owned approximately 1.6% of the outstanding principalis subject to periodic enhancements. The implementation of these securities as of December 31, 2017.

SBNA has entered into derivative agreementsenhancements to the internal management reporting methodology may materially affect the results disclosed for each segment with Santander and Abbey National Treasury Services plc, a subsidiary of Santander, which consist primarily of swap agreementsno impact on consolidated results. Whenever significant changes to hedge interest rate risk and foreign currency exposure. These contracts had notional values of $2.0 billion and $0.1 billion, respectively, as of December 31, 2017, compared to $2.5 billion and $2.1 billion, respectively, as of December 31, 2016.

In the normal course of business, SBNA provides letters of credit and standby letters of credit to affiliates. During the year ended December 31, 2017, the average unfunded balance outstanding under these commitments was $82.9 million.

During the year ended December 31, 2017, the Company paid $11.2 million in rental payments to Santander, compared to $6.1 million in 2016 and $8.1 million in 2015.

In the ordinary course of business, we may provide loans to our executive officers and directors, also known as Regulations O insiders. Pursuant to our policy, such loans are generally issued on the same terms as those prevailing at the time for comparable loans to unrelated persons and do not involve more than the normal risk of collectability. As permitted by Regulation O, certain mortgage loans to directors and executive officers of the Company and the Bank, including the Company's executive officers, are priced at up to a 0.25% discount to market and require no application fee, but contain no other terms than terms available in comparable transactions with non-employees. The 0.25% discountmanagement reporting methodologies take place, prior period information is discontinued when an employee terminates his or her employment with the Company or the Bank. The outstanding balance of these loans was immaterial at December 31, 2017 and $2.1 million at December 31, 2016.

The Company and its affiliates entered into or were subject to various service agreements with Santander and its affiliates. Each of the agreements was made in the ordinary course of business and on market terms. Those agreements include the following:
NW Services Co., a Santander affiliate doing business as Aquanima, is under contract with the Company to provide procurement services, with fees paid in 2017 in the amount of $3.7 million, $3.6 million in 2016 and $3.8 million in 2015. There were no payables in connection with this agreement for the years ended December 31, 2017 and 2016. The fees related to this agreement are recorded in Technology, outside service, and marketing expense in the Consolidated Statement of Operations.
Geoban, S.A., a Santander affiliate, is under contract with the Company to provide administrative services, consulting and professional services, application support and back-office services, including debit card disputes and claims support, and consumer and mortgage loan set-up and review, with total fees paid in 2017 in the amount of $3.3 million, $15.1 million in 2016 and $9.8 million in 2015. In addition, as of December 31, 2017 and 2016, the Company had payables with Geoban, S.A. in the amounts of $0.2 million and $2.1 million, respectively. The fees related to this agreement are recorded in Technology, outside service, and marketing expense in the Consolidated Statement of Operations.reclassified wherever practicable.

212177




NOTE 21. RELATED PARTY TRANSACTIONS23. BUSINESS SEGMENT INFORMATION (continued)

Ingenieria De Software Bancario S.L.,The CODM manages SC on a Santander affiliate, is under contract withhistorical basis by reviewing the Company to provideresults of SC on a pre-Change in Control basis. The Results of Segments table below discloses SC's operating information technology development, support and administration, with fees paid in 2017 in the amount of $77.9 million, $91.7 million in 2016 and $101.6 million in 2015. In addition, as of December 31, 2017 and 2016, the Company had payables with Ingenieria De Software Bancario S.L. in the amounts of $26.3 million and $17.9 million, respectively. The fees related to this agreement are capitalized in Premises and equipment, net on the Consolidated Balance Sheets.
Produban Servicios Informaticos Generales S.L., a Santander affiliate,same basis that it is under contract withreviewed by the CompanyCODM. The adjustments column includes adjustments to provide professional services, and administration and support of information technology production systems, telecommunications and internal/external applications, with fees paid in the amount of $110.7 million in 2017, $123.4 million in 2016 and $119.1 million in 2015. In addition, as of December 31, 2017 and 2016, the Company had payables with Produban Servicios Informaticos Generales S.L. in the amounts of $10.2 million and $8.9 million, respectively. The fees relatedreconcile SC's GAAP results to this agreement are recorded in Occupancy and equipment expenses and Technology, outside service, and marketing expense in the Consolidated Statement of Operations.
Santander Back-Offices Globales Mayoristas S.A., a Santander affiliate, is under contract with the Company to provide administrative services and back-office support for the Bank’s derivative, foreign exchange and hedging transactions and programs. Fees in the amounts of $1.1 million were paid to Santander Back-Offices Globales Mayoristas S.A. with respect to this agreement in 2017, and $1.8 million and $1.6 million in 2016 and 2015, respectively. There were no payables in connection with this agreement in 2017 or 2016. The fees related to this agreement are recorded in Technology, outside service, and marketing expense in the Consolidated Statement of Operations.SHUSA's consolidated results.

SC has entered into or was subject to various agreements with Santander, its affiliates or the Company. EachResults of the agreements was done in the ordinary course of business and on market terms. Those agreements include the following:Segments

SC has a $3.0 billion committed revolving credit agreement with Santander that can be drawn on an unsecured basis. DuringThe following tables present certain information regarding the years ended December 31, 2017, December 31, 2016 and December 31, 2015, SC incurred interest expense, including unused fees of $51.7 million, $69.9 million and $96.8 million. As of December 31, 2017 and 2016, SC had accrued interest payable of $1.4 million and $6.3 million, respectively. In August 2015, under a new agreement with Santander, SC agreed to begin incurring a fee of 12.5 basis points (per annum) on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations. SC recognized guarantee fee expense of $6.0 million, $6.4 million and $2.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, SC had $7.6 million and $1.6 million of fees payable to Santander under this arrangement.Company’s segments.
SC has entered into derivative agreements with Santander and its affiliates, which consist primarily of swap agreements to hedge interest rate risk. These contracts had notional values of $3.7 billion and $7.3 billion at December 31, 2017 and 2016, respectively, which are included in Note 14 of these Consolidated Financial Statements.
During 2014, and until May 9, 2015, SC entered into a flow agreement with SBNA under which SBNA has the first right to review and approve Chrysler Capital consumer vehicle lease applications. SC could review any applications declined by SBNA for SC’s own portfolio. SC provides servicing and received an origination fee on all leases originated under this agreement. Pursuant to the Chrysler Agreement, SC pays FCA on behalf of SBNA for residual gains and losses on the flowed leases. All fees and expenses associated with this agreement between SBNA and SC eliminate in consolidation.
During the year ended December 31, 2017, SBNA purchased a RV/Marine loan portfolio from SC. Servicing of these receivables will be performed by SC. All fees and expenses associated with this agreement between SBNA and SC eliminate in consolidation.
Beginning in 2018, SC has agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail loans, primarily from Chrysler dealers. In addition, SC has agreed to perform the servicing for any loans originated on SBNA’s behalf.
SC's wholly-owned subsidiary, Santander Consumer International Puerto Rico, LLC (SCI), opened deposit accounts with Banco Santander Puerto Rico, an affiliated entity. As of December 31, 2017 and 2016, SCI had cash of $106.6 million and $98.8 million, respectively, on deposit with Banco Santander Puerto Rico. This transaction eliminates in the consolidation of SHUSA.
For the Year EndedSHUSA Reportable Segments    
December 31, 2019Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$1,504,887
$231,270
$417,418
$152,083
$72,535
 $3,971,826
$38,408
$54,341
 $6,442,768
Non-interest income359,849
71,323
11,270
208,955
415,473
 2,760,370
6,184
(104,307) 3,729,117
Provision for/(release of) credit losses156,936
31,796
13,147
6,045
(7,322) 2,093,749
(2,334)
 2,292,017
Total expenses1,655,923
238,681
135,319
270,226
770,254
 3,284,179
40,107
(28,837) 6,365,852
Income/(loss) before income taxes51,877
32,116
280,222
84,767
(274,924) 1,354,268
6,819
(21,129) 1,514,016
Intersegment revenue/(expense)(1)
2,093
6,377
5,950
(14,420)
 


 
Total assets23,934,172
7,031,238
19,019,242
9,943,547
40,648,746
 48,922,532


 149,499,477
(1)
On March 29, 2017, SC entered into a Master Securities Purchase Agreement with Santander, whereby it hasIntersegment revenue/(expense) represents charges or credits for funds used or provided by each of the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform, for a term ending in December 2018. SC will provide servicing on all loans originated under this arrangement. For the year ended December 31, 2017, SC sold $1.2 billion of loans under this arrangement. Under a separate securities purchase agreement, SC sold $1.3 billion of prime loans to Santander during the year ended December 31, 2017. A total loss of $13.0 million was recognized for the year ended December 31, 2017 on these sales, whichsegments and is included in Miscellaneous (loss)/income, net(1) in the Consolidated Statement of Operations. SC had $13.0 million of collections due to Santander as of December 31, 2017.
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, which are presented 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.
For the Year EndedSHUSA Reportable Segments    
December 31, 2018Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$1,298,571
$228,491
$413,541
$136,582
$240,110
 $3,958,280
$31,083
$38,192
 $6,344,850
Non-interest income310,839
82,435
6,643
195,023
402,006
 2,297,517
9,678
(59,833) 3,244,308
Provision for/(release of) credit losses100,523
(35,069)15,664
9,335
24,254
 2,205,585
19,606

 2,339,898
Total expenses1,575,407
225,495
116,392
234,949
786,543
 2,857,944
47,173
(11,578) 5,832,325
Income/(loss) before income taxes(66,520)120,500
288,128
87,321
(168,681) 1,192,268
(26,018)(10,063) 1,416,935
Intersegment revenue/(expense)(1)
2,507
4,691
4,729
(12,362)435
 


 
Total assets21,024,740
6,823,633
18,888,676
8,521,004
36,416,377
 43,959,855


 135,634,285

213178




NOTE 21. RELATED PARTY TRANSACTIONS23. BUSINESS SEGMENT INFORMATION (continued)

SC is party to a master service agreement ("MSA") with a company in which it has a cost method investment and holds a warrant to increase its ownership if certain vesting conditions are satisfied. The MSA enables SC to review point-of-sale credit applications of retail store customers. Under terms of the MSA, SC originated personal revolving loans of zero, zero, and $23.5 million during the years ended December 31, 2017, 2016 and 2015, respectively. During the year ended December 31, 2015, SC fully impaired its cost method investment in this entity and recorded a loss of $6.0 million. Effective August 17, 2016, SC ceased funding new originations from all of the retailers for which it reviews credit applications under this MSA.
On July 2, 2015, the Company announced the departure of Mr. Dundon from his roles as Chairman of SC’s Board and its CEO, effective as of the close of business on July 2, 2015. On the date of Mr. Dundon's departure, among other things, he entered into the separation agreement (the"Separation Agreement").
            
For the Year EndedSHUSA Reportable Segments    
December 31, 2017Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$1,115,169
$233,759
$396,318
$152,346
$256,373
 $4,114,600
$124,551
$30,834
 $6,423,950
Total non-interest income362,186
60,974
9,246
195,879
534,425
 1,793,408
(9,177)(45,688) 2,901,253
Provision for credit losses85,115
28,355
1,231
33,275
93,165
 2,363,812
154,991

 2,759,944
Total expenses1,503,656
185,398
138,987
220,500
950,647
 2,740,190
44,066
(19,120) 5,764,324
Income/(loss) before income taxes(111,416)80,980
265,346
94,450
(253,014) 804,006
(83,683)4,266
 800,935
Intersegment revenue/(expense)(1)
2,330
4,164
1,973
(8,086)(381) 


 

The Separation Agreement as amended provided for certain payments and benefits to Mr. Dundon, as well as the delivery by the Company of an irrevocable notice to exercise the call option with respect to the shares of SC Common Stock owned by DDFS and consummate the transactions contemplated by that call option notice, subject to required bank regulatory approvals and any other approvals required by law being obtained. On August 31, 2016, Santander exercised its option to assume the Company’s obligation to purchase the shares of SC Common Stock in respect of that call transaction.

On November 15, 2017, the parties to the Separation Agreement entered into a settlement and release that, among other things, altered certain of the economic arrangements in the Separation Agreement. Pursuant to the settlement agreement, (i) the amounts payable by SC to Mr. Dundon were reduced by $50.0 million to $66.1 million and (ii) Santander affirmed its prior commitment to complete the call transaction. The call transaction was consummated at the aggregate price of $941.9 million, representing the aggregate of the previously agreed price per share of SC Common Stock of $26.17, plus accrued interest. The settlement agreement included mutual releases. All transactions contemplated by the settlement agreement, including the call transaction, were completed on November 15, 2017.

Pursuant to the Separation Agreement, concurrently with the completion of the call transaction, $294.5 million of the net proceeds payable to DDFS in that transaction were used to pay off all outstanding principal, interest and fees under a loan agreement between Santander and DDFS.

On November 15, 2017, Santander contributed the 34,598,506 shares of SC Common Stock purchased from DDFS in the call transaction to the Company. The Company recorded the capital contribution at the contribution date fair value of $566 million. As a result, the Company currently owns a total of 245,593,555 shares of SC Common Stock, representing approximately 68.1% of SC’s outstanding shares.

As of December 31, 2017, Mr. Kulas and Mr. Dundon, both former members of SC's Board of Directors and CEOs of SC, along with a Santander employee who was a member of the SC Board until the second quarter of 2015, each had a minority equity investment in a property in which SC leases 373,000 square feet as its corporate headquarters. Under the rental agreement, SC was not required to pay base rent until February 2015. During the years ended December 31, 2017, 2016 and 2015 SC paid $5.0 million, $4.9 million and $4.6 million, respectively, in lease payments on this property. Future minimum lease payments over the 9-year term of the lease, which extends through 2026, total $62.4 million.

Entities that transferred to the IHC have entered into or were subject to various agreements with Santander or affiliates. Each of the agreements was made in the ordinary course of business and on market terms. Those agreements include the following:

BSI enters into transactions with affiliated entities in the ordinary course of business. As of December 31, 2017, BSI had short-term borrowings from unconsolidated affiliates of $78.7 million compared to $278.2 million as of December 31, 2016. BSI had cash and cash equivalents deposited with affiliates of $152.7 million and $28.0 million as of December 31, 2017 and December 31, 2016, respectively. BSI has foreign exchange rate forward contracts with affiliated companies as counterparties with notional amounts of approximately $1.6 billion and $1.8 billion as of December 31, 2017 and December 31, 2016, respectively.

SIS enters into transactions with affiliated entities in the ordinary course of business. SIS executes, clears and custodies certain of its securities transactions through various affiliates in Latin America and Europe. The balance of payables to customers (due to Santander) at December 31, 2017 was $1,059.3 million, compared to $929.1 million at December 31, 2016.

214



(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, which are presented 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 22.24. PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of the parent company is as follows:

BALANCE SHEETSResults of Segments

The following tables present certain information regarding the Company’s segments.
     
  AT DECEMBER 31,
  2017 2016
  (in thousands)
Assets    
Cash and cash equivalents $4,369,307
 $2,812,067
AFS investment securities 248,692
 990,860
Loans to non-bank subsidiaries 3,000,000
 300,000
Investment in subsidiaries:    
Bank subsidiary 11,160,429
 11,046,366
Non-bank subsidiaries 10,384,290
 8,715,397
Premises and equipment, net 84,873
 94,587
Equity method investments 9,324
 22,185
Restricted cash 74,156
 74,023
Deferred tax assets, net 29,096
 117,369
Other assets 284,500
 278,474
Total assets $29,644,667
 $24,451,328
Liabilities and stockholder's equity    
Borrowings and other debt obligations $8,149,565
 $4,418,516
Borrowings from non-bank subsidiaries 142,554
 141,154
Deferred tax liabilities, net 65,814
 80,282
Other liabilities 245,249
 189,493
Total liabilities 8,603,182
 4,829,445
Stockholder's equity 21,041,485
 19,621,883
Total liabilities and stockholder's equity $29,644,667
 $24,451,328

For the Year EndedSHUSA Reportable Segments    
December 31, 2019Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$1,504,887
$231,270
$417,418
$152,083
$72,535
 $3,971,826
$38,408
$54,341
 $6,442,768
Non-interest income359,849
71,323
11,270
208,955
415,473
 2,760,370
6,184
(104,307) 3,729,117
Provision for/(release of) credit losses156,936
31,796
13,147
6,045
(7,322) 2,093,749
(2,334)
 2,292,017
Total expenses1,655,923
238,681
135,319
270,226
770,254
 3,284,179
40,107
(28,837) 6,365,852
Income/(loss) before income taxes51,877
32,116
280,222
84,767
(274,924) 1,354,268
6,819
(21,129) 1,514,016
Intersegment revenue/(expense)(1)
2,093
6,377
5,950
(14,420)
 


 
Total assets23,934,172
7,031,238
19,019,242
9,943,547
40,648,746
 48,922,532


 149,499,477
(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, which are presented 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.
For the Year EndedSHUSA Reportable Segments    
December 31, 2018Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$1,298,571
$228,491
$413,541
$136,582
$240,110
 $3,958,280
$31,083
$38,192
 $6,344,850
Non-interest income310,839
82,435
6,643
195,023
402,006
 2,297,517
9,678
(59,833) 3,244,308
Provision for/(release of) credit losses100,523
(35,069)15,664
9,335
24,254
 2,205,585
19,606

 2,339,898
Total expenses1,575,407
225,495
116,392
234,949
786,543
 2,857,944
47,173
(11,578) 5,832,325
Income/(loss) before income taxes(66,520)120,500
288,128
87,321
(168,681) 1,192,268
(26,018)(10,063) 1,416,935
Intersegment revenue/(expense)(1)
2,507
4,691
4,729
(12,362)435
 


 
Total assets21,024,740
6,823,633
18,888,676
8,521,004
36,416,377
 43,959,855


 135,634,285

215178




NOTE 22. PARENT COMPANY FINANCIAL INFORMATION (continued)

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
       
  YEAR ENDED DECEMBER 31,
  2017 2016 2015
  (in thousands)
Interest income $67,369
 $12,350
 $7,439
Income from equity method investments 2,737
 185
 262
Other income 52,584
 34,213
 2,688
Net gains on sale of investment securities 1,845
 
 
Total income 124,535
 46,748
 10,389
Interest expense 214,280
 155,256
 108,811
Other expense 349,882
 361,229
 287,650
Total expense 564,162
 516,485
 396,461
Loss before income taxes and equity in earnings of subsidiaries (439,627) (469,737) (386,072)
Income tax provision/(benefit) 18,165
 (121,840) (1,062,338)
(Loss)/income before equity in earnings of subsidiaries (457,792) (347,897) 676,266
Equity in undistributed earnings / (deficits) of:      
Bank subsidiary 239,887
 230,017
 266,072
Non-bank subsidiaries 778,972
 480,764
 (2,344,055)
Net income/(loss) 561,067
 362,884
 (1,401,717)
Other comprehensive income, net of tax:      
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments 337
 9,856
 (2,321)
Net unrealized losses recognized on investment securities (9,744) (34,812) (44,102)
Amortization of defined benefit plans 4,184
 2,278
 4,160
Total other comprehensive loss (5,223) (22,678) (42,263)
Comprehensive income/(loss) $555,844
 $340,206
 $(1,443,980)


216




NOTE 22. PARENT COMPANY FINANCIAL INFORMATION (continued)

STATEMENT OF CASH FLOWS
       
  FOR THE YEAR ENDED DECEMBER 31
  2017 2016 2015
  (in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income/(loss) $561,067
 $362,884
 $(1,401,717)
Adjustments to reconcile net income to net cash (paid in)/provided by operating activities:      
Deferred tax benefit/(expense) 75,053
 (94,551) (1,085,642)
Undistributed (earnings)/deficit of:      
Bank subsidiary (239,887) (230,017) (266,072)
Non-bank subsidiaries (778,972) (480,764) 2,344,055
Net gain on sale of investment securities (1,845) 
 
Stock based compensation expense (164) 395
 25
Equity earnings from equity method investments (2,737) (185) (262)
Dividends from investment in subsidiaries 150,330
 
 
Depreciation, amortization and accretion 45,475
 24,201
 6,457
Loss on debt extinguishment 5,582
 
 
Net change in other assets and other liabilities 51,267
 11,484
 36,478
Net cash used in operating activities (134,831) (406,553) (366,678)
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of AFS investment securities 741,250
 
 
Proceeds from prepayments and maturities of AFS investment securities 
 2,000,000
 
Purchases of AFS investment securities 
 (2,990,800) 
Net capital (contributed to)/returned from subsidiaries (37,380) 45,616
 5,734
Net change in restricted cash (133) (963) 8,959
Originations of loans to subsidiaries (5,105,000) 
 
Repayments of loans by subsidiaries 2,405,000
 
 
Proceeds from the sales of equity method investments 
 
 14,947
Purchases of premises and equipment (22,493) (33,762) (58,524)
Net cash used in investing activities (2,018,756) (979,909) (28,884)
CASH FLOWS FROM FINANCIAL ACTIVITIES:      
Repayment of parent company debt obligations (931,252) (1,976,037) (600,000)
Net proceeds received from parent company senior notes and senior credit facility 4,656,279
 3,094,249
 2,085,205
Net change in borrowings 1,400
 1,010
 960
Dividends to preferred stockholders (14,600) (15,128) (21,162)
Dividends paid on common stock (10,000) 
 
Capital contribution from shareholder 9,000
 
 
Impact of SC stock option activity 
 69
 (67)
Redemption of preferred stock 
 (75,000) 
Net cash provided by financing activities 3,710,827
 1,029,163
 1,464,936
Net increase/(decrease) in cash and cash equivalents 1,557,240
 (357,299) 1,069,374
Cash and cash equivalents at beginning of period 2,812,067
 3,169,366
 2,099,992
Cash and cash equivalents at end of period $4,369,307
 $2,812,067
 $3,169,366
       
NON-CASH TRANSACTIONS      
Capital expenditures in accounts payable $10,729
 $25,027
 $
Capital distribution to shareholder 
 30,789
 
Contribution of SFS from shareholder 322,078
 
 
Contribution of incremental SC shares from shareholder 566,378
 
 

217




NOTE 23. BUSINESS SEGMENT INFORMATION

Business Segment Products and Services

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

The Consumer and Business Banking segment includes the products and services provided to Bank customers through the Bank's branch locations, including consumer deposit, business banking, residential mortgage, unsecured lending and investment services. The branch locations offer a wide range of products and services to consumers and business banking customers, including demand and interest-bearing demand deposit accounts, money market and savings accounts, CDs and retirement savings products. The branch locations also offer lending products such as credit cards, home equity loans and lines of credit, and business loans such as commercial lines of credit and business credit cards. In addition, the Bank provides investment services to its retail customers, including annuities, mutual funds, and insurance products. Santander Universities, which provides grants and scholarships to universities and colleges as a way to foster education through research, innovation and entrepreneurship, is the last component of this segment.
The Commercial Banking segment currently provides commercial lines, loans, and deposits to medium and large business banking customers as well as financing and deposits for government entities, commercial loans to dealers and financing for equipment and commercial vehicles. This segment also provides financing and deposits for government entities and niche product financing for specific industries, including oil and gas and mortgage warehousing, among others.
The CRE segment offers commercial real estate loans and multifamily loans to customers.
The GCB segment serves the needs of global commercial and institutional customers by leveraging the international footprint of Santander to provide financing and banking services to corporations with over $500 million in annual revenues. GCB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.
SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC’s primary business is the indirect origination of RICs, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with a ten-year private label financing agreement with FCA that became effective May 1, 2013, SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile, recreational and marine vehicle portfolios for other lenders. During 2015, SC announced its intention to exit the personal lending business.
SC has entered into a number of intercompany agreements with the Bank as described above as part of the Other segment. All intercompany revenue and fees between the Bank and SC are eliminated in the consolidated results of the Company.

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

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

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 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.


218




NOTE 23. BUSINESS SEGMENT INFORMATION (continued)

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.
            
For the Year EndedSHUSA Reportable Segments    
December 31, 2017Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$1,115,169
$233,759
$396,318
$152,346
$256,373
 $4,114,600
$124,551
$30,834
 $6,423,950
Total non-interest income362,186
60,974
9,246
195,879
534,425
 1,793,408
(9,177)(45,688) 2,901,253
Provision for credit losses85,115
28,355
1,231
33,275
93,165
 2,363,812
154,991

 2,759,944
Total expenses1,503,656
185,398
138,987
220,500
950,647
 2,740,190
44,066
(19,120) 5,764,324
Income/(loss) before income taxes(111,416)80,980
265,346
94,450
(253,014) 804,006
(83,683)4,266
 800,935
Intersegment revenue/(expense)(1)
2,330
4,164
1,973
(8,086)(381) 


 
(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, which are presented 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.

The Chief Operating Decision Maker ("CODM"), as described by ASC 280, Segment Reporting, manages SC on a historical basis by reviewing the results of SC on a pre-Change in Control basis. The Results of Segments table discloses SC's operating information on the same basis that it is reviewed by SHUSA's CODM. The adjustments column includes adjustments to reconcile SC's GAAP results to SHUSA's consolidated results.
NOTE 24. PARENT COMPANY FINANCIAL INFORMATION

During 2016, certain management and business line changes became effective as the Company reorganized its management reporting in order to improve its structure and focus to better align management teams and resources with the business goalsCondensed financial information of the Company and provide enhanced customer service to its clients. Accordingly, the Company made changes within the Company's reportable segmentsparent company is as of December 31, 2016, and the results of segments for the year ended December 31, 2015 were recast to the current composition of the Company's reportable segments. There were no changes to the Company's reportable segments during the year ended December 31, 2017.follows:

Results of Segments

The following tables present certain information regarding the Company’s segments.
            
For the Year EndedSHUSA Reportable Segments   SHUSA Reportable Segments   
December 31, 2017Consumer & Business BankingCommercial BankingCRE GCB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
December 31, 2019Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
(in thousands)(in thousands)
Net interest income$1,266,073
$346,766
$292,945
$155,826
$92,502
 $4,024,508
$124,551
$30,834
 $6,334,005
$1,504,887
$231,270
$417,418
$152,083
$72,535
 $3,971,826
$38,408
$54,341
 $6,442,768
Total non-interest income366,827
62,515
10,475
37,135
713,933
 1,793,556
(9,177)(45,688) 2,929,576
Provision for credit losses85,115
37,915
(8,329)33,275
93,166
 2,254,361
154,991

 2,650,494
Non-interest income359,849
71,323
11,270
208,955
415,473
 2,760,370
6,184
(104,307) 3,729,117
Provision for/(release of) credit losses156,936
31,796
13,147
6,045
(7,322) 2,093,749
(2,334)
 2,292,017
Total expenses1,570,954
219,158
79,431
102,164
1,055,804
 2,740,190
44,066
(19,120) 5,792,647
1,655,923
238,681
135,319
270,226
770,254
 3,284,179
40,107
(28,837) 6,365,852
Income/(loss) before income taxes(23,169)152,208
232,318
57,522
(342,535) 823,513
(83,683)4,266
 820,440
51,877
32,116
280,222
84,767
(274,924) 1,354,268
6,819
(21,129) 1,514,016
Intersegment revenue/(expense)(1)
12,213
6,081
2,827
(7,212)(13,909) 


 
2,093
6,377
5,950
(14,420)
 


 
Total assets19,889,065
11,626,318
13,691,750
5,544,182
38,120,411
 39,422,304


 128,294,030
23,934,172
7,031,238
19,019,242
9,943,547
40,648,746
 48,922,532


 149,499,477
(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 disclosedwhich are presented 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.
            


For the Year EndedSHUSA Reportable Segments    
December 31, 2018Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$1,298,571
$228,491
$413,541
$136,582
$240,110
 $3,958,280
$31,083
$38,192
 $6,344,850
Non-interest income310,839
82,435
6,643
195,023
402,006
 2,297,517
9,678
(59,833) 3,244,308
Provision for/(release of) credit losses100,523
(35,069)15,664
9,335
24,254
 2,205,585
19,606

 2,339,898
Total expenses1,575,407
225,495
116,392
234,949
786,543
 2,857,944
47,173
(11,578) 5,832,325
Income/(loss) before income taxes(66,520)120,500
288,128
87,321
(168,681) 1,192,268
(26,018)(10,063) 1,416,935
Intersegment revenue/(expense)(1)
2,507
4,691
4,729
(12,362)435
 


 
Total assets21,024,740
6,823,633
18,888,676
8,521,004
36,416,377
 43,959,855


 135,634,285

219178




NOTE 23. BUSINESS SEGMENT INFORMATION (continued)

     
For the Year EndedSHUSA Reportable Segments   SHUSA Reportable Segments   
December 31, 2016Consumer & Business BankingCommercial BankingCRE GCB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
December 31, 2017Consumer & Business BankingC&ICRE & VFCIB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
(in thousands)(in thousands)
Net interest income$1,099,097
$349,834
$287,387
$237,635
$(63,191) $4,448,535
$187,296
$18,099
 $6,564,692
$1,115,169
$233,759
$396,318
$152,346
$256,373
 $4,114,600
$124,551
$30,834
 $6,423,950
Total non-interest income384,177
62,882
24,264
82,765
792,457
 1,432,634
42,271
(54,691) 2,766,759
362,186
60,974
9,246
195,879
534,425
 1,793,408
(9,177)(45,688) 2,901,253
Provision for credit losses56,440
79,891
6,025
7,952
52,490
 2,468,199
308,728

 2,979,725
85,115
28,355
1,231
33,275
93,165
 2,363,812
154,991

 2,759,944
Total expenses1,565,151
210,984
87,941
118,804
1,152,027
 2,252,259
56,557
(46,475) 5,397,248
1,503,656
185,398
138,987
220,500
950,647
 2,740,190
44,066
(19,120) 5,764,324
Income/(loss) before income taxes(138,317)121,841
217,685
193,644
(475,251) 1,160,711
(135,718)9,883
 954,478
(111,416)80,980
265,346
94,450
(253,014) 804,006
(83,683)4,266
 800,935
Intersegment revenue/(expense)(1)
2,523
4,127
2,273
(9,052)129
 


 
2,330
4,164
1,973
(8,086)(381) 


 
Total assets19,828,173
11,962,637
14,630,450
9,389,271
44,010,655
 38,539,104


 138,360,290
(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 disclosedwhich are presented 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 24. PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of the parent company is as follows:

BALANCE SHEETS
For the Year EndedSHUSA Reportable Segments    
December 31, 2015Consumer & Business BankingCommercial BankingCRE GCB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$865,044
$276,407
$272,999
$218,917
$246,151
 $4,614,402
$407,139
$347
 $6,901,406
Total non-interest income301,758
53,052
44,170
89,208
873,413
 1,303,643
285,882
(46,091) 2,905,035
Provision for credit losses42,629
17,398
25,719
40,881
75,293
 2,785,871
1,091,952

 4,079,743
Total expenses1,625,814
184,365
72,095
108,718
955,719
 1,842,562
4,644,576
(51,957) 9,381,892
Income/(loss) before income taxes(501,641)127,696
219,355
158,526
88,552
 1,289,612
(5,043,507)6,213
 (3,655,194)
Intersegment revenue/(expense)(1)
1,207
4,146
2,814
(9,601)1,434
 


 
     
  AT DECEMBER 31,
  2019 2018
  (in thousands)
Assets    
Cash and cash equivalents $3,125,760
 $3,562,789
AFS investment securities 
 247,510
Loans to non-bank subsidiaries 5,650,000
 3,500,000
Investment in subsidiaries:    
Bank subsidiary 11,617,397
 11,219,433
Non-bank subsidiaries 11,606,398
 10,915,872
Premises and equipment, net 49,983
 52,447
Equity method investments 5,876
 3,801
Restricted cash 58,168
 79,555
Deferred tax assets, net 
 66
Other assets (1)
 395,822
 348,268
Total assets $32,509,404
 $29,929,741
Liabilities and stockholder's equity    
Borrowings and other debt obligations $9,949,214
 $8,351,685
Borrowings from non-bank subsidiaries 148,748
 145,165
Deferred tax liabilities, net 297,253
 61,332
Other liabilities 234,703
 235,144
Total liabilities 10,629,918
 8,793,326
Stockholder's equity 21,879,486
 21,136,415
Total liabilities and stockholder's equity $32,509,404
 $29,929,741
(1)Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income.
(2)Other includes the results of the entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.
(3)Management of SHUSA manages SC by analyzing the pre-Change in Control results of SC as disclosed in this column.
(4)Purchase Price Adjustments represents the impact that SC purchase marks had on the results of SC included within the consolidated operations of SHUSA, while eliminations eliminate intercompany transactions.
(1) Includes $1.0 million and zero of other investments at December 31, 2019 and December 31, 2018, respectively.


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NOTE 24. CORRECTION OF ERRORSPARENT COMPANY FINANCIAL INFORMATION (continued)

On December 7, 2016, the Company filed an amended Annual Report on Form 10-K/ASTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
       
  YEAR ENDED DECEMBER 31,
  2019 2018 2017
  (in thousands)
Interest income $176,013
 $123,389
 $67,369
Income from equity method investments 2,288
 78
 2,737
Other income 58,373
 67,100
 52,584
Net gains on sale of investment securities 
 
 1,845
Total income 236,674
 190,567
 124,535
Interest expense 345,888
 288,006
 214,280
Other expense 234,849
 301,418
 349,882
Total expense 580,737
 589,424
 564,162
Loss before income taxes and equity in earnings of subsidiaries (344,063) (398,857) (439,627)
Income tax (benefit)/provision (38,732) (51,114) 18,165
Loss before equity in earnings of subsidiaries (305,331) (347,743) (457,792)
Equity in undistributed earnings of:      
Bank subsidiary 387,938
 489,452
 239,887
Non-bank subsidiaries 670,562
 565,695
 770,255
Net income 753,169
 707,404
 552,350
Other comprehensive income, net of tax:      
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments (301) (3,796) 337
Net unrealized gains/(losses) recognized on investment securities 222,887
 (80,891) (9,744)
Amortization of defined benefit plans 10,859
 560
 4,184
Total other comprehensive gain/(loss) 233,445
 (84,127) (5,223)
Comprehensive income $986,614
 $623,277
 $547,127

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NOTE 24. PARENT COMPANY FINANCIAL INFORMATION (continued)

STATEMENT OF CASH FLOWS
       
  FOR THE YEAR ENDED DECEMBER 31
  2019 2018 2017
  (in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income $753,169
 $707,404
 $552,350
Adjustments to reconcile net income to net cash provided by operating activities:      
Deferred tax expense 235,688
 24,277
 75,053
Undistributed earnings of:      
Bank subsidiary (387,938) (489,452) (239,887)
Non-bank subsidiaries (670,562) (565,695) (770,255)
Net gain on sale of investment securities 
 
 (1,845)
Stock based compensation expense 
 
 (164)
Equity earnings from equity method investments (2,288) (78) (2,737)
Dividends from investment in subsidiaries 482,548
 592,797
 150,330
Depreciation, amortization and accretion 34,403
 44,388
 45,475
Loss on debt extinguishment 1,627
 3,955
 5,582
Net change in other assets and other liabilities (56,938) (60,256) 51,267
Net cash provided by/(used in) operating activities 389,709
 257,340
 (134,831)
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from sales of AFS investment securities 
 
 741,250
Proceeds from prepayments and maturities of AFS investment securities 250,000
 
 
Purchases of other investments (1,042) 
 
Net capital (contributed to)/returned from subsidiaries (215,657) (208,622) (37,380)
Originations of loans to subsidiaries (7,995,000) (4,295,000) (5,105,000)
Repayments of loans by subsidiaries 5,845,000
 3,795,000
 2,405,000
Purchases of premises and equipment (9,800) (15,333) (22,493)
Net cash used in investing activities (2,126,499) (723,955) (2,018,623)
CASH FLOWS FROM FINANCIAL ACTIVITIES:      
Repayment of parent company debt obligations (2,225,806) (1,224,474) (931,252)
Net proceeds received from Parent Company senior notes and senior credit facility 3,811,670
 1,423,274
 4,656,279
Net change in borrowings from non-bank subsidiaries 3,583
 2,611
 1,400
Dividends to preferred stockholders 
 (10,950) (14,600)
Dividends paid on common stock (400,000) (410,000) (10,000)
Capital contribution from shareholder 88,927
 85,035
 9,000
Redemption of preferred stock 
 (200,000) 
Net cash provided by/(used in) financing activities 1,278,374
 (334,504) 3,710,827
Net (decrease)/increase in cash, cash equivalents, and restricted cash (458,416) (801,119) 1,557,373
Cash, cash equivalents, and restricted cash at beginning of period 3,642,344
 4,443,463
 2,886,090
Cash, cash equivalents, and restricted cash at end of period (1)
 $3,183,928
 $3,642,344
 $4,443,463
       
NON-CASH TRANSACTIONS      
Capital expenditures in accounts payable $10,326
 $8,174
 $10,729
Contribution of SFS from shareholder (2)
 
 
 322,078
Contribution of incremental SC shares from shareholder 
 
 566,378
Contribution of SAM from shareholder (2)
 
 4,396
 
Adoption of lease accounting standard:      
ROU assets 6,779
 
 
Accrued expenses and payables 7,622
 
 
(1) Amounts for the yearyears ended December 31, 2015 in which the Company restated its audited financial statements2019, 2018, and 2017 include cash and cash equivalents balances of $3.1 billion, $3.6 billion, and $4.4 billion, respectively, and restricted cash balances of $58.2 million, $79.6 million, and $74.2 million, respectively.
(2) The contributions of SFS and SAM were accounted for the year ended December 31, 2015as non-cash transactions. Refer to correct certain errors which are reflected herein, the most significantNote 1 - Basis of which were as follows:

The methodologyPresentation and Accounting Policies for estimating the ACL for RICs HFI and the identification of the population of loans that should be classified as TDRs.
The effective rate used to discount expected cash flows to determine TDR impairment.
The classification of subvention payments within the Consolidated Statements of Operations related to leased vehicles.
The application of the retrospective effective interest method for accreting discounts, subvention payments from manufacturers, and other organizational costs on individually acquired RICs HFI.
The consideration of net unaccreted discounts when estimating the allowance for credit losses for non-TDR portfolio of retail installment contracts held for investment.
The recognition of and disclosure of severance and stock compensation expenses, a deferred tax asset, and a liability for certain benefits payable to the former CEO of SC.
The recognition of the gain on the Change in Control and related goodwill.
As a result of the restatement, the Company made corrections to the goodwill impairment charge recorded during the year ended December 31, 2015.

additional information.

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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The Company has had no disagreements with its auditors on accounting principles, practices or financial statement disclosure during and through the date of the financial statements included in this report.


ITEM 9A - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and Chief Financial Officer ("CFO"),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 Annual Report on Form 10-K.December 31, 2019, (the “Evaluation Date”). Based on suchthat evaluation, our CEO and CFO have concluded that as of December 31, 2017, we did not maintain effectivethe Evaluation Date, our disclosure controls and procedures because ofwere effective at 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 financial results impacted by the control deficiencies including the validation of data underlying key financial models and the addition of substantive logic inspection, fluctuation analysis and testing procedures. 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 additional analyses and other procedures performed, management concluded that the financial statements included in this report fairly present in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented in conformity with GAAP.reasonable assurance level.


Management's Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’sCompany's internal control over financial reporting is a process designed under the supervision of the Company's CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’sCompany's financial statements for external purposes in accordance with GAAP.

Management’sManagement's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’sCompany's assets that could have a material effect on the financial statements.

As of December 31, 2017,2019, management assessed the effectiveness of the Company’sCompany's internal control over financial reporting based on the criteria established in “Internal"Internal Control - Integrated Framework," issued by the Committee of Sponsoring Organizations (COSO)COSO of the Treadway Commission ("(the 2013 framework). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2019. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the 2013 framework").effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, as stated in their report, which appears in Part II, Item 8 of this Annual Report on Form 10-K.

Remediation of Previously Reported Material Weaknesses

Management has completed the testing of design and operating effectiveness of the new and enhanced controls related to the following previously reported material weaknesses. 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. Management considers these material weaknesses remediated:

Based on this assessment, management determined that the Company did not maintain effective internal control over financial reporting as of December 31, 2017, because of the material weaknesses noted below. These deficiencies could result in misstatements of the accounts and disclosures noted below that in turn, would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.Control Environment


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1.Control Environment

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

We have identified

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To address this material weakness, 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 weaknesses emanatingestimates, 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.

The following previously reported material weakness emanated from SC:

2.SC’s Control Environment, Risk Assessment, Control Activities and Monitoring
SC’s Control Environment, Risk Assessment, Control Activities and Monitoring

We did not maintain effective internal control over financial reporting related to the following areas: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 for the risk and controls self-assessment process, which contributed to a lack of clarity about ownership of risk assessments and control design and effectiveness.
There was insufficient governance, oversight and monitoring of the credit loss allowance and accretion processes and a lack of defined roles and responsibilities in monitoring functions.

ThisTo address this material weakness, in control environment contributes to each ofthe Company has taken the following identified material weaknesses emanating from SC:

3. Development, Approval, and Monitoring of Models Used to Estimate the Credit Loss Allowance

Various deficiencies were identified in the credit loss allowance process related to review, monitoring and approval processes over models and model changes that aggregated to a material weakness. The following controls did not operate effectively:

Review controls over completeness and accuracy of data, inputs and assumptions in models and spreadsheets used for estimating credit loss allowance and related model changes were not effective and management did not adequately challenge significant assumptions.
Review and approval controls over the development of new models to estimate credit loss allowance and related model changes were ineffective.
Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.

This material weakness relates to the following financial statement line items: the allowance for loan and lease losses, provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.


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4. Identification, Governance, and Monitoring of Models Used to Estimate Accretion

Various deficiencies were identified in the accretion process related to review, monitoring and governance processes over models that aggregated to a material weakness. The following controls did not operate effectively:

Review controls over completeness and accuracy of data, inputs, calculation and assumptions in models and spreadsheets used for estimating accretion were not effective and management did not adequately challenge significant assumptions.
Review and approval controls over the development of new models to estimate accretion and related model changes were ineffective.
Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.

This material weakness relates to the following financial statement line items: loans held for investment, loans held for sale, the allowance for loan and lease losses, interest income - loans, provision for credit losses, miscellaneous (loss)/income, net and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

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

5. Review of Statement of Cash Flows and Footnotes

Management identified a material weakness in internal control over the Company's process to prepare and review the Statement of Cash Flows ("SCF") and Notes to the Consolidated Financial Statements. Specifically, the Company concluded that it did not have adequate controls designed and in place over the preparation and review of such information.

PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, as stated in their report which appears herein.

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

Established regular working group meetings, with appropriate oversight by management, to review and challenge complex accounting matters, strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.
Appointed a Head of Internal Controls with significant public company financial reporting experience and the requisite skillsets in areas important to financial reporting.
Developed a plan to enhance its risk assessment processes, control procedures and documentation.
Established policies and procedures for the oversight of subsidiaries that includes accountability for each subsidiary for maintenance of accounting policies, evaluation of significant and unusual transactions, material estimates, and regular reporting and review of changes in the control environment and related accounting processes.
Reallocated additional Company resources to improve the oversight of subsidiary operations and to ensure sufficient staffing to conduct enhanced financial reporting reviews.
Collaborated with other departments, such as Accounting Policy and Legal, to ensure entity information/data is shared and reviewed accordingly.


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To address the material weakness in SC’s control environment, risk assessment, control activities and monitoring (material weakness 2, noted above), the Company is in the process of strengthening its processes and controls as follows:measures:

Appointed an additional independent director to the Audit Committee of the SC Board with extensive experience as a financial expert in ourSC's industry to provide further experience on the Committee.committee.
Established regular working group meetings, with appropriate oversight by management of both SCthe Company and SHUSASC, 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.

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

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 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.

To address thethis material weaknesses related to the development, approval, and monitoring of models used to estimate the credit loss allowance (material weakness, 3, noted above), the Company has taken the following measures:

Completed a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.
Implemented a more comprehensive monitoring plan for the credit loss allowance with a specific focus on model inputs, changes in model assumptions and model outputs to ensure an effective execution of the Company’s risk strategy.
Implemented improved controls over the development of new models or changes to models used to estimate credit loss allowance.
Implemented enhanced on-going performance monitoring procedures.
Developed comprehensive model documentation.
Enhanced the Company’s communication on related issues with its senior leadership team and the Board, including the Risk Committee and the Audit Committee.
Increased resources dedicated to the analysis, review and documentation to ensure compliance with GAAP and the Company’s policies.

To address the material weaknesses related to the identification, governance and monitoring of models used to estimate accretion (material weakness 4, noted above), the Company has taken the following measures:

Developed a comprehensive accretion model documentation manual and implemented on-going performance monitoring to ensure compliance with required standards.
Automated the process for the application of the effective interest rate method for accreting discounts, subvention payments from manufacturers and other origination costs on individually acquired RICs.
Implemented comprehensive review controls over data, inputs and assumptions used in the models.
Strengthened review controls and change management procedures over the models used to estimate accretion.
Increased accounting resources with qualified, permanent resources to ensure an adequate level of review and execution of control activities.


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To address the material weaknesses in the review of statement of cash flows and footnotes (material weakness 5, noted above), the Company is in the process of strengthening its controls as follows:

Improved the review controls over financial statements and the related disclosures to include a more comprehensive disclosure checklist and improved review procedures from certain members of the management.
Designed and implemented additional controls over the preparation and the review of the SCF and Notes to the Consolidated Financial Statements.
StrengtheningStrengthened the review controls, reconciliations and supporting documentation related to the classification of cash flows between operating activities and investing activities in the SCF.
ImplementingEnhanced 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 areas, as of December 31, 2017, we are still in the process of implementing the enhanced processes and procedures and testing the operating effectiveness of these improved controls. We believe our actions will be effective in remediating the material weaknesses, and we continue to devote significant time and attention to these efforts. In addition, the material weaknesses will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weaknesses are not remediated as of December 31, 2017.

Remediation Status of Previously Reported Material Weaknesses

Management has completed the implementation of remediation efforts related to the following previously reported material weaknesses emanating from SC and considers the following remediated:

Application of Effective Interest Method for Accretion

The Company’s policies and controls related to the methodology used for applying the effective interest rate method in accordance with GAAP, specifically as it relates the review of key assumptions over prepayment curves, pool segmentation and presentation in financial statements either were not designed appropriately or failed to operate effectively. Additionally the resources dedicated to the reviews were not sufficient to identify all relevant instances of non-compliance with policies and GAAP and did not sufficiently review supporting methodologies and practices to identify variances from the Company’s policy and GAAP.

To remediate this material weakness, we formalized a process for documenting assumptions related to the accretion methodology and added additional review procedures of key assumptions to ensure the Company's accretion methodology conforms to Company policy and GAAP. Additionally, we increased accounting resources with qualified, permanent employees to ensure an adequate level of review and execution of control activities.

Methodology to Estimate Credit Loss Allowance

The Company’s policies and controls related to the methodology used for estimating the credit loss allowance in accordance with GAAP, specifically as it relates to the calculation of impairment for TDRs separately from the general allowance on loans not classified as TDRs, the consideration of net discounts and the calculation of selling costs when estimating the allowance either were not designed appropriately or failed to operate effectively. Additionally the resources dedicated to the reviews were not sufficient to identify all relevant instances of non-compliance with policies and GAAP and did not sufficiently review supporting methodologies and practices to identify variances from the Company’s policy and GAAP.

To remediate this material weakness, we conducted a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks were addressed. Additionally, we enhanced the documentation and review controls over the estimation of the credit loss allowance to ensure the Company’s policies and procedures align with GAAP. Specifically, the enhanced controls ensure that the calculation of impairment for TDRs is evaluated separately from the general allowance on loans not classified as TDRs and that net discounts and selling costs are considered when estimating the allowance. In addition, we formalized controls for documenting assumptions and decisions related to the credit loss allowance.


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Loans Modified as TDRs

The following controls over the identification of TDRs and inputs used to estimate TDR impairment did not operate effectively:

Review controls of the TDR footnote disclosures and supporting information did not effectively identify that parameters used to query the loan data were incorrect.
A review of inputs used to estimate the expected and present value of cash flows of loans modified in TDRs did not identify errors in types of cash flows included and in the assumed timing and amount of defaults and did not identify that the discount rate was incorrect.

To remediate this material weakness, management implemented a comprehensive monitoring plan for TDRs with a specific focus on new and enhanced controls over the completeness and accuracy of the population of TDRs, inputs and assumptions to the model used to estimate the expected and present value of cash flows and enhanced disclosure controls. In addition, we increased resources dedicated to the analysis, review and documentation over TDRs to ensure compliance with GAAP and the Company’s polices. Finally, we implemented enhanced controls over the review of financial statements disclosures for TDRs to ensure compliance with the Company's policies and GAAP.

Review of New, Unusual or Significant Transactions

Management identified an error in the accounting treatment of certain transactions related to separation agreements with the former Chairman of the Board and CEO of SC. Specifically, controls over the review of new, unusual or significant transactions related to application of the appropriate accounting and tax treatment to this transaction in accordance with GAAP did not operate effectively in that management failed to detect as part of the review procedures that regulatory approval was a prerequisite to recording the transaction and that approval had not been obtained prior to recording the transaction and therefore should have not been recorded.

To remediate this material weakness, we formalized controls to identify and evaluate all new, unusual or significant transactions, including instituting regular periodic meetings with key members of management to ensure that such transactions are recorded in accordance with the Company's policies and GAAP.

In addition to the above items emanating from SC, management has also completed the remediation efforts relating to the following previously reported material weakness identified at SHUSA:

Goodwill Impairment Assessment

In connection with the annual goodwill impairment assessment, the Company determined the controls over the review of the calculation of the carrying value of the Company’s SC reporting unit used in the Company’s Step One goodwill impairment tests did not operate effectively. Additionally, the Company determined there was a material weakness in the operating effectiveness of the review control over data utilized in Step Two of the impairment test for the SC reporting unit.

To remediate this material weakness, we strengthened the precision of the review of the carrying value calculation. We improved the reconciliation of carrying value inputs to key information sources, sourcing data (e.g., risk-weighted assets) from certified data providers, such as our Regulatory Reporting Department.

The Company elected early adoption of ASU 2017-04 “Simplifying the Test for Goodwill Impairment” on the date of its annual impairment test, October 1, 2017. The objective of the ASU was to simplify the accounting for goodwill impairment and eliminated Step Two from the impairment test. Thus, adoption of ASU 2017-04 results in inherent remediation of the material weakness in the operating effectiveness of the review control over data utilized in Step Two of the impairment test for the SC reporting unit given that Step Two is no longer applicable.

Changes in Internal Control over Financial Reporting

Except as described above under Remediation Status of Previously Reported Material Weaknesses, thereThere were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by RuleRules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three monthsquarter ended December 31, 20172019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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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.


ITEM 9B - OTHER INFORMATION

None.

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ITEM 9B - OTHER INFORMATION

None.


PART III


ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Our Board has established the following standing Board level committees of SHUSA: Audit Committee, CTMC, Nominations Committee, and SHUSA/US Risk Committee. Certain information relating to the directors of SHUSA as of the filing date of this Form 10-K is set forth below.

Directors of SHUSA

Jose DoncelAna Botin - Age 56.  Mr. Doncel59. Ms. Botín was appointed to SHUSA’s Boardand the Bank’s Boards in July 2016, SBNA’s Board in June 2016, and SC’s Board in December 2015.  He serves asOctober 2019. She is the Executive Chairman of Banco de Albacete, S.A., AdministracióSantander and has held this position since September 2014.  Ms. Botín de Bancos Latinoamericanoshas served as a director of Santander S.L., Grupo Empresarial Santander, S.L., Santander Investment I, S.A., Ablasa Participaciones, S.L.since 1989, where she currently chairs its Executive and Finsantusa, S.L.,Innovation and Technology Committees and serves as a member of the BoardsResponsible Banking, Sustainability and Culture Committee. She joined Santander after beginning her banking career at JPMorgan Chase & Co., where she held various positions in its Treasury and Latin American divisions from 1980 to 1988. From 2010 to 2014, Ms. Botín was CEO of Santander Holding Internacional,UK, where she currently serves as a Non-Executive Director. She previously served as Executive Chairman of Banco Español de Credito, S.A., Santusa Holding, S.L., Ingenieria de Software Bancario, S.L., Geoban, S.A., Produban Servicios Informáticos Generales, S.L. and Banco Popular Espanol S.A. Mr. Doncel (Banesto). Since 2014, Ms. Botin has served as a senior executive of Santander and certain predecessor companies since 1993, currently as Senior Executive Vice Presidentthe Chairman and Director of the AccountingUniversia España, Red De Universidades, S.A. and Control division since October 2014. He has also served as the Director of the Corporate Division of Internal Audit from June 2013 to October 2014Chairman and Director of Universida Holding, S.L. She is the Retail Banking Management Control Areafounder and Chair of CyD Foundation, which supports and promotes the contribution made by Spanish universities to economic and social development in the country, and Fundación Empieza por Educar, the Spanish subsidiary of the global NGO Teach for All which trains talented young graduates to be teachers. Ms. Botín is also the founder and Vice Chair of Fundación Empresa y Crecimiento, which finances small and medium sized companies in Latin America. She is a Board Member of the Coca-Cola Company and sits on the Advisory Board of the Massachusetts Institute of Technology. Ms. Botín graduated from April 2013 to June 2013.  Prior to his time with Santander, he worked for Arthur Andersen Auditores, S.A., Division of Financial Institutions. Mr. Doncel holds a degree in Economic and Business Sciences from Universidad Complutense de Madrid.  HeBryn Mawr College. She brings extensive global banking industry leadership experience to the Board as a result of hisher professional and Board and professional experience.

Stephen A. Ferriss - Age 72.73. Mr. Ferriss was appointed to SHUSA’s Board in 2012 and is a member of its AuditCTMC and CompensationAudit Committees. In 2018, he was appointed to BSI's Board, andwhere he is Chairman of its Risk Committee and a member of its Audit Committee. Since 2015, he has served as Chairman of the Board of Santander BanCorp, where he is a member of the Compensation and Nomination Committee, and as the Chairman of the Board of Santander BanCorp’s banking subsidiary, Banco Santander Puerto Rico.BSPR. He was appointed to SC’s Board in 2013 and iswhere he has served as Vice Chairman of itsthe Board since 2015, Chairman of SC's Risk Committee, and as a member of itsSC's Audit, Compensation and Executive Committees. From 2012 to 2015, Mr. Ferriss served on the Board of the Bank, where he was a member of the Audit, Enterprise Risk, and Bank Secrecy Act/Anti-Money Laundering Oversight Committees. From 2006 to June 2016, Mr. Ferrisshe was Chairman of the Nominations Committee and a senior independent director of Management Consulting Group PLC, London, a publicly traded company on the London Stock Exchange, and he servedas well as Chairman of its Audit Committee from 2008 to 2011. From 2007 to 2013, hefor three years. He previously served on the boardBoard of Iberchem in Madrid, Spain. From 1999 to 2002, Mr. Ferriss servedhas also held roles as President and Chief Executive OfficerCEO of Santander Central Hispano Investment Services,Securities, Inc. Prior to his service for Santander Central Hispano Investment Services, Inc., Mr. Ferriss held various roles at Bankers Trust Global Investment Bank in Madrid, London and New York. Prior to his time at Bankers Trust Global Investment Bank, Mr. Ferriss served 19 yearsYork and several leadership positions at Bank of America. Mr. Ferriss received a B.A. from Columbia College and an M.I.A. from Columbia University’s School of International Affairs. He brings extensive global experience to the Board as a result of his Board and professionalfinancial services industry experience.

Alan Fishman - Age 71.73. Mr. Fishman was appointed to SHUSA’s and the Bank’s Boards in 2015. He is a member of SHUSA’s Audit and SHUSA/US Risk Committees and isserves as the Bank's Lead Independent Director, where he serves as the Chairman of the Bank's Audit Committee and a member of the Compliance, Executive,Bank’s Nominations and Risk Committees. Mr. Fishman was also appointed to the SIS Board in 2017, and, since 2016,where he serves as a memberChairman of the Combined U.S. Operations Risk Committee, which is a sub-committee of Santander’s Executive Risk Committee.Board. Since 2008, Mr. Fishman has served as Chairman of the Board of Ladder Capital, a leading commercial real estate finance company, and, since 2005, has served on the Board of Continental Grain Company. Mr. Fishman has had an extensive career in the financial services industry. From 2008 to 2013, he servedindustry, including serving as Chairman of the Board of Beech Street Capital, and for a brief time in 2008, served as Chief Executive OfficerCEO of Washington Mutual, Inc. Prior to serving with Washington Mutual, he served as, Chairman of Meridian Capital Group, and as President of Sovereign Bancorp. From 2001 to 2006, Mr. Fishman served as, President and Chief Executive OfficerCEO of Independence Community Bank to its sale to Sovereign Bank in 2006. Previously, Mr. Fishman served asand President and Chief Executive OfficerCEO of Conti Financial Corp. He was also a private equity investor, focused on financial services, at Neuberger and Berman, Adler & Shaykin, and at his own firm, Columbia Financial Partners LP. He held a variety of senior executive positions at Chemical Bank and American International Group. He is active in the community, having served as Chairman of the Brooklyn Academy of Music from 2002 to January 20172016, Chairman of the Brooklyn Navy Yard from 2002 to 2014, and currently serving as Chairman of the Brooklyn Community Foundation. He received a B.A. from Brown University and an M.A. from Columbia University. Mr. Fishman brings extensive leadership experience and financial services industry expertise to the Board.


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Hector Grisi - Age 53. Mr. Grisi was appointed to SHUSA’s Board in January 2020. He is the Executive President and CEO of Banco Santander Mexico, and has held this position since 2015. He currently serves on the Boards of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo and Santander Vivienda. Prior to joining Banco Santander Mexico, Mr. Grisi was President and CEO of Credit Suisse Mexico from 2001 to 2015 and served on its Board of Directors during that time. Mr. Grisi is an active philanthropist, and board member of three leading cultural and social organizations in Mexico, including the Museum of Fine Arts, the Chapultepec Zoo, and the Juconi Foundation that supports families, youth, and children affected by violence, poverty, and marginalization. He graduated with honors from the Universidad Iberoamericana. Mr. Grisi brings extensive banking and leadership experience to the Board.

Juan Guitard- Age 58.60. Mr. Guitard was appointed to SHUSA’s Board in 2014 and is a member of its CompensationCTMC and SHUSA/US Risk Committees. He has served as a member of the Bank's Board since March 2016 and BSI's Board since August 2016, where he is a member of the Risk and Compensation Committees. Since June 2016, he has also been a member of the Combined U.S. Operations Risk Committee. HeMr. Guitard currently serves as Head of Internal Audit of Santander. He has worked within Santander since 1999, having also served as Head of its Corporate Risk Division, Head of its Recovery and Resolution Plans Corporate Project, Head of its Corporate Legal Department, and Head of its Corporate Investment Banking Division. He has served on the Boards of Santander, Banco Español de Crédito, S.A., and Banco Hipotecario de España. He holds a law degree from the Universidad Autónoma de Madrid. Mr. Guitard brings extensive risk and audit experience to the Board.

Edith Holiday - Age 68. Ms. Holiday joined the SHUSA Board in December 2019 and serves as a member of its CTMC and Risk Committee. She joined the SC Board in November 2016 and serves as Chairman of its Compensation and Talent Management Committee and as a member of the Regulatory and Compliance Oversight Committee. Ms. Holiday is a member of the Board of Directors of Hess Corporation, White Mountains Insurance Group Ltd., and Canadian National Railway, and is a member of the Boards of Directors or Trustees of various investment companies in the Franklin Templeton Group of Funds, serving as Lead Trustee of each of the Franklin Funds and Templeton Funds. She also served on the Board of Directors of RTI International Metals, Inc. from 1999 to 2015. Ms. Holiday also has extensive legal and regulatory experience, having previously served as Assistant to the President of the United States and Secretary of the U.S. Cabinet, General Counsel of the U.S. Treasury Department and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison of the U.S. Treasury Department. Ms. Holiday holds a B.S. and a J.D. from the University of Florida and is a member of the State Bars of Florida, Georgia and the District of Columbia. She brings extensive experience in legal and regulatory matters and in public service to the Board.

Thomas S. Johnson - Age 77.79. Mr. Johnson was appointed to SHUSA’s and the Bank’s Boards in 2015. He serves as SHUSA’s Lead Independent Director, Chairman of its Audit Committee, and a member of its ExecutiveNominations and SHUSA/US Risk Committees and the Bank’s Audit and Risk Committees. He serves as a member of the Bank’s Audit, Compliance, and Risk Committees. Since June 2016, he has also been a member of the Combined U.S. Operations Risk Committee. Mr. Johnson serves on the Boards of the Institute of International Education, the Inner-City Scholarship Fund, the National 9/11 Memorial and Museum Foundation, the Norton Museum of Art, and the Lower Manhattan Development Corporation. From 1993 to 2004, he served as Chairman and Chief Executive Officer of GreenPoint Financial Corp. and GreenPoint Bank. Prior to his tenure at GreenPoint, Mr. Johnson served as President and Director of Manufacturers Hanover Trust Company from 1989 to 1991. Mr. Johnson’sstarted his banking career in banking started in 1969 at Chemical Bank and Chemical Banking Corporation, where he ultimately became President and Director. He previously served as Chairman and CEO of GreenPoint Financial Corp. and GreenPoint Bank and as President and Director in 1983.of Manufacturers Hanover Trust Company. In addition, Mr. Johnson is a former director of Alleghany Corporation, R.R. Donnelly & Sons Co. Inc., The Phoenix Companies, Inc., Freddie Mac,FHLMC, North Fork Bancorporation, Prudential Life Insurance Company of America, and Online Resources Corp. FromCorp and, from 1966 to 1969, he served as a special assistant to the Comptroller of the U.S. Department of Defense in the Pentagon. He received a B.A. in Economics from Trinity College and an M.B.A., with distinction, from Harvard Business School. Mr. Johnson brings extensive leadership experience in the banking industry to the Board.

Catherine Keating - Age 56. Ms. Keating was appointed to SHUSA’s and the Bank’s Boards in 2015. She serves as Chair of SHUSA’s Compensation Committee and is a member of its Audit and Executive Committees. She also serves as Chair of the Bank’s Compensation Committee and a member of its Compliance and Risk Committees. Since 2015, she has served as Chief Executive Officer of Commonfund, an asset management firm that primarily serves not-for-profit institutions and pension plans. From 1996 to 2015, she served in multiple management roles at JPMorgan Chase & Co., including Head of Investment Management Americas at J.P. Morgan Chase & Co. where she was responsible for more than $700 billion in client assets, Chief Executive Officer of JPMorgan Chase’s U.S. Private Bank, and as Global Head of its Wealth Advisory and Fiduciary Services business. She was a director of the JPMorgan Foundation and executive sponsor of JPMorgan Chase’s Women’s Interactive Network. Prior to joining JPMorgan Chase, she was a partner at Morgan, Lewis & Bockius LLP. She received a B.A. from Villanova University and a law degree from the University of Virginia School of Law. She is on the Boards of the University of Virginia Law School Foundation, Inner-City Scholarship Fund and the former Chair of the Villanova University Board. Ms. Keating brings to the Board extensive experience as a former attorney and as a leader in the financial services industry.

Javier Maldonado - Age 55.57. Mr. Maldonado has served as Vice Chairman of SHUSA’s Board since 2015, and he is a member of SHUSA’s Executivethe Nominations and SHUSA/US Risk Committees.Committee. He was appointed to SC’s Board in 2015 and is a member of its Compensation, Executive,Nominations, and Regulatory and Compliance Oversight Committees. He was appointed to the Bank’s Board in 2015 and is a member of its Risk Committee. Mr. Maldonado was appointed to BSI's Board in August 2016 and is a member of its Executive Committee. Since 2015, he has served as a Director of Santander BanCorp, where he is a member of its Executive Committee and is Chairman of theits Compensation and Nomination Committee, andCommittee. Mr. Maldonado also serves as a Director of Banco Santander Puerto RicoBSPR and of SIS. He served as Acting Chairman of SIS' Board from April 2016 to April 2017. Since June 2016, he has also served as a member of the Combined U.S. Operations Risk Committee. Mr. Maldonado has served on the Board of the Saudi Hollandi Bank Riyadh since 2008. He currently serves as Senior Executive Vice President, Global Head of Cost Control for Santander. Since 1995, he has held numerous management positions with Santander, including Senior Executive Vice President, Head of the General Directorate for Coordination and Control of Regulatory Projects in the Risks Division, and Executive Committee Director and Head of Internal Control and Corporate Development for Santander UK. In addition, Mr. Maldonado served on the Board of Alawwal Bank (formerly known as the Saudi Hollandi Bank Riyadh) from 2008 to 2019. Prior to his time with Santander, Mr. Maldonado was an attorney with Baker & McKenzie and Head of the Corporate and International Law Department at J.Y. Hernandez-Canut Law Firm. He received a law degree from UNED University and a law degree from Northwestern University. Mr. Maldonado brings to the Board extensive corporate and international legal experience, as well as leadership in the financial services sector.


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Victor MatarranzGuy Moszkowski - Age 41.62. Mr. MatarranzMoszkowski was appointed to SHUSA’s and the Bank’s Boards in 2015January 2020 and to BSI's Board in 2018. He isserves as a member of SHUSA’s CompensationAudit and ExecutiveRisk Committees and as a member of the Bank’s Risk and Compensation Committee. He has been a member ofand Talent Management Committees. Mr. Moszkowski joined the Portal Universia SABSI Board since 2015in January 2020, and the Santander Fintech Board from 2014 to 2017. Since September 2014, Mr. Matarranz has served as Senior Executive Vice President of Santander, and in September 2017 he was appointed as Head of Santander's Wealth Management division. From September 2014 to September 2017, he served as Head of Group Strategy at Santander and Chief of Staff to Santander's Executive Chairman. From 2012 to 2014, Mr. Matarranz worked at Santander UK, where he was the Director of Strategy, the Chief of Staff to the Chief Executive Officer, and a member of the Executive Committee. From 2004 to 2012, he worked at McKinsey & Company in Madrid, where he served as a partner, working primarily in financial services practice advising local and global banks on strategic and retail banking issues. He received a Master’s Degree in Telecommunications Engineering from the Politechnical University of Madrid and an M.B.A., with a specialization in Finance, from the London Business School, where he graduated with distinction. Mr. Matarranz brings expertise in financial services and retail banking strategy and significant international experience to the Board.

Juan Olaizola - Age 56. Mr. Olaizola was appointed to SHUSA’s and the Bank’s Boards in 2015. He serves as a member of the Audit, Risk Committee of SHUSA's Board and the Bank's Board. Since June 2016, he has also been a member of the Combined U.S. Operations Risk Committee. Since 2013, he has served as a Director of Santander Insurance Services UK LtdCompensation Committees. Mr. Moszkowski founded and since 2014, as a member of the advisory board of Fintech Investments. In addition, he is a former a Director of VISA Europe, where he served from 2010 to 2013 and from 2015 to 2016. Since 2005, Mr. Olaizola has served as Chief Operating Officer responsible for Technology and Operations at Santander UK. From 1986 to 2003, Mr. Olaizola worked at IBM Global Services, having served as the Vice President of EMEA (IBM Financial Services Consulting) in London from 2000 to 2004 and as the Vice President of Professional Services in the U.S. from 1999 to 2000, among other roles. He graduated from Universidad Autonoma and received an M.B.A. from IESE Business School. Mr. Olaizola brings significant financial services and technology experience to the Board.

Scott Powell - Age 55. Mr. Powell leads Santander US as Santander's U.S. Country Head and Chief Executive Officer of SHUSA. He was appointed Director, President and CEO of SHUSAAutonomous Research US LP, a specialized independent provider of institutional research focused exclusively on financial sector companies, from 2012 until his retirement in 2019. Prior to his tenure at Autonomous Research, Mr. Moszkowski led large analyst teams on financial research at Citigroup and Merrill Lynch, becoming the Bankhead of all U.S. financials research at Merrill Lynch. Mr. Moszkowski also worked at J.P. Morgan & Co. as a Managing Director in 2015Investor Client Management, and to SC's Board in 2016. He servedbegan his career as President and CEO of the Bank until he was appointed SC’s President and CEO in 2017.a Latin America corporate lending officer for Bankers Trust Co. He is a member of SHUSA’s,FINRA’s Economic Advisory Committee and also serves on SCO Family of Services Board of Directors, where he chairs the Bank’sInvestment Committee. Mr. Moszkowski graduated from Harvard University and SC's Executive Committees. From 2013 to 2014, Mr. Powell was Executive Chairmanthe Wharton School of National Flood Services Inc. From 2002 to 2012, he was employed at JPMorgan Chase & Co. and its predecessor Bank One Corporation. During this time, he served as Head of Home Lending Default from July 2011 to February 2012, Head of JPMorgan Chase’s Banking and Consumer Lending Operations from June 2010 to June 2011, Chief Executive Officer of Consumer Banking from January 2007 to May 2010, Head of its Consumer Lending businesses from March 2005 to December 2006, and Chief Risk Officer, Consumer from 2004 to February 2005. From May 2003 through June 2004, Mr. Powell was President of Retail Lending at Bank One, and from February 2002 to April 2003, he was its Chief Risk Officer, Consumer. Mr. Powell is a director of the Phipps Houses and The END Fund in New York City. He received a B.A. from the University of Minnesota and an M.B.A. from the University of Maryland. In addition, he has held a variety of senior positions at JPMorgan Chase and spent 14 years at Citigroup/Citibank in a variety of risk management roles.Pennsylvania. Mr. PowellMoszkowski brings extensive experience in retail banking, risk managementleadership and consumer and auto lendingfinancial services industry expertise to the Board.

Henri-Paul Rousseau - Age 69.71.  Mr. Rousseau was appointed to SHUSA’s Board in March 2017 and the Bank’s Board in 2015. He serves as Chairman of the SHUSA/US Risk Committee, and as a member of the CTMC. Mr. Rousseau also serves as Chairman of the Bank’s Board Risk and Compliance CommitteesCommittee and as a member of its Audit, Compensation, and ExecutiveNominations Committees. HeMr. Rousseau joined the BSI Board in January 2020, where he serves as Chairman of its Audit Committee and as a member of SHUSA's Boardthe Compensation and Risk and Compensation Committees. From 2009 until his retirement effectiveMr. Rousseau served as Vice President of Power Corporation International from January 2018 through July 2018. He has been a visiting professor at the Paris School of Economics since September 2018 and is currently an adjunct professor at Hautes Études Commerciales in Montréal. From 2012 until 2017, Mr. Rousseau served as Vice-Chairman of the Boards of Power Corporation of Canada and Power Financial Corporation, whileCorporation. He also servingserved on the Boards of Great-West Lifeco Inc. and IGM Financial Inc. and those of their respective subsidiaries. Since 2011,subsidiaries from 2012 to 2017. Mr. Rousseau has also served ason the Board of Noovelia, Inc. since 2017 and is currently the Chairman of the Board of Montreal Heart Institute Foundation, andNoovelia. Additionally, he served on its Board since 1995. He alsohas served as Chairman of the Board of the Tremplin Sante Foundation since 2015.2015, Chairman of the Board of Montreal Heart Institute Foundation from 2011 to 2017, having served on its Board since 1995, and Co-Chair of the Finance Committee of the Orchestra Symphonique de Montreal Foundation from 2010 through 2014. Mr. Rousseau is the former President and CEO of the Caisse de dépôt et placement du Québec. Prior to that role, he was the President and CEO of the Laurentian Bank of Canada. Previously, he was a Professor of Economics at both Université Laval and Université du Québec à Montréal. He received a B.A. in Economics from the University of Sherbrooke and an M.A. and Ph.D. in Economics from the University of Western Ontario. He was a Professor of Economics at both Université Laval and Université du Québec à Montréal, and he has been selected to serve as visiting professor at the Paris School of Economics during the 2018-2019 academic year. Mr. Rousseau brings extensive experience ininternational leadership and financial services industry managementexperience to the Board.


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T. Timothy Ryan, Jr. - Age 72.74. Mr. Ryan was appointed to SHUSA’s and the Bank's Boards in December 2014 and serves as Chairman of each, Board andas well as of their respective Executive Committees.Nominations Committees, the Bank’s Compensation Committee and the CTMC. He was appointed to BSI's Board in July 2016, and he serves as Chairman of its Board and Compensation and Executive Committees and asis a member of its Audit and Risk Committees. Mr. Ryan served as Global Head of Regulatory Strategy and Policy of JPMorgan Chase & Co. from February 2013 to January 2015. From December 2008 to February 2013, heMr. Ryan was previously President and Chief Executive OfficerCEO of the Securities Industry and Financial Markets Association and Chief Executive OfficerSIFMA, CEO of the Global Financial Markets Association, (“SIFMA”), SIFMA's global affiliate. Prior to 2008, Mr. Ryan wasaffiliate and Vice Chairman, Financial Institutions and Governments, at JPMorgan Chase. Before joining JPMorgan Chase in 1993, Mr. Ryan also previously served as the Directordirector of the Office of Thrift Supervision, a Directordirector of the Resolution Trust Corporation and a Directordirector of the FDIC. Since 2011, he has served on the Board of Power Corp. of Canada and Power Financial Company and has served as Chairman of its Audit Committee and as a member of its Executive, Compensation, Investment and Risk Committees. Since 2010, Mr. Ryan also has served on the Board of Great West LifeCo Inc. and is a member of its Compensation, Executive, and Risk Committees. He also served as a director of Markit Ltd. infrom 2014 to 2015 and of Lloyds Banking Group from 2009 to 2013. He received a B.A. from Villanova University and a law degree from American University. Mr. Ryan brings to the Board extensive experience as a former regulator and banker and a deep understanding of the U.S. banking market, regulatory environment and financial services industry management.

Richard SpillenkothenTim Wennes - Age 68.52. Mr. SpillenkothenWennes has served as Santander’s US Country Head and SHUSA’s President and CEO since December 2019. Additionally, since September 2019, he has served as President and CEO of the Bank. Mr. Wennes was appointed to SHUSA’s Board in December 2019 and the Bank’s BoardsBoard in 2015.September 2019. He serves as Chairman of SHUSA’s Risk Committee and a member of its Executive and Compensation Committees, and as a member of SHUSA’s and the Bank’s Audit, Compliance,respective Nominations Committees. Prior to joining the Bank, Mr. Wennes was the West Coast President and Risk Committees.Head of the Regional Bank at MUFG Union Bank from 2008 to 2019, where he oversaw Commercial Banking, Real Estate Industries, Consumer Banking and Wealth Management. He was also responsible for MUFG Union Bank’s Enterprise Marketing and Corporate Social Responsibility programs. Mr. SpillenkothenWennes serves as the Lead Director of Operation Hope and is a Corporate Advisory Board Member of the University of Southern California’s Marshall School of Business. From 2012 to 2019, he served as the ChairmanPacific Region Trustee of the SBNA Risk Committee from 2015 to September 2016. He serves as ChairmanBoys and Girls Club of America. Mr. Wennes is a graduate of the Combined U.S. Operations Risk Committee. From 2007 to 2011, he served as a consultant and advisor at Deloitte & Touche LLP. From 1976 to 2006, Mr. Spillenkothen worked for the Federal Reserve,University of Southern California, where he served as Director of the Federal Reserve’s Division of Banking Supervision and Regulation. In this capacity, he was the senior Federal Reserve staff official with responsibility for banking supervision and regulation policy. He worked with the Federal Reserve Banks, which have day-to-day responsibility for supervising BHCs and financial holding companies, state member banks, and the U.S. activities of foreign banks. He also coordinated financial institution supervisory policy with other federal, state, and foreign banking authorities, and with the international supervisory coordinating bodies. He served on the Basel Committee on Banking Supervision from 1992 to 2006, and was Chairman of the Board of the Association of Supervisors of Banks of the Americas from 2003 to 2006. From 2013 to 2015, Mr. Spillenkothen served on the Board of Mitsubishi UFJ Securities (USA) as an independent non-executive director, serving on the Risk, Audit and Compensation Committees. In February 2017, he joined the Rappahannock County, Virginia Food Pantry Board.received a bachelor’s degree in Business Administration. He received an A.B.M.B.A. in International Business from HarvardCalifornia State University and an M.B.A. from the University of Chicago.Fullerton. Mr. SpillenkothenWennes brings extensive leadership, knowledge and experience as a former regulatorin commercial banking, consumer banking and a deep understanding of the U.S. banking market, regulatory environment, and financial services industrywealth management to the Board.


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Executive Officers of SHUSA

Certain information, including the principal occupation during the past five years, relating to the executive officers of SHUSA as of the filing date of this filingForm 10-K is set forth below:

Mahesh AdityaJuan Carlos Alvarez de Soto - Age 56.49. Mr. AdityaAlvarez de Soto has served as Chief Operating OfficerCFO for SHUSA and Seniorthe Bank since September 2019. He is a member of SC’s Board of Directors and is a member of each of SHUSA’s and the Bank’s CEO Executive ViceCommittees. From October 2017 to September 2019, Mr. Alvarez de Soto served as the CFO for SC. From 2009 to 2017, he was the Treasurer for SHUSA, overseeing SHUSA’s liquidity risk management, asset liability management and treasury functions.  In addition, he currently serves as Director and President of the Santander Consumer USA Foundation. Mr. Alvarez de Soto holds an M.S. in Finance from George Washington University and a B.S. in Management from Tulane University. He is also a Chartered Financial Analyst.

Sandra Broderick - Age 61. Ms. Broderick has served as Head of Operations for SHUSA since MayOctober 2019 and of SC since October 2017, and is a member of SHUSA’s CEO Executive Committee. She is responsible for aligning scope, priorities and approach across U.S. operating units and key functions, including Business Continuity Management, Facilities, and the Business Control Officer community. Prior to joining SC and SHUSA, Mr. AdityaMs. Broderick served as Chief Risk Officer for Visa, Inc. from June 2014 to February 2017. Prior to that, heExecutive Vice President, Operations Executive at U.S. Bank in 2017, where she oversaw consumer originations and servicing. She has also served as Retail Bank/Mortgage Chief Risk Officer forManaging Director, Operations Executive at JPMorgan Chase from April 20112002 to June 2014. Mr. Aditya earned2017. Ms. Broderick holds a Bachelor of Engineering from BMS College of Engineering and an M.B.A.Bachelor’s in Business Administration from the FacultyState University of Management Studies.New York at Buffalo.

David CornishDan Budington - Age 57. 48.Mr. CornishBudington has served as Chief AccountingStrategy Officer Controller and Executive Vice President of SHUSA and SBNA since May 2017, and he is Chairman of the Company’s Disclosure Committee. Prior to joining SHUSA and the Bank, Mr. Cornish served as Deputy Controller and Senior Vice President for American Express Company from August 2004 to March 2017, Partner for KPMG LLP from June 2002 until July 2004 and for Arthur Anderson from June 1983 to May 2002. Mr. Cornish holds a CPA he earned a B.S. in Accounting from Montclair State University.


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Madhukar Dayal - Age 53. Mr. Dayal has served as Chief Financial Officer and Senior Executive Vice President of SHUSA and the Bank since April 2016,January 2020 and he is a member of each of SHUSA’s and the Bank’s CEO Executive Committees. In September 2017,He joined Santander US in 2014 and served in a number of roles in the Finance organization, most recently as Executive Director of Financial Planning & Analysis. Prior to joining Santander US, Mr. Dayal was appointedBudington spent over a decade as an investment banker focused on advising financial institutions on mergers and acquisitions and capital raising, working for leading investment banks including Guggenheim Securities, Deutsche Bank and Merrill Lynch. Prior to his career in investment banking, Mr. Budington worked as a management consultant advising middle market companies on strategy and performance management. He holds a Masters of Business Administration in Finance and Accounting from the University of Rochester Simon School of Business and a B.S. in Business Administration from the University of Vermont.

Sarah Drwal - Age 43. Ms. Drwal has served as Chief Risk Officer of SHUSA and the Bank since December 2019. From February 2016 to December 2019, Ms. Drwal served as Executive Vice President - Head of Enterprise Risk Management for SHUSA and CEO of SBNA while continuing to serve as its Chief Financial Officer. Also in September 2017, he was appointed toRisk Officer for the Bank’s Board,Consumer and he serves onBusiness Banking. She is a member of each of SHUSA's and the Bank Board’sBank’s CEO Executive Committee.Committees. Prior to joining SHUSA and the Bank, Mr. Dayal served asMs. Drwal was Chief FinancialRisk Officer for BNP Paribas USA Holdings, BancWestConsumer Banking and Bank of the West from 2015 to March 2016, BancWest Corporation and Bank of the West from 2012 to 2015 and for Bank of the West from 2010 to 2012.Prior to Bank of the West, Mr. Dayal helped lead a private equity start-up for JP MorganChase Wealth Management at JPMorgan Chase & Co., Brysam Global Partners, focused on building an international consumer banking franchise. Prior to that, he spent eight years with Citi She also served in a variety of operations and financeexecutive leadership roles in New York, California, South Korearisk, fraud, governance and Brussels. Mr. Dayal earnedstrategy for JPMorgan Chase & Co. and Capital One. Ms. Drwal received a B.A. with honorsMaster’s Degree in Accounting and FinanceMathematics from Nottingham Trentthe University and he is a member of the Chartered Institute of Management Accountants in London. Mr. Dayal serves as a member of the Executive Committee on the Board of Trustees for the Institute of International Banking and in 2017 he was elected as a Board member of the Federal Home Loan Bank of Pittsburgh.Leicester, UK.

Daniel Griffiths - Age 49.51. Mr. Griffiths has served as Chief Technology Officer and Senior Executive Vice President of SHUSA and the Bank since June 2016, and in 2019 he became Head of Technology for North America. He is also a member of each of SHUSA's and the Bank's CEO Executive Committees. From 2011 to 2016, Mr. Griffiths was Chief Technology Officer at TD Bank and, from 2008Bank. Prior to 2011,joining TD Bank, he was Managing Director, Emerging Markets and Commodities, at Barclays Capital. Mr. Griffiths received a Bachelor of ScienceB.S. in Computer Studies from Polytechnic of Wales.

Brian Gunn - Age 45. Mr. Gunn has served as Chief Risk Officer and Senior Executive Vice President of SHUSA since June 2015, and is a member of SHUSA’s CEO Executive Committee. In February 2016, he was named Chief Risk Officer and Senior Executive Vice President of the Bank, and also serves on the Bank’s CEO Executive Committee. He was appointed to the Board of SC in December 2015 and serves as a member of its Risk Committee. Prior to joining SHUSA, Mr. Gunn served as the Chief Risk Officer of Ally Financial Services from 2011 to 2015. Prior to that role, Mr. Gunn was Chief Risk Officer of Ally’s Global Automotive Services division. Before joining Ally, he spent 10 years in a variety of risk management positions at GE Capital, including as Chief Risk Officer of GE Money Canada. Mr. Gunn received a B.S. from Providence College and an M.B.A. from Hofstra University.
Michael Lipsitz - Age 53.55. Mr. Lipsitz has served as Chief Legal Officer and Senior Executive Vice President of SHUSA since August 2015 and of the Bank since FebruaryApril 2016, and is a member of each of SHUSA’s and the Bank’s CEO Executive Committees. Prior to joining SHUSA, Mr. Lipsitz served as Managing Director and General Counsel for Retail and Community Banking at JPMorgan Chase & Co. Priorand, prior to that, Mr. Lipsitz held multiple senior and general counsel roles supporting consumer banking and lending, corporate and regulatory activities, and mergers and acquisitions at JPMorgan Chase & Co. and its predecessor companies. Mr. Lipsitz received a B.A. from Northwestern University and a J.D. degree from Loyola University Chicago School of Law.

Scott PowellTim Wennes - - Age 55.52. For a description of Mr. Powell'sWennes’ business experience, please see "Directors“Directors of SHUSA"SHUSA” above.

Maria Veltre - Age 56. Maria Veltre has served as SHUSA’s Head of U.S. Digital and Innovation and Senior Executive Vice President since September 2018, and is a member of SHUSA’s CEO Executive Committee. Ms. Veltre has served as the Bank’s Chief Marketing and Digital Officer since September 2016. Prior to joining SHUSA and the Bank, Ms. Veltre’s experience was comprised of substantial banking industry experience, including most recently serving as Chief Marketing Officer at Fifth Third Bank from May 2013 to August 2016 and holding multiple leadership positions at Citibank, including Chief Marketing Officer and Managing Director of Small Business Banking. Ms. Veltre received a B.S. in Economics from the Wharton School at the University of Pennsylvania and an M.B.A. from the Stern School of Business at New York University.

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William Wolf - Age 52.54. Mr. Wolf has served as Chief Human Resources OfficerCHRO and Senior Executive Vice President of SHUSA and the Bank since March 2016, and he is a member of each of SHUSA’s and the Bank’s CEO Executive Committees. Prior to joining SHUSA and the Bank, he was Managing Director, Global Head of Talent Acquisition and Development, for Credit Suisse from 2011 to 2016. Mr. Wolf received a B.A. from Dartmouth College and an M.B.A. from the University of North Carolina.

Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires SHUSA's officers and directors, and any persons owning more than ten percent of SHUSA's common stock or any class of SHUSA's preferred stock, to file in their personal capacities initial statements of beneficial ownership, statements of changes in beneficial ownership and annual statements of beneficial ownership with the SEC with respect to their ownership of securities of SHUSA. Persons filing such beneficial ownership statements are required by SEC regulation to furnish SHUSA with copies of all such statements filed with the SEC. The rules of the SEC regarding the filing of such statements require that “late filings” of such statements be disclosed by SHUSA. Based solely on SHUSA's review of copies of such statements received by it and on written representations from SHUSA's directors and officers, SHUSA believes that all such statements were timely filed in 2017. Since Santander's acquisition of SHUSA, none of the filers has owned any of SHUSA's common stock or shares of any class of SHUSA's preferred stock.
Code of Ethics
 
SHUSA adopted a Code of Ethics that applies to the CEO and senior financial officers of the Company including the Chief Financial Officer,CFO, Treasurer, and Chief Accounting Officer and Controller. SHUSA undertakes to provide to any person without charge, upon request, a copy of such Code of Ethics by writing to: Chief Legal Officer, Santander Holdings USA, Inc., 75 State Street, Boston, Massachusetts 02109.
 

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Procedures for Nominations to the SHUSA Board
 
On January 30, 2009, SHUSA became a wholly-owned subsidiary of Santander. Immediately following the effective time of the Santander transaction, because Santander is the sole shareholder of all of SHUSA’s outstanding voting securities, SHUSA's Board no longer has a formal procedure for shareholders to recommend nominees to SHUSA's Board.
 
Audit Committee of the Board
 
SHUSA has a separately-designated standing Audit Committee appointedestablished by and among the Board. Mr. Johnson serves as Chairman of SHUSA's Audit Committee, and Mr.Messrs. Ferriss, Mr. Fishman and Ms. KeatingMoszkowski serve as the other members. Mr. Ryan is an ex officio member of the Audit Committee. The Board has determined that Messrs. Ferriss, Fishman, Johnson, and Ms. Keating are independent andJohnson qualify as audit committee financial experts for purposes ofunder SEC and NYSE requirements applicable to audit committees.


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ITEM 11 - EXECUTIVE COMPENSATION

Compensation Discussion and Analysis
This Compensation Discussion and Analysis relates to our executive officers included in the Summary Compensation Table, who we refer to collectively as the “named"named executive officers.” SHUSA (who we refer to in this Item as “we,” “us,” “or “our”) is a wholly owned subsidiary of Banco Santander S.A. (which we refer to in this Item as “Santander”). We also refer in this Item to our wholly owned subsidiary, Santander Bank, N.A. as "SBNA" and our partially owned subsidiary Santander Consumer USA Inc. as "Santander Consumer." This Compensation Discussion and Analysis explains our role and the role of Santander in setting the compensation of the named executive officers.
For 2017,2019, our named executive officers were:
Scott Powell,Timothy Wennes, our current President and CEO;
Scott Powell, our former President and CEO;
Juan Carlos Alvarez de Soto, our current CFO and Principal Financial Officer;
Madhukar Dayal, our Chief Financial Officerformer CFO and Principal Financial Officer;
Daniel Griffiths, our Chief Technology Officer;
Brian Gunn,Michael Lipsitz, our Chief RiskLegal Officer;
William Wolf, our Chief Human Resources Officer; and
Mahesh Aditya, our former Chief OperatingRisk Officer.


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During 2019, there were significant changes to our executive team:
Mr. Powell resigned from his SHUSA and SC President and CEO, and Santander's U.S. Country Head roles as of December 2, 2019;
Mr. Wennes, who was hired as the President and CEO of SBNA as of September 16, 2019, was appointed President and CEO of SHUSA and Santander's U.S. Country Head as of December 2, 2019; he retained his SBNA positions;
Mr. Aditya was appointed President and CEO of SC as of December 2, 2019, and no longer has any SHUSA responsibilities;
Mr. Dayal transferred to Santander UK to serve as that country’s CFO as of September 16, 2019; and
Mr. Alvarez assumed his current role as of September 16, 2019; he previously served as SC’s CFO since 2017.

Mr. Wennes’s 2019 compensation was largely based on his July 2019 employment letter with SBNA. Mr. Powell did not receive any compensation or severance in connection with his resignation, did not receive a 2019 incentive award, and forfeited all prior year deferred cash and equity awards. Mr. Aditya’s 2019 incentive award was paid by SHUSA given he served most of 2019 in his SHUSA role. Mr. Dayal received a pro rata 2019 incentive award from SHUSA based on his role and service with SHUSA through September 16, 2019. Given his service to both SHUSA and SC during 2019, Mr. Alvarez’s 2019 incentive award was paid proportionately by both entities.

This section of the Compensation Discussion and Analysis provides information with respect to our named executive officers:

the general philosophy and objectives behindunderlying their compensation,
our and Santander`s respective roles and involvement in the analysis and decisions regarding their compensation,
the general process of determining their compensation, and
each component of their compensation, and
the rationale behind the components of their compensation.

Since we are a wholly owned subsidiary of Santander and do not hold public shareholder meetings, we do not conduct shareholder advisory votes.

General Philosophy and Objectives
The fundamental principles that Santander and weSHUSA follow in designing and implementing compensation programs for the named executive officers are to:
attract, motivate, and retain highly skilled executives with the business experience and acumen necessary for achieving our short-term and long-term business objectives;
link pay and performance, while appropriately balancing risk and financial results and complying with regulatory requirements;
align, to an appropriate extent, the interests of management with those of Santander and its shareholders; and
leverage our compensation practices to support our core values and strategic mission and vision.

Santander aimsintends to provide a total compensation packageopportunity that is comparable to that of similar financial institutions in the country in which the named executive officer is located, the United States in our case.located. Within this framework, Santander considers both total compensation and the individual components (i.e., salary and incentives) of each named executive officer’s compensation package independently. Any other perquisites are also considered independently of total compensation. When setting each named executive officer’s compensation for 2017,2019, we took into account market competitive pay, historical pay within Santander, our budget, level of duties and responsibilities, experience and expertise, individual performance, applicable European regulatory guidance that mandates deferrals of variable compensation, and historical track record within the organization for each individual.
Responsibility for determining the compensation of our named executive officers resides both at our level as well as the Santander level. We set forth the various parties involved in determining executive compensation and their specific responsibilities below.
The Parties Involved in Determining Executive Compensation

Both weSHUSA and Santander have responsibility for overseeing and determining the compensation of our named executive officers. We are involved in setting the compensation of all our employees. Santander is involved in overseeing its senior level employees globally, including theour named executive officers. We are involved in setting the compensation of all our employees. We set forth the various parties, including both Board committees and management committees, involved in contributing to and determining executive compensation and their specific responsibilities below.


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The Role of Our Board Compensation and Santander Consumer's Compensation CommitteesTalent Management Committee ("BCMTC")

Our Compensation Committee has the responsibility of,BCTMC is responsible for, among other things:
at least annually, reviewing and approving the terms of our compensation programs, including the Executive Bonus Program,Incentive Plan, in which our named executive officers participate, in accordance with all applicable guidelines that Santander establishes with respect to variable compensation;
reviewing and approving the annual corporate goals and objectives with respect to ourof the President and CEO’s compensation,CEO, evaluating the President and CEO’s performance in light of these corporate goals, and determiningapproving the base and approving thevariable compensation of our President and CEO, based on this evaluationas proposed by the Santander Executive Chairman and in accordance with all applicable guidelines thatCEO and validated by the Santander establishes with respect to variable compensation;Remuneration Committee;
monitoring the performance and regularly approving the design and function of the incentive compensation programs, including the Executive Bonus Program,Incentive Plan, to assess whether the overall design and performance of such programs are consistent with Santander guidelines, are safe and sound, and do not encourage employees, including our named executive officers, to take excessive risk;
reviewing and approving the overall goals and purpose of our incentive compensation programs and providing guidance to our Board and management so that the Board's policies and procedures are appropriately carried out in a manner that achieves balance and is consistent with safety and soundness;
approving amounts paid under the incentive compensation programsExecutive Incentive Plan according to Santander guidelines, including the Executive Bonus Program;
overseeing the administration of our qualified retirement plan and other employee benefit plans under which all eligible employees can participate, including the named executive officers, as well as certain other deferred compensation plans in which our named executive officers are eligible to participate;guidelines;
evaluating the applicability of any malus and clawback provisions to our senior executive officers, including the named executive officers;
at least annually, reviewing and recommending any changes to our outside director compensation program;
reviewing and discussing with management the Compensation Discussion and Analysis required to be included in this Annual Report on Form 10-K; and
approvingreviewing and recommending to our Board the Compensation CommitteeBCTMC Report for inclusion in our filings with the SEC, including this Annual Report on Form 10-K.

Our Compensation Committee met 11 times in 2017.
Because Mr. Powell provides services to both us and to Santander Consumer, our Compensation Committee, and Santander Consumer's Compensation Committee, agreed to allocate Mr. Powell's 2017 total cash compensation at 77% for us and 23% for Santander Consumer. When considering only the period of time during 2017 that Mr. Powell actually served as Santander Consumer’s CEO, from September 1, 2017 through December 31, 2017, we allocated 69% of cash compensation to Santander Consumer, and 31% of cash compensation to us. We collectively decided on these allocations to reflect the percentage of time that Mr. Powell worked for each organization. In order to provide Mr. Powell with an equity stake in Santander Consumer, both our Compensation Committee and Santander Consumer's Compensation Committee agreed to provide 50% of Mr. Powell's total equity award for 2017 under the Executive Bonus Program in Santander American Depository Receipts (or "ADRs") and 50% in Santander Consumer common stock and RSUs.
The Role of Santander’s Human Resources Committee
Santander’s Human Resources Committee's responsibilities includeCommittee is responsible for the design and the calculation of the applicable funding level of the Executive Bonus ProgramIncentive Plan and oversight ofoverseeing performance management and compensation processes, including consideration of all present and futureconsidering risks that may impact the bonus process as well as the application of malus and clawback related clauses,provisions, when applicable. Santander's Human Resources Committee also reviews and validates the compensation proposals for our named executive officers, except for our President and CEO.
The Role of Santander`s Board Remuneration Committee
Santander’s Board Remuneration Committee has the authority and responsibility to,is responsible for, among other things, review, revise,reviewing, revising as appropriate, determining and then presentpresenting to Santander’s Board of Directors the compensation of Santander’s senior executives, which include our President and CEO. The Board Remuneration Committee also has the responsibility to review, reviseCEO and present to Santander's Board the key elements of the compensation of our named executive officers.

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The Role of Santander’s Board of Directors
Santander’s Board of Directors validates and approves the compensation of certain of our management, including our President and CEO.
The Role of Our Management
Our Human Resources Committee oversees our incentive compensation programs (except for the Executive Bonus Program) and makes recommendations to our Compensation CommitteeBCTMC with respect to theseour incentive compensation programs. A key responsibility of our Human Resources Committee is to review our incentive compensation programs to ensure the programs do not incentivize excessive risk-taking and make recommendations to our Compensation Committee regarding certain compensation matters. The members of the Human Resources Committee include the heads of our Risk, Legal, Finance, Operations and Human Resources Departments. In addition, the head of our Internal Audit Department participates as a non-voting member. The Human Resources Committee met seven times in 2017.risk-taking.
Our management also played a role in other parts of the compensation process with respect to the named executive officers in 2017. Our President and CEO generally performed (or delegated to our Human Resources Department) management’s responsibilities (except with respect to his own compensation) in accordance with the requirements set forth2019 by Santander, our applicable policies and procedures, and applicable law. The most significant aspects of management’s role in the compensation process were presenting, and recommending for approval, salarysalaries, incentive targets, and bonusesincentive awards for the named executive officers to our Compensation CommitteeBCTMC and to the applicable committees at Santander.
None of the named executive officers determined or approved any portion of theirhis own compensation for 2017.2019.

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The Role of Outside Independent Compensation Advisors
Santander, SHUSA and its entitiessubsidiaries seek guidance and advice from a diversified mix of outside independent compensation advisors.
Santander’s Remuneration Committee engaged Willis Towers WatsonErnst & Young to provide advice on the general policies and approaches with respect to the compensation of Santander’s worldwide employees. For 2017 target compensation review purposes,employees, and Willis Towers Watson provided benchmarking datacompetitive market compensation ranges for the President and CEO position.global leadership roles.
For 2017 target compensation review purposes, atAt the request of our Compensation Committee,BCTMC, we engaged McLagan Partners, Inc. to provide competitive market compensation ranges for our senior executive officers, including the named executive officers.
Santander Consumer’s Remuneration Committee hasAs discussed under "Benchmarking" below, we also engaged PayGovernancePay Governance to advise onassist the BCTMC in setting 2018 and 2019 compensation matters relevant to that business (e.g., peer benchmarking) and to the additional demands required of public companies.targets for Mr. Powell.
Benchmarking
For 2017 target compensation review purposes,In 2018, both Willis Towers Watson and McLagan Partners provided independently compiled target compensation benchmarking data for our President and CEO position.position, which Pay Governance summarized along with additional data extracted from publicly disclosed proxy statements. The peer group isdata set comprised 42 financial institutions: Bank of 11 US regional financial institutions and four business units of global US financial institutions as follows:the West, BBVA Compass, BMO Financial, BB&T Corporation, HSBC, MUFG Union Bank, RBC, TD Securities, BNP Paribas, Deutsche Bank, Barclays, RBS, Mizuho, UBS, Credit Suisse, The Toronto Dominion Bank, Ally Financial, Citizens Financial, Comerica, Credit Acceptance Corp., Encore Capital, Lending Club, Nationstar Mortgage, Navient, Nelnet, One Main Holdings, PRA Group, SLM Corp., Capital One Financial Group, Discover Financial Services Inc., Fifth Third Bancorp, Huntington Bancshares Incorporated, KeyCorp, M&T Bank Corporation, PNC Financial Services Group, Inc., Regions Financial Corporation, SunTrust Banks, Inc., U.S. Bancorp, Bank of America Corporation (Consumer), Citigroup Inc. (Global Consumer Bank), JPMorgan Chase & Co. (Community Banking), and Wells Fargo & Company (Community Banking). Since this data was used to assist us in validating Mr. Powell’s compensation for a full two-year term (2018-19) as described in his employment agreement, we did not formally review 2019 benchmarks for Mr. Powell’s role.

For 20172019 target compensation review purposes, McLagan Partners Inc.also provided benchmarking data for Mr. Wennes's compensation in each of his roles and for our other named executive officers’ compensation and used the following peer group: Capital One, Ally Bank, of America Corporation,Discover, CIT Bank, BB&T Corporation, BBVA Compass Bancshares, Inc., Citigroup Inc., Citizens Financial Group, Inc., Comerica, Inc., Fifth Third Bank, First Niagara Financial Group, Inc., Huntington Bancshares Incorporated, JPMorgan Chase & Co., Keycorp, M&T Bank Corporation, MUFG Union Bank, PNC Bank, Regions Financial Corporation, State Street Bank & Trust Co., SunTrust Banks, Inc., The Toronto Dominion Bank, Northern Trust Corporation, U.S. Bancorp,Bank of the West, and Wells Fargo & Company.BMO Financial.

We and Santander have also periodically used additional independent third-party compensation surveys to assist in assessing certain of our executive officers’ overall compensation. We use this additional data to broadly evaluate market trends, pay levels, and relative executive compensation performance trends.

Lastly, we describe the peer group used in connection with specific measures leveraged withinperformance based deferred awards under the Executive Bonus ProgramIncentive Plan under the caption “Executive Bonus Program.” We and Santander have also periodically used additional independent third party compensation surveys to assist in assessing certain of our executive officers’ overall compensation.


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"Executive Incentive Plan."

Components of Executive Compensation

For 2017,2019, the compensation that we provided to our named executive officers consisted primarily of base salary and both shortshort- and long-term incentive opportunities, as we describe more fully below. In addition, the named executive officers are eligible for participation in benefitsbenefit plans that we generally offer to all our employees, and we also provide the named executive officers with certain benefits andlimited perquisites not available to the general employee population.
Base Salary
Base salary represents the fixed portion of the named executive officers’ compensation, and we intend it to provide compensation for expected day-to-day performance. The base salaries of the named executive officers were generally set in accordance with each named executive officer’s employment or letter agreement considering market competitive pay, historical pay at Santander, our budget, level of duties and responsibilities, applicable European regulatory guidance that mandates deferrals of variable compensation, experience and expertise. While each of the named executive officer’s letter agreements provides for the possibility of increases in baseBase salary annual increases are not guaranteed. We review our named executive officers’ salary levelsis reviewed as a part of our annual compensation review process.process to determine whether increases should be provided based on performance and market conditions. Annual increases are not guaranteed.

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Our Chief Human Resources Officer (and with respect to Mr. Wolf's compensation, our CEO) consulted with Santander’s Human Resources Department to ensureconfirm named executive officers’ salaries are competitive and take into account market survey data of our peers, salary history at Santander, scope of duties and responsibilities, experience and expertise, individual performance, applicable regulatory requirements, and our budget. Santander’s Human Resources Department consulted with the Santander Board Remuneration Committee and Santander’s Board of Directors in setting the base salary of Mr. Powell. In 2017,Wennes. As of December 2, 2019, we increased Mr. Wennes’s annual base salary from $2,100,000 to $2,650,000 to reflect his additional new roles as SHUSA CEO and U.S. Country Head. Mr. Alvarez’s annual base salary increased from $1,000,000 to $1,100,000 as of September 16, 2019 as a result of his new SHUSA role and responsibilities as SBNA CFO.
We did not adjust any other named executive officer's base salary for 2019. As of January 1, 2020, we made the following changes to our named executive officerofficer's base salaries:
We increased Mr. Dayal'sAlvarez's annual base salary from $1.0 million$1,100,000 to $1.2 million$1,500,000 to complybetter align his compensation with pay ratio requirementsmarket practices for his scope of European Union Capital Requirements Directive IV, which we refer to as "CRD IV."responsibilities.
We increased Mr. Gunn'sGriffiths's annual base salary from $1.0 million$1,100,000 to $1.6 million,$1,200,000 to compensate him for his increased role in North America. He now serves as the Head of Technology for North America. As part of his expanded duties in this role, a variableportion of his compensation will now be allocated to fixed pay mix shift in accordanceSantander Mexico.
Because prior to his resignation Mr. Powell provided services to both us and to SC, our BCTMC, and SC's BCTMC”), agreed to allocate Mr. Powell's 2019 total compensation at 36% to us and 64% to SC. We jointly decided on these allocations to reflect the percentage of time that Mr. Powell spent working for and with CRD IV's requirements. Mr. Gunn's 2017 targeted incentive opportunity was correspondingly reduced a similarrespect to each organization based on time allocation tracking. The Summary Compensation Table shows the entire amount to maintain a generally consistent total target compensation for 2017.
We did not adjust any of the other named executive officers' base salariessalary payments to Mr. Powell for 2017.2019 regardless of this allocation.
Incentive Compensation
We provide annual incentive opportunities for our executive officers, including the named executive officers, to reward achievement of both business and individual performance objectives and to link pay to both short-term and long-term performance. We intend our incentive programs to incentivizemotivate participants to achieve and exceed these objectives at the Santander, country,U.S., and business level,business/function levels, as well as to reward the progressive improvement of individual performance. All of our named executive officers are designated as Identified Staff under European regulations and, therefore, are subject to the compensation guidelines of the European Banking Authority and limits of CRD IV and likely other developing regulations.as set forth under CRD-IV. These regulations and guidelines define the short-term/immediate and long-term/deferred percentages for incentives awards with respect to the total compensation package as well asand mandate that such awards be delivered in at least 50% shares or other equity instruments, such as ADRs, with a mandatory one-year holding period upon delivery, and no more than 50% paid in cash.
For the 2019 performance year of the Executive Bonus ProgramIncentive Plan (described below), the targeted incentive opportunity for each of the named executive officers was as follows:
Named Executive OfficerTarget Bonus ($)
Timothy Wennes (1)
$3,400,000
Scott Powell (2)
$4,250,000
Juan Carlos Alvarez de Soto (3)
$1,000,000
Madhukar Dayal (4)
$1,885,500
Daniel Griffiths$1,660,500
Michael Lipsitz$1,385,000
William Wolf$1,180,000
Mahesh Aditya$1,025,000
(1) Mr. Wennes’s 2019 incentive award is guaranteed under his July 2019 employment letter with SBNA.
(2) No 2019 performance year incentive award was paid to Mr. Powell due to his resignation.
(3) Mr. Alvarez’s target incentive opportunity at SC was $575,000. The amount set forth above reflects his 12-month annualized SHUSA target opportunity. For 2019, his total target opportunity was $681,250, which reflects 9 months of service at SC and 3 months of service at SHUSA.
(4) Mr. Dayal became the CFO for Santander UK as of September 16, 2019. For 2019, SHUSA paid him a pro rata incentive award based on his nine months of SHUSA service.


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Executive Incentive Plan
Our incentive program, which we refer to as the “Executive Bonus Program,”"Executive Incentive Plan," establishes both financial and non-financial measures to determine the bonusincentive pool level from which we pay annual bonuses.incentives. We generally align the structure of our Executive Bonus ProgramIncentive Plan each year with the applicable annual cyclein consideration of Santander’s corporate bonus program for executives of similar levels across the Santander platform.Santander. Each of the named executive officers participated in the Executive Bonus ProgramIncentive Plan for 2017.2019, although Mr. Powell did not receive an award for 2019 as a result of his resignation. The general structure of the Executive Bonus Program is:Incentive Plan:
to deferdefers a portion of a participant’s award over a period of threethree- or five years,five-year period, depending on the participant’s position within our organization and variable compensation target, subject to the non-occurrence of certain circumstances;events;
in turn, to linklinks a portion of such deferred amount to ourSantander performance over a multi-year period; and
to paypays a portion of such award in cash and a portion in equity, in accordance with the rules that weand standards referenced above and set forth in more detail below.


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On January 31, 2017, weThe 2019 incentive framework was approved the preliminary design of the Executive Bonus Program. On March 2, 2017,by Santander’s Board of Directors adopted the Second Cycle of the Deferred Multi-year Objectives Variable Plan for executives (which is generally aligned with our Executive Bonus Program),on April 11, 2019 and Santander’s shareholders approved it at itsthe annual general meeting of shareholders on April 7, 2017. Santander’s Remuneration Committee and Board of Directors approved the final scorecard for the Executive Bonus Program, as recommended by our Compensation Committee, on June 14, 2017, and June 26, 2017, respectively. Our Compensation Committee incorporated feedback from Santander into the final scorecard for the Executive Bonus Program when it approved the Executive Bonus Program on September 20, 2017.12, 2019.

The Executive Bonus ProgramIncentive Plan provides for differences in the amount of final awards, higher or lower than their target bonusincentive amounts, (which we describe below), in order to reinforce our pay for performance philosophy.
Under the Executive Bonus Program, weWe determine aan aggregate pool infrom which awards for all participants are decided.determined and paid. The pool incorporates both quantitative (via a scorecard) and qualitative considerations as well as feedback from Santander to ensure that the Executive Bonus ProgramIncentive Plan links theour executives' pay of our executives to performance. For 2019, Santander modified the pool framework so that 30% of the incentive pool for named executive officers and other senior executives was tied to Santander results, emphasizing the importance of global collaboration within the institution.
Our Compensation CommitteeBCTMC worked with Mr. Powell and Santander’s Human Resources Committee and the Board Remuneration Committee to validate that the proposed scorecard performancequantitative metrics are aligned with overall business goals. Our Compensation CommitteeBCTMC reviewed the appropriateness of the financial measures used in the Executive Bonus Program with respect to the named executive officers and the degree of difficulty in achieving specific performance targets and determined that there was a sufficient balance. All scorecard calculations for us under the Executive Bonus ProgramIncentive Plan are determined in accordance with International Financial Reporting StandardsIFRS because Santander uses similar terms and metrics in its incentive programs across its platform,the Group, making the use of country-specific accounting standards infeasible.
Our named executive officers all perform functions for both us and SBNA. Our Compensation Committee agreed to consider individual allocation of the final bonus pool funding level for these executives based on both our and SBNA's performance to recognize their pay needing to be aligned for both businesses' performance as well as certain principles set forth by our regulators.
SHUSA BonusIncentive Pool Scorecard Overview: The bonusAs set forth above, the incentive pool funding is determined through a scorecard, which is primarily driven by a quantitative (mathematically informed) score, and is then adjusted by qualitative and otherdiscretionary measures. We develop the scorecard metrics to measure our, our subsidiaries’ and our business units’ performance on an aggregate basis over the full year. As set forth above, 70% of the 2019 incentive pool was determined by SHUSA results and 30% of the pool was determined by Santander results.
Together these make up our overall bonus pool funding level. As we describe in more detail below, the bonusincentive pool funding was 107.9%110.45% of aggregate target amounts for 2017. 2019, which was approved by Santander based on the following components:
The total SHUSA scorecard result was 109.4%, which equals the SHUSA Quantitative Score (101.2%) and SHUSA Qualitative Score (8.2%) set forth below.
The total Santander scorecard result was 113%.
70% of the SHUSA scorecard and 30% of the Santander scorecard equals 110.45%.
There was no discretionary adjustments to this amount in 2019 so the final funding remained at 110.45%.

We determine the aggregate total of the bonusincentive amounts, in U.S. dollars, available for distribution to our employees, including the named executive officers and other senior executive officers by multiplying this bonusincentive pool funding level by the sum of target incentives.

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Below is a summary ofmore detail on how we calculated the bonusincentive pool for 2017.2019 for named executive officers and other senior executive officers
Part 1: SHUSA Quantitative Score
77.3101.2%
1. Quantitative Score: The quantitative score is a mathematically derived score based on our achievement of pre-determined business goalsmetrics (which we reflect in Table 1 below under the heading “Quantitative Metrics”"Quantitative Metrics").
WeIn collaboration with Santander, we pre-assign each metric with a weight and a goal. Then we calculateSantander calculates the percentage credit towards the quantitative score for each metric by multiplying its percentage weight by its percentage achievement. Except for capital contribution, quantitative metrics are capped to a maximum achievement of 150%. A minimum threshold of 75% of the target is required for each of the quantitative metrics; if the results are below the threshold, the score for that metric defaults to 0%. Finally, we add up all the percentages to derive the total quantitative score.
For 2017,2019, our total quantitative score was 77.3%101.2%.


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Table 1: Quantitative Metrics - SHUSA BonusIncentive Pool Funding Scorecard

Scorecard Component (Part)Quantitative MetricsWeight2017 Goal
Full Year Result (1)
% Achievement(2)
% Credit Towards Quantitative Score ("Weight" * "% Achievement")(2)
Component (Part) Score (sum previous column)
Part 1: Quantitative ScoreCustomer Satisfaction (%)2.5%18%14%87.5%2.2%77.3%
Loyal Customers (#)2.5%311,654
309,694
99.4%2.5%
Employee Engagement (%)5%67%65%87.5%4.4%
Cost of Credit Ratio (Loan Loss Ratio) (%)10%3.27%3.44%94.8%9.5%
% Completion of Certain Regulatory Requirements10%90%93.6%104.0%10.4%
Contribution to Santander's Capital ($ millions)15%$533$968181.6%27.2%
Net Profit ($ millions)27.5%$887$66074.4%0%
Return on Risk Weighted Assets (%)27.5%0.95%0.73%76.8%21.1%
Category WeightMetricWeight % Achievement
CUSTOMERS20.0%Net Promoter Score / Customer Satisfaction10.0%110.00%
Number of Loyal Customers10.0%109.55%
SHAREHOLDERSRISK10.0%Cost of Credit Ratio (IFRS9)5.0%112.73%
Non-Performing Loans Ratio5.0%134.16%
CAPITAL20.0%Contribution to Group Capital20.0%85.90%
PROFITABILITY50.0%Net Profit20.0%100.66%
Return on Tangible Equity30.0%98.54%
Total Quantitative Score 101.2%

(1)Figures shown in the “Full Year Result” column are forecasts as of November 2017. We used these forecasts in determining the 2017 bonus pool. The full-year results were not materially different from the forecasts. Our Compensation Committee and Santander’s Remuneration Committee approved the exclusion of the impact of Hurricane Harvey on Santander Consumer’s results, the impact of Hurricane Maria on Santander Puerto Rico’s results, and an un-budgeted loss impact on the sale of the Island Finance business in Puerto Rico on SHUSA’s quantitative results.
(2)If percent achievement is less than 75% for any individual Quantitative Metric, then 0% credit is applied towards Quantitative score applicable to that metric.

Part 2: SHUSA Qualitative Adjustment-1.4+8.2%

2. Qualitative Adjustment: Santander's Remuneration Committee, or our Compensation Committeein consultation with Santander's and SHUSA's control functions, may, in theirits discretion, add or subtract up to 25% to or from the quantitative score based on qualitative factors. For 2019, Santander considered five qualitative factors including:

progressrelating to risk, capital sustainability and execution of our regulatory agenda,
advancement of our integrationcapital plan, financial results and governance model,costs, and
management of our Risk Appetite Statement. certain financial benchmarks.

Santander's Remuneration Committee applied a -1.4%+8.2% Qualitative Adjustmentqualitative adjustment to our Quantitative Scorequantitative score based on its assessment of our progress against these qualitative factors.

Part 3: Santander MultiplierAdjustments by Santander's Remuneration Committee+7.0%

3. Adjustment dueAdjustments by Santander's Remuneration Committee:Santander’s Remuneration Committee may, in its discretion, make general risk and control adjustments and other exceptional adjustments to the incentive pool funding level. For 2019, Santander Multiplier:did not assign any adjustments to the SHUSA pool for named executive officers and other senior executives.

The Santander Multiplier is an incremental adjustment that provides for a link between our resultsevaluation of Santander's categories of quantitative metrics and overallqualitative factors, which resulted in the Santander results. The adjustment is the difference between Santander’s global bonus pool funding level (110.8%) and our score after the Qualitative Adjustment (75.9%)of 113%, multiplied by 20%. The adjustment due to the application of the Santander Multiplier was +7.0%.

is as follows:

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The evaluation of the Santander's categories of quantitative metrics and qualitative factors, which results in the Santander bonus pool funding level of 110.8%, is as follows:Quantitative Score: 109.2%

Customers:Customers (weighted 20%): the goals set for net promoter score / customer satisfaction and loyalty were met with a result of 92%, which was qualitatively adjusted upwards to 98.5% for the overall progress on the implementation of conduct risk controls with customers.105.2% and 101.3% respectively.
Risks:Risks (weighted 10%): the quantitative results obtained from the evaluated metrics, cost of credit and non-performing loansNPL ratio provided a result of 101.5%, which was qualitatively adjusted upwards to 114% for aspects related to the management of the risk appetite model.106.2% and 108.0% respectively.
Capital:Capital (weighted 20%): Santander exceeded the capital targets set for the year, providing a result of 100.8%147.5%.
Profitability:Profitability (weighted 50%): Ordinary Net Profit result was 104.9%,net profit and the RoRWA result was at 111.6%. ROTE results were 97.6% and 96.0% respectively.

Qualitative Score: +3.8%
Santander considered five qualitative factors were evaluated, including comparison with comparable companiesrelating to risk, capital sustainability and the solidity and sustainabilityexecutive of capital plan, financial results and nocosts, and certain financial benchmarks.
Santander’s Board Remuneration Committee approved a +3.8% adjustment, which was comprised of two items: +12% qualitative modification was applied, resulting in a category achievement of 117.4%.

The following qualitative criteria were also considered; however, no additional adjustments were madeadjustment to the quantitative score based on its assessment of progress against these criteria:

Management ofqualitative factors, and a -8.2% exceptional adjustment proposed by management and supported by the risk appetite model, level and disclosure of excesses.
The general control environment in accordance with internal regulations and Santander standards.
The degree of compliance with internal and external regulations, and observations made by regulators and supervisory bodies.
Prudent and efficient liquidity.


Part 4: Exceptional Adjustment by Santander's Remuneration Committee+25.0%

4. Exceptional Adjustment by Santander's Remuneration Committee:Santander’s Remuneration Committee may, in its discretion, make an exceptional adjustment of up to 25% to the pool funding level. Santander took into account various factors, including Mr. Powell’s achievement of the Contribution to Santander Capital goal set in May 2017 and Santander’s Tier 1 Common EquityBoard of Directors to better align variable compensation with a challenging market environment and in its full discretion assigned an exceptional adjustment of +25.0%.subsequent attributable profit and shareholder returns.

Setting BonusIncentive Targets: We assigned eachEach of the named executive officers had a pre-set target bonusincentive amount atfor 2019. During 2019, we increased Mr. Alvarez’s target incentive opportunity from $575,000 to $1,000,000 to reflect his new SHUSA role and responsibilities. The final 2019 target incentive amounts are disclosed in the beginning of 2017.Incentive Compensation section above. We determined the target bonusincentive awards taking into account market competitive pay, historical pay at Santander, level of duties and responsibilities, individual performance, historical track record within the organization for each individual, impacts of regulatory changes, and our budget. We review these factors at least annually and theto determine whether adjustments are appropriate. The target bonusincentive amounts for 20172019 were subject to management reviewour BCTMC and Santander's Remuneration Committee review. In late 2019, we changed the following targets for certain of our named executive officers, which will be used for 2020 performance year target incentive opportunity amounts:

Mr. Wennes’s target incentive opportunity was increased from $3,400,000 to $3,850,000 to reflect his new roles as wellSHUSA CEO and U.S. Country Head.
Mr. Alvarez’s target incentive opportunity was increased from $1,000,000 to $1,500,000 to better align his compensation with market practices for his scope of responsibilities.
Mr. Griffiths’s target incentive opportunity was increased from $1,660,500 to $1,800,000 to compensate him for his increased role in North America as Compensation Committee review as needed.described above.

Discretionary Pay for Performance Decisions: During the 2019 decision-making process, we used target bonusincentive amounts to establish an initial starting point for the executive. Each named executive officer’s initial bonus target incentive opportunity was subject to a discretionary adjustment, either upwards or downwards, based on the SHUSA incentive pool calculationfunding results and the executive’s individual performance evaluation. In no event did the aggregate total of the actual bonus amounts exceed the aggregate total of the approved bonus pool. Our compensation philosophy continues to evolve and, beginning in 2016, we shifted from looking solely at pay against target to also assessing each named executive officer's actual bonus from one year to the next. Both percentages against target, and against prior year actual bonus, were consideredevaluation, to determine final pay.an initial proposed incentive amount.

We conducted a detailed assessment of each named executive officer’s accomplishments versus pre-established goals for the year with respect to the individual performance evaluation results. These goals included specific objectives directly related to the named executive officer’s job responsibilities. These goals are not all objective, formulaic, or quantifiable. Rather they include both quantitative and qualitative measures that cut across critical objectives related to business strategy and performance; regulatory, compliance and risk management; our customers and clients; as well as our employees and culture. We describe certain of these measures for each of the named executive officers:

Mr. Wennes

As an inducement to accept our offer of employment, Mr. Wennes’s July 2019 employment letter provided a guaranteed 2019 incentive award of $3.4 million, which he was paid. Given that this was a first year only guaranteed incentive and that he did not begin employment with us until September 2019, he did not have any formal functional objectives for 2019.


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Mr. Powell
 
Mr. Powell’s 20172019 functional objectives included, but were not limited to:

Deliver budget financials, with a focus on capital generation, net income, return on risk-weighted assets,profit, and return on tangible equity, which are all common financial measures in the banking industry.
Improve financialPursue cross business collaboration, both within the U.S. and abroad, to drive incremental revenue.
Complete risk control environment and file financial reports on time.framework implementation.
Significantly improve technology stability, efficiency, and effectiveness.
Ensure integration with Santander initiatives.
Continue to makeAccelerate progress on outstanding regulatory issues.and control issues, and ensure sustainability of progress made.
Complete governance implementationDefine longer-term digital strategy, and fully integrate businesses into our governancelaunch priority initiatives to digitize customer experience and management framework.operations, with a focus on SC and SBNA.
Continue to implement a culture of risk management and compliance, and ensure Santander values (Simple,(including, Simple, Personal and Fair). are embedded.
Improve engagement scores.

Due to his resignation as of December 2, 2019, Mr. Powell did not receive an incentive award for the 2019 performance year.

Mr. Alvarez:
Mr. Alvarez’s 2019 functional objectives included, but were not limited to:
Deliver 2019 budget financials.
Deliver capital contribution targets.
Partner with business leadership to support key strategies.
Assist in defining longer-term digital strategy and support initiatives to digitize customer experience and operations.
Improve compliance and operational risk management.
Improve employee engagement and ensure engagement within our communities.

Certain of these objectives reflect Mr. Alvarez’s role as SC CFO until September 16, 2019. Based on his performance results for 2017,2019, we paid Mr. PowellAlvarez approximately 114%147% of his pro-rated target bonus level, which is approximately 96%incentive opportunity. 75% of his prior year bonus.award was paid by SC and 25% was paid by SHUSA.

Mr. Dayal

Mr. Dayal’s 20172019 functional objectives included, but were not limited to:

Deliver 2019 budget financials and meet capital generation targets.
Optimize balance sheet to enhance capital, liquidity, and profitability.
Ensure that we pass financial regulation tests such asContinue to build and enhance the CCARprofitability and the Dodd-Frank Act Stress Testcapital allocation framework.
Complete Risk Framework implementation.
Continue progress on outstanding regulatory and begin capital distributions and continuecontrol issues.
Execute year two of Santander U.S. integration to improve stress testingeffectiveness, controls and integrate into business as usual.efficiency.
Continue to improve SBNA's funds transfer pricing, which is a process most often used in the banking industry as a means of outlining the areas of strength and weakness within the funding of the institution.
Identify key efficiency opportunities across our organization and begin execution on top opportunities.
Contribute to our culture of risk management and complianceImprove employee engagement and ensure that we maintainengagement within our values.communities.
Ensure integration with Santander global strategic initiatives and other key Santander initiatives.
 
Based on his performance results for 2017,2019, we paid Mr. Dayal approximately 109%111% of his prorated target bonus level, which is approximately 114% of his prior year bonus.
incentive opportunity. SHUSA paid Mr. Aditya
Mr. Aditya's 2017 functional objectives included, but were not limited to:

Maintain consistency and efficiencies across services through process standardization, automation, and site consolidation.
Establish first-line-of defense risk and control functions including enterprise-wide risk control self-assessment implementation.
Develop robust analytics and processes leading to servicing and decisioning competitive advantages.
Minimize risk and assure resiliency through the creation of the business control officer network and establishing an enterprise business continuity organization.
DevelopDayal a scalable and robust platform and geographic footprint to accommodate growth and future acquisitions.
Ensure safety and soundness in underwriting.
Contribute to our culture of risk management and compliance and ensure that we maintain our values.

Basedprorated award based on his performance results for 2017, we paid Mr. Aditya approximately 107%nine months of his target bonus level.
Mr. Gunn
Mr. Gunn’s 2017 functional objectives included, but were not limited to:SHUSA service during 2019.

Re-develop the ALLL processes with effective quantitative and qualitative elements.
Ensure proper and accurate loss forecasting and reserve targets reported monthly compared to prior forecast.
Assist us in passing the CCAR tests and to comply with OCC guidelines regarding the risk governance framework for large financial institutions.
Deliver on 100% of regulatory written agreement commitments.

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Continue to develop and implement a robust and comprehensive risk control framework with a focus on risk governance, risk appetite statement compliance, effective management of emerging risks and effective escalation of risks through the monthly risk report.
Continue to shape our employee agenda and improve employee engagement.
Contribute to our culture of risk management and compliance and ensure that we maintain our values.

Based on his performance results in 2017, we paid Mr. Gunn approximately 89% of his target bonus level. Comparison against the prior year for Mr. Gunn is not meaningful given the shift of pay from variable to fixed during 2017, which we describe above under "Base Salary."Griffiths

Mr. Griffiths
Mr. Griffiths’ 2017Griffiths’s 2019 functional objectives included, but were not limited to:

Reduce customer impactDeliver the 2019 budget financials.
Ensure 80% of the IT components related to book of work projects are delivered on time, on budget.
Continue migration to the Enterprise Data Warehouse and decommission legacy warehouses.
Ensure consistency of information technology-related incidentssecurity, data, architecture, and infrastructure strategies/tools across the U.S.
Meet regulatory and compliance commitments and ensure closure of audit and regulatory actions by 50% year-over-year.commitment dates.
Deliver on $35 million expense management plan.
Initiate information security remediation processImprove employee engagement and materially reduce information security exposure through 2017,
Address 50% of identified technology obsolescence issues (databases and operating systems) before year end.ensure engagement within our communities.
Ensure information technology environment is acceptable to pass Comprehensive Capital Analysisintegration with Santander global strategic initiatives and Review and move from project phase to business as usual before year end.
Contribute to our culture of risk management and compliance and ensure that we maintain our values.other key Santander initiatives.

Based on his performance results for 20172019, we paid Mr. Griffiths approximately 108%111% of his target bonus level, which isincentive opportunity.

Mr. Lipsitz
Mr. Lipsitz’s 2019 functional objectives included, but were not limited to:
Ensure proactive, engaged and effective support for business initiatives, relationships, and strategic transactions.
Support all strategic regulatory initiatives, including continued progress on outstanding regulatory and control issues.
Maintain/enhance compliance functions across U.S. entities.
Maintain constructive and effective regulatory relations.
Assist with completion of Risk Framework implementation.
Support Group initiatives.

Based on his performance results for 2019, we paid Mr. Lipsitz approximately 110%126% of his prior year bonus.target incentive opportunity.
Compensation Committee
Mr. Wolf

Mr. Wolf’s 2019 functional objectives included, but were not limited to:

Deliver 2019 budget financials.
Evolve employee communications.
Continue roll out of compensation and benefits strategy.
Complete roll out of employee networks.
Transform learning function.
Improve employee engagement scores.
Clarify culture principles and continue to implement on a U.S. wide basis.
Ensure integration with Santander Group and Group initiatives/CHRO objectives.

Based on his performance results in 2019, we paid Mr. Wolf approximately 114% of his target incentive opportunity.

Mr. Aditya

Mr. Aditya's 2019 functional objectives included, but were not limited to:

Deliver on the Risk Control Framework across the U.S.
Continue to upgrade the quality of the Risk organization; promote from within and attract top talent from outside the company.
Actively participate in cross border initiatives.
Develop excellence in the Risk function across all U.S. entities in collaboration with Santander.
Improve engagement scores and senior management diversity.

These objectives do not reflect any objectives based on Mr. Aditya’s role as SC CEO, which he assumed in December 2019. Based on his performance results for 2019, we paid Mr. Aditya approximately 124% of his target incentive opportunity.


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BCTMC Review and Approval

On December 6, 2017, our Compensation Committee reviewed11, 2019, the preliminary results with respect to Mr. Powell’s bonus award under the Executive Bonus Program and recommended an award to Santander’s Human Resources Committee. On January 18, 2018, Santander’s Human Resources Committee recommended Mr. Powell’s bonus award to Santander’s Board Remuneration Committee, on January 29, 2018, Santander’s Board Remuneration Committee recommended Mr. Powell’s award to Santander’s Board of Directors, and on January 30, 2018, Santander’s Board of Directors validated Mr. Powell’s award. Our and Santander Consumer's Board of Directors approved Mr. Powell’s final bonus on February 27, 2018.
On December 6, 2017, our Compensation CommitteeBCTMC determined preliminary bonusincentive awards under the Executive Bonus ProgramIncentive Plan for the other named executive officers (other than Mr. Powell, who resigned as of December 2, 2019) subject to validation by Santander’s CEO.CEO and Santander's Board of Directors. On January 22, 2018, our Compensation Committee24, 2020, the BCTMC approved the final bonusincentive awards for the named executive officers other than Mr. Powell.officers. On January 28, 2020, Santander's Board of Directors also approved the final incentive awards for the named executive officers.

Bonus Delivery: We paid current awards for 2019 to the named executive officers under the Executive Bonus Program for 2017Incentive Plan as short-term and long-term incentive awards payable in a combination of cash and Santander ADRs, and in the case of Mr. Powell, a combination of cash, Santander ADRs, and Santander Consumer common stock and RSUs. These amounts include payments made with respect to each of the named executive officer’s individual performance and the performance of Santander and us, as applicable.equity. Amounts that we pay in equity as short-term incentive awards are immediately vested and are in the form of Santander ADRs (and, in the case of Mr. Powell, Santander Consumer common stock).ADRs. Amounts that we pay in equity as long-term incentive awards are subject to vesting criteria, as we describe below, and are in the form of restricted Santander ADRs (and, in the case of Mr. Powell, Santander Consumer RSUs).ADRs. Any payment made in shares of Santander ADRs or Santander Consumer common stock under the Executive Bonus ProgramIncentive Plan is subject to a one-year holding requirement from the grant date (in the case of immediately vested ADRs/Santander Consumer shares)ADRs) or vesting date, if any, of the deferred ADRs/Santander Consumer shares.ADRs.
Short-term/Immediate: Under the Executive Bonus Program,Incentive Plan, the named executive officers receive the short-term award 50% in cash and 50% in immediately vested Santander ADRs, orADRs. For 2019, Mr. Alvarez received 50% of his award in the case of Mr. Powell, 50% in cash and 50% in a combination of immediately-vested Santander ADRs and Santander Consumer shares.SC common stock, split proportionately based on the time he spent during 2019 at each company.
Long-term/Deferred: Under the Executive Bonus Program, participants are required to deferIncentive Plan, a portion of theireach named executive officer's bonus is deferred depending on theirthe named executive officer's position and/or targeted incentive levels within Santander. For 2019, Santander considers considers:

Mr. Wennes to be a "Category 1" executive, and therefore 60% of his overall bonus award is deferred for five years, and
Mr. Dayal to be a "Category 2" executive, and therefore 50% of his overall bonus award is deferred for five years, and
Messrs. Powell, Dayal,Alvarez, Griffiths, Lipsitz, Wolf and Griffiths as “Category 2”Aditya to be "Category 3" executives and therefore they each must defer 50% of their overall bonus awards for five years. Santander considers Messrs. Aditya and Gunn as “Category 3” executives and therefore they each must defer 40% of their respective overall bonusincentive awards are deferred for three years.

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We deliver deferred amounts under the Executive Bonus ProgramIncentive Plan 50% in cash and 50% in restricted Santander ADRs, and in the caseADRs. A portion of Mr. Powell, 50%Alvarez's 2019 award was deferred in cash, 25% in restricted Santander ADRs and 25% in Santander ConsumerSC RSUs. The deferred amounts vest over three or five years, depending on the participant’s Categorycategory (as we describedescribed above) and the participant remaining employed through the applicable payment date (except in certain limited circumstances). The deferred amounts are subject to our Policy onthe Santander US Malus and Clawback Requirements includingPolicy, which provides for the requirement that noneforfeiture of the following circumstances has arisen during the period priordeferred amounts or recoupment of paid incentives due to each payment by reason of the participant's actions:
A significant failure with respect to our risk management or any control or support function;
A material or negative (in each case as determined by our external auditors) restatement of our financial statements (other than any restatement undertaken as a result of a change in accounting standards);
The participant’s material breach of any of our material internal rules or regulations, particularly if such rules or regulations relate to risk management;
A material, negative change in our capitalization of our risk profile;
A material, unforeseen increase in our economic or regulatory capital requirements;
The participant or the participant’s business unit is subject to material regulatory sanctions;
The participant is convicted of or indicted for a felony, or a lesser crime involving moral turpitude;
Any material misconduct by the participant, whether individually or as part of a group, particularly in connection with the marketing of unsuitable products;
Our deficient financial performance;
A material error by the participant, including such activities by the participant that result in material losses to us or an affiliate or material regulatory sanctions being imposed on us or on an affiliate;
A material downturn in our, an affiliate’s or a business unit’s financial performance as a result of the participant’s inappropriate business management activities; or
The participant’s detrimental conduct (as defined in the Executive Bonus Program).or certain pre-defined financial losses.

The accrualpayment of a portion of such deferred amounts is subject to the compliance withachievement of certain multi-year performance objectives, which we describe below, during the 2017-20192019-2021 period. At the end of the 20192021 fiscal year, Santander`s Board will set the maximum amount of each annual payment of the deferred portion subject to such performance conditions for each participant.

Multi-year objectives and metrics for deferred cash and compliance scalesSantander ADRs applicable to the 2019 Executive Incentive Plan are as follows:

a)Compliance withAchievement of consolidated earnings-per-share (“EPS”)EPS growth target of Santander for 20192021 versus 2016. The coefficient corresponding to this target (the “EPS Coefficient”) will be obtained from the following table:2018.
2019 EPS growth (% against 2016)EPS Coefficient
≥ 25%1
≥ 0% but < 25%0 - 1
< 0%0

b)Relative performance of total shareholder return (“TSR”,TSR, as we define below)below of Santander for the 2017-20192019-2021 period compared to the weighted TSRs of a peer group of 17 creditnine financial institutions, which we set forth below.

We define “TSR”Santander defines "TSR" as the difference (expressed as a percentage) between the final value of an investment in Santander common stock and the initial value of the same investment. Dividends or other similar items received by a Santander shareholder during the corresponding period of time are treated as if they had been invested in more shares of the same class at the first date on which the dividend or similar item is owed to the shareholder and at the average weighted listing price on that date. To calculate TSR, we use the average weighted daily volume of the average weighted listing prices of Santander common stock corresponding to the 15 trading sessions prior to January 1, 20172019 (for the calculation of the initial value), and of the 15 trading sessions prior to January 1, 20202022 (for the calculation of the final value).


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The Santander peer group is the following 179 financial institutions:
Financial Institutions
Banco Bilbao Vizcaya Argentaria SA
Credit Agricole
ING
Itaú Unibanco Holding SA
JP Morgan Chase & CoWells Fargo & Co
Bank of America CorpUnicredit SpA
UBS Group AGStandard Chartered PLC
Intesa San Paolo SpACitigroup Inc
HSBC Holdings PLCING Groep NV
Barclays PLCLloyds Banking Group PLCCitigroup Inc
BNP Paribas SADeutsche Bank AG
Société Générale SAING Groep NV
In case of unexpected changes in the peer group, and in light of objective circumstances, Santander's Board may adjust the rules of comparison among them or modify the peer group’s composition.

TSR compliance scale:
TSR position of Santander"TSR Coefficient"
Exceeding the 66th percentile1
From the 33rd to the 66th percentiles0-1
Below the 33rd percentile0

c)Compliance withAchievement of the fully-loaded CET1 target ratio target of Santander Group for the financial year 2019. The coefficient corresponding to this target (the "CET1 Coefficient") will be obtained from the following table:2021
CET1 in 2019CET1 Coefficient
≥ 11.30%1
≥ 11% but < 11.30%0.5‑1
< 11%0


In order to verify if this target has been met, in general, any potential increase in CET1 deriving from share capital increases will be disregarded. Moreover, Santander may adjust the CET1 ratio, in order to remove the effects of any regulatory change on the calculation rules that may occur through December 31, 2019.2021.

To determine the maximum amount of the deferred portion subject to objectives that, if applicable, must be paid to each participant on the applicable payment date, the following formulaoriginal deferred amount will be applied to each one of the annual payments pending payment:multiplied by a pre-established coefficient for earnings per share, TSR and CET1, as set forth in Santander guidelines.

Final Annual Payment = Amt. x ((1/3 x A) + (1/3 x B) + (1/3 x C))SRIP

where:

Amt.” corresponds to the amount of award equivalent to an annual payment.
A” is the EPS coefficient according to the scale in paragraph (a) above based on EPS growth in 2019 with respect to 2016.
B” is the TSR coefficient according to the scale in paragraph (b) above based on the relative performance of the TSR of Santander for the 2017-2019 period with respect to the peer group.
C” is the CET1 coefficient according to compliance with the CET1 target described in paragraph (c) above.

Santander’s Board of Directors may in its discretion revise the structure of this portion of the Executive Bonus Program.

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Special Regulatory Incentive Program (“SRIP”)
During 2016, we developed a special regulatory incentive program, which we refer to as the “SRIP,”"SRIP," for performance periods 2017, 2018-192018 and 2019-20.2019. The SRIP was approved by Santander’s Remuneration Committee on June 27, 2016. The SRIP is part ofan addendum to the Executive Bonus Program.Incentive Plan, with separate targets and performance metrics. We designed the SRIP to support meeting our U.S. regulatory commitments, an important factor in helping to shape our strategy over the next several years. The SRIP reinforces our regulatory focus, and we intend it to reward those select leaders who drive our success. Each of our named executive officers participates in the SRIP.

Overall Program Objectives:

The purpose of the SRIP is to strengthen the alignment between pay and the annual achievement of critical U.S. regulatory priorities.
We will establish the SRIP measures for each period to ensure that payouts align to critical regulatory milestones, which differ for each period, and to ensure our adherence to CRD-IV pay ratio requirements.
SRIP eligibility is directed to select leadership roles responsible for achieving these goals and will provide meaningful compensation over time in order to reinforce accountability and assist with retention.

2017 Program:2019 SRIP:
Total target opportunity overNo SRIP payments were made for 2019. In November 2019, the lifeBCTMC recommended to Santander to extend completion of the multi-year program wasthird and final set at $2,000,000 for Mr. Powell and at $1,000,000 each forof objectives under the other named executive officers.
For 2017, 25% of each participant’s total targeted opportunity was based on achievingSRIP through December 31, 2020, which the following goals:
Pass the CCAR; and
Secure approvalSantander Remuneration Committee later approved. 60% of the capital plan’s external dividends/capital distributions.

We achieved both of these goals for 2017. Based on these results, we approved each named executive officer’s actual award amounts for 2017 at 25% of their respective total target opportunity. See footnote 4 to the Summary Compensation Table for the actual amounts that weSRIP awards previously were paid to the named executive officers underofficers. The remaining 40% of the SRIP for 2017.awards may be paid if the third tranche of objectives are met before the end of 2020. Payment will be made within 30 days of the BCTMC and Santander determining that the objectives were met.


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Any payments made under the SRIP to our named executive officers are subject to the same payment, deferral, and performance requirements as those applicable to payments made under the Executive Bonus Program,Incentive Plan, which we describe above.
Additional Long-TermTotal Results for 2019 Executive Incentive CompensationPlan
The following chart summarizes the 2019 Executive Incentive Plan awards for the named executive officers:
NameCashEquity
Immediate
($)
Deferred
($)
Total
($)
Immediate
($)
Deferred
($)
Total
($)
Mr. Wennes$680,000
$1,020,000
$1,700,000
$680,000
$1,020,000
$1,700,000
Mr. Powell$
$
$
$
$
$
Mr. Alvarez$300,000
$200,000
$500,000
$300,000
$200,000
$500,000
Mr. Dayal$472,500
$315,000
$787,500
$472,500
$315,000
$787,500
Mr. Griffiths$555,000
$370,000
$925,000
$555,000
$370,000
$925,000
Mr. Lipsitz$525,000
$350,000
$875,000
$525,000
$350,000
$875,000
Mr. Wolf$405,000
$270,000
$675,000
$405,000
$270,000
$675,000
Mr. Aditya$382,500
$255,000
$637,500
$382,500
$255,000
$637,500

The total cash amount for each named executive officer, both immediate and deferred, is included in the 2019 "Bonus" column in the Summary Compensation Table.
As noted above, the 2019 equity awards are provided in immediate and deferred Santander discontinued useADRs (and SC common stock and RSUs for Mr. Alvarez). The number of any additional long-term incentive planADRs is determined using the average weighted daily volume of the average weighted listing prices of shares of Santander on the Madrid Stock Exchange for the 15 trading sessions prior to the Friday (exclusive) of the previous week to January 28, 2020. Since the awards are established in a currency other than the Euro, the amount for immediate payment and deferral applicable is converted to Euros using the average closing exchange rate over the 15 trading sessions prior to the Friday (exclusive) of the previous week to January 28, 2020. For the SC shares/RSUs for Mr. Alvarez, the number of shares/RSUs is determined by dividing the value of the RSU award by the 15-day volume weighted average stock price of an SC share on the NYSE for the 15 trading days beginning with the 2016trading day prior to the grant date. These equity awards were granted in February 2020 after the 2019 performance year. Santander merged the targeted awards madeassessments, and under the long-term incentive plan in previous years with the targeted incentive awards granted under the Executive Bonus Program.SEC rules will be reported as 2020 compensation based on their accounting grant date fair values.

Annual Discretionary BonusesDigital Transformation Award Plan

In 2019, Santander adopted a new equity plan called the DTA. Final award values under the DTA were linked to Santander’s achievement of certain cases, we award annual discretionary bonusesdigital milestones in 2019, and further considered an eligible employees’ critical skillsets, role in the organization and individual performance. The purpose of the DTA is to attract and retain talent that will advance, accelerate and deepen Santander’s digital transformation, which at the same time will drive long term-share value creation through the achievement of key digital milestones. On January 28, 2020, Mr. Wennes received a 2019 DTA of 68,601 shares of Santander stock and an option to purchase up to 358,638 shares of Santander stock (“share options”). The Santander shares and share options vest over a five-year period, subject to continued employment (with limited exceptions). The shares have a mandatory one-year holding period after vesting. The share options can be exercised over a seven-year option period and have an exercise price equal to the named executive officers to motivate and reward outstanding performance outside of our incentive compensation program, which we describe above. These awards permit us to apply discretion in determining awards rather than applying a formulaic approach that may inadvertently reward inappropriate risk-taking. Nonefair market value of the named executive officers received a discretionary bonus outsideshares on the Executive Bonus Program for 2017.date of grant. Awards and payments under the DTA are subject to Santander guidelines, which were previously filed with the SEC.

Employment Letters and Other Agreements

We have entered into letter agreementsemployment letters with each of our named executive officers to establish key elements of compensation that differ, in some cases, from our standard plans and programs. Santander and we both believe these letter agreements provide stability to the organization and further our overarching compensation objective of attracting and retaining the highest quality executives to manage and lead us. We discuss these letter agreements below under the caption “Description"Description of Letter Agreements."


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Sign-On, Buy-Out and Retention Bonuses

We paid sign-on and buy-out bonuses to certain of the named executive officers in connection with their commencing employment with us. Providing these sign-on and buy-out bonuses is an industry-standard practice that supports the attraction of executives and makes executives whole for forfeited compensation that they would otherwise receive if they had not left their prior employment. The employment letters for Messrs. Wennes, Dayal, Griffiths, Lipsitz, Wolf, and Aditya include buy-out or sign-on bonuses, and were necessary to recruit these individuals from their prior employers. The portion of these bonuses earned and paid in 2019 is included in the 2019 "Bonus" column in the Summary Compensation Table. In certain limited cases, we will providegrant retention bonusesawards to certain of our executive officers as an inducement for them to stay in active service with us. TheseNo retention bonuses comply with all applicable regulatory guidance and we describe them in the descriptionawards were provided to any of the named executive officers’ respective letter agreements, where applicable.officers in or with respect to 2019. On February 4, 2020, Messrs. Alvarez and Griffiths received retention awards with the following potential payments at the end of March 2021:

Named Executive OfficerRetention Award ($)
Mr. Alvarez$500,000
Mr. Griffiths$500,000

Payment of these retention awards is subject to certain SHUSA performance conditions and will be subject to the CRD-IV requirements as set forth above, including the deferral requirements.

Other Compensation

We provide limited perquisites and personal benefits to our named executive officers. The Compensation CommitteeBCTMC has determined that each of these benefits has a valid business purpose. We describe these perquisites and benefits that we paid to the named executive officers below in the notes to the Summary Compensation Table.

Retirement Benefits

Each of the named executive officers is eligible to participate in our qualified defined contribution retirement plan under the same terms as our other eligible employees. In addition, the named executive officers are eligible to defer receipt of all or part of their annual bonuses under a nonqualified deferred compensation arrangement. We describe this arrangement below under the caption “Deferred
Board Compensation Plan.”
Compensationand Talent Management Committee Report

For purposes of Item 407(e)(5) of Regulation S-K, the Board Compensation and Talent Management Committee furnishes the following information. The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in Part III - Item 11 of this Form 10-K with management. Based upon the Compensation Committee’s review and discussion with management, the Compensation Committee has recommended that the Compensation Discussion and Analysis be included in the Form 10-K for the fiscal year ended December 31, 2017.2019.

Submitted by:
Catherine Keating,T. Timothy Ryan, Jr., Acting Chair
Stephen A. Ferriss
Juan Guitard
Henri-Paul Rousseau
Victor MatarranzEdith Holiday
Richard Spillenkothen

The foregoing “Compensation"Board Compensation and Talent Management Committee Report”Report" shall not be deemed to be “filed”"filed" with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and notwithstanding anything to the contrary set forth in any of our previous filings under the Act, or the Securities Exchange Act, that incorporate future filings, including this Form 10-K, in whole or in part, the foregoing “Compensation"Board Compensation and Talent Management Committee Report”Report" shall not be incorporated by reference into any such filings.

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Board Compensation and Talent Management Committee Interlocks and Insider Participation

The following directors served as members of our Compensation CommitteeBCTMC in 2017: Catherine Keating,2019: T. Timothy Ryan, Jr., Stephen A. Ferriss, Juan Guitard, Edith Holiday, Richard Spillenkothen, Henri-Paul Rousseau and Victor Matarranz. Mr. Guitard is the Head of Internal Audit at Santander and Mr. Matarranz is the Head of Santander’s Wealth Management Division. With these exceptions, no member of the Compensation CommitteeBCTMC (i) was during the 20172019 fiscal year, or had previously been, an officer or employee of SHUSA or its subsidiaries nor (ii) had any direct or indirect material interest in a transaction of SHUSA or a business relationship with SHUSA, in each case that would require disclosure under the applicable rules of the SEC.SEC rules.
None of our executive officers is a member of the compensation committee or board of directors of another entity whose executive officers have served on our Board of Directors or the Compensation Committee,BCTMC, except that Mr. Powell servesserved as our and SC's director, President and CEO and Mr. Gunn servesAditya served as our Chief Risk Officer and a director of SC. Neither Mr. Powell nor Mr. GunnAditya serve on our or SC's compensation committee.


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Tablethe SC BCTMC. Effective as of Contents

December 2, 2019, Mr. Alvarez serves as our CFO and a director of SC.

CEO Pay Ratio Disclosure

As required by applicable SEC rules, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of Mr. Powell, our President and CEO.
For 2017,2019, our last completed fiscal year:
the median of the annual total compensation of all our employees (other than Mr. Powell) was $52,902;$56,583; and
the annual2019 total compensation of Mr.our CEO, based on the combined compensation of Messrs. Powell and Wennes in their roles as reported in the Summary Compensation Table included elsewhere in this Annual Report on Form 10-K,our CEO during 2019 and as described further below, was $4,775,979.

$5,825,869.
Based on this information, for 20172019 the ratio of the annual annualized total compensation of Mr. Powell, our President and CEO, was 90.3103.0 times that of the median of the annual total compensation of all our other employees.

We tookAs permitted by SEC rules, we used the same median employee as identified for 2017, because there have been no significant changes to our workforce or pay design for 2019 that we believe would significantly change our CEO pay ratio results.

The following stepsbriefly describes the process we used to identify theour median of the annual total compensation of all our employees,employee for 2017, as well as to determine the annual total compensation of our median employee and Mr. Powell:Messrs. Powell and Wennes:

1.We determined that, as of October 1, 2017, our employee population consisted of approximately 16,963 individuals. This population consisted of our full-time, part-time, and temporary employees employed with us as of the determination date. This number differs from the number of employees that we disclose elsewhere in this Form 10-K because, for purposes of the CEO pay ratio disclosure, we do not calculate the number of employees as of the end of our fiscal year.
2.To identify the “median employee”"median employee" from our employee population, we used the amount of “gross wages”"gross wages" for the identified employees as reflected in our payroll records for the nine-month period beginning January 1, 2017 and ending October 1, 2017. For gross wages, we generally used the total amount of compensation the employees were paid before any taxes, deductions, insurance premiums, andor other payroll withholding. We did not use any statistical sampling techniques.
3.For the annual total compensation of our median employee, we identified and calculated the elements of that employee’s compensation for 20172019 in accordance with the requirements of Item 402(c)(2)(x), of SEC Regulation S-K, resulting in annual total compensation of $52,902.$56,583.
4.In accordance with SEC rules, because we had two individuals serve as our CEO during 2019, the annual total compensation of our CEO is determined as the aggregate of the annual total compensation of Mr. Powell and Mr. Wennes, the two individuals who served as our CEO during 2019, attributable to their service as our CEO. For the annual total compensation of Mr. Powell, we used the amount reported in the “Total”"Total" column of our 20172019 Summary Compensation Table included in this Annual ReportForm 10-K since all of his 2019 compensation was attributable to his CEO role. The 2019 total compensation of Mr. Wennes, as reported in the Summary Compensation Table included elsewhere in this Form 10-K, was $2,427,034. For purposes of this CEO Pay Ratio Disclosure, given Mr. Wennes’s appointment as our President and CEO on Form 10-K.December 2, 2019, we used $345,513 as his annual compensation, which represents his base salary for December 2, 2019 to December 31, 2019 and one-twelfth (1/12th) of the cash portion of his Executive Incentive Plan award. The sum of these amounts for Mr. Powell and Mr. Wennes is $5,825,869.


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The CEO pay ratio that we report above is a reasonable estimate calculated in a manner consistent with SEC rules based on the methodologies and assumptions described above. SEC rules for identifying the median employee and determining the CEO pay ratio permit companies to employ a wide range of methodologies, estimates, and assumptions. As a result, the CEO pay ratios reported by other companies, which may have employed other permitted methodologies or assumptions and which may have a significantly different work forceworkforce structure from ours, are likely not comparable to our CEO pay ratio.








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Summary Compensation Table - 20172019
Name and
Principal Position
 Year 
Salary(3)
 
Bonus(4)
 
Stock
Awards
(5)
 Option
Awards
 Non-Equity
Incentive
Plan
Compensation
 Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
 
All Other
Compensation
(6)
 Total
                   
Scott Powell (1)
 2017 $2,000,000
 $1,447,500
 $1,296,202
 $
 $
 $
 $32,277
 $4,775,979
President and Chief Executive Officer 2016 $2,000,000
 $1,250,000
 $1,129,778
 $
 $
 $
 $108,529
 $4,488,307
  2015 $1,653,846
 $3,750,000
 $
 $
 $
 $
 $73,336
 $5,477,182
                   
Madhukar Dayal 2017 $1,200,000
 $1,625,500
 $918,820
 $
 $
 $
 $105,974
 $3,850,294
Chief Financial Officer 2016 $788,462
 $2,151,000
 $
 $
 $
 $
 $213,111
 $3,152,573
                   
Daniel Griffiths 2017 $1,000,000
 $1,687,000
 $826,939
 $
 $
 $
 $597,453
 $4,111,392
Chief Technology Officer 2016 $653,846
 $1,310,000
 $
 $
 $
 $
 $88,412
 $2,052,258
                   
Brian Gunn 2017 $1,600,000
 $1,205,870
 $929,549
 $
 $
 $
 $28,239
 $3,763,658
Chief Risk Officer 2016 $1,000,000
 $1,431,869
 $945,001
 $
 $
 $
 $121,217
 $3,498,087
  2015 $557,692
 $800,000
 $
 $
 $
 $
 $44,720
 $1,402,412
                   
Mahesh Aditya(2)
 2017 $819,231
 $2,125,000
 $
 $
 $
 $
 $404,718
 $3,348,949
Chief Operating Officer 
 

 

 

 

 

 

 

 

                   
Name and
Principal Position
 Year 
Salary(6)
 
Bonus(7)
 
Stock
Awards
(8)
 
All Other
Compensation
(9)
 Total
             
Timothy Wennes (1)
 2019 $613,269
 $1,700,000
 $
 $113,765
 $2,427,034
Current President and Chief Executive Officer            
             
Scott Powell (2)
 2019 $2,850,000
 $
 $2,439,835
 $190,521
 $5,480,356
Former President and Chief Executive Officer 2018 $2,980,769
 $2,475,000
 $1,417,683
 $62,337
 $6,935,789
  2017 $2,000,000
 $1,447,500
 $1,296,202
 $32,277
 $4,775,979
             
Juan Carlos Alvarez (3)
 2019 $1,007,692
 $500,000
 $406,561
 $88,861
 $2,003,114
Current Chief Financial Officer and Principal Financial Officer            
             
Madhukar Dayal 2019 $876,923
 $787,500
 $1,202,002
 $37,077
 $2,903,502
Former Chief Financial Officer and Principal Financial Officer 2018 $1,200,000
 $1,725,500
 $1,102,652
 $23,583
 $4,051,735
  2017 $1,200,000
 $1,625,500
 $918,820
 $105,974
 $3,850,294
             
Daniel Griffiths 2019 $1,100,000
 $1,591,000
 $1,028,916
 $21,154
 $3,741,070
Chief Technology Officer 2018 $1,055,769
 $1,737,000
 $978,001
 $42,419
 $3,813,189
  2017 $1,000,000
 $1,687,000
 $826,939
 $597,453
 $4,111,392
             
Michael Lipsitz (4)
 2019 $951,923
 $875,000
 $937,563
 $32,269
 $2,796,755
Chief Legal Officer 
 

 

 

 

 

             
William Wolf (5)
 2019 $800,000
 $1,095,000
 $781,301
 $29,385
 $2,705,686
Chief Human Resources Officer 2018 $800,000
 $1,532,500
 $755,080
 $23,583
 $3,111,163
             
Mahesh Aditya 2019 $1,480,769
 $962,500
 $685,620
 $14,000
 $3,142,889
Former Chief Operating Officer 2018 $1,327,019
 $1,113,000
 $647,210
 $11,000
 $3,098,229
  2017 $819,231
 $2,125,000
 $
 $404,718
 $3,348,949
             

Footnotes:

(1)Mr. Wennes was hired as the President and CEO of SBNA as of September 16, 2019, was appointed as President and CEO of SHUSA and Santander U.S. Country Head as of December 2, 2019. Therefore, no historical information is presented.
(2)Mr. Powell served as the President and CEO of SHUSA and SC during 2019 until his resignation on December 2, 2019. Mr. Powell also served as a director of us, SBNA, and SBNA.SC through that date. Mr. Powell received no compensation for that service as a director. Amounts for 2017, (other than the amounts in the "Stock Awards" column, which we entirely paid)2018 and 2019 include aggregate compensation that we and Santander ConsumerSC paid Mr. Powell for his services for our respective companies. For information about the allocation of these amounts, see "The Role""Components of Our Board and Santander Consumer'sExecutive Compensation, Committees.Base Salary.""
(2)(3)Mr. Aditya commenced employment with usAlvarez was appointed as the Chief Financial Officer of SHUSA on March 1, 2017. We appointed him Chief Operating Officer on May 17, 2017.September 16, 2019 and is being reported in this disclosure for the first time. Therefore, no historical information is presented.
(3)(4)Mr. Lipsitz was not a named executive officer of SHUSA for 2017 or 2018 and therefore no historical information is presented.
(5)Mr. Wolf became a named executive officer of SHUSA the first time for 2018 and therefore no historical information prior to 2018 is presented.
(6)Reflects actual base salary paid through the end of the applicable fiscal year. For Mr. Aditya, the 2019 amount in this column includes base salary received from SC in December 2019.
(4)(7)The amounts in this column for 20172019 reflect the cash portion of the applicable named executive officer’s bonus payableawards for performance in 2019 under the 2017 Executive Bonus Program as well as other cash bonuses payable pursuant to an applicable letter agreementIncentive Plan, both immediate and do not includedeferred amounts payable in Santander ADRs that vest in future years pursuant tobased on fulfillment of time and performance conditions. See "Total Results for 2019 Executive Incentive Plan" in the terms ofCompensation Discussion and Analysis above for details on these amounts. The amounts in this column also include any sign-on bonus or equity buy-out amount paid during the Executive Bonus Program. We describeyear. For 2019, the Executive Bonus Program under the caption “Incentive Compensation.” The bonuses earned by thefollowing named executive officers for 2017received equity buy-out amounts under the Executive Bonus Program before deferral were:their employment letters as follows: Mr. Wolf, $420,000; Mr. Griffiths, $666,000; and Mr. Aditya, $325,000.

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Named Executive Officer Executive Bonus SRIP Total Bonus
Scott Powell $2,395,000 $500,000 $2,895,000
Madhukar Dayal $2,050,000 $250,000 $2,300,000
Daniel Griffiths $1,790,000 $250,000 $2,040,000
Brian Gunn $1,100,000 $250,000 $1,350,000
Mahesh Aditya $1,100,000 $250,000 $1,350,000
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(5)(8)The amounts in this column for 20172019 reflect the grant date fair value of suchequity-based awards granted in 2019 under the 20162018 Executive Bonus ProgramIncentive Plan determined in accordance with ASC Topic 718. We describe the Executive Bonus Program718 as further detailed in the Compensation Discussion and Analysis section above. The amounts in this column also reflect the grant date fair value associated with the additional shares awarded on September 26, 2017, to account for dilution resulting from Santander’s purchaseGrants of Banco Popular in June 2017.Plan-Based Awards Table below. The Company recognizes compensation expense related to stock awards based upon the fair value of the awards on the date of the grant. For Santander ADRs (both vested and deferred), the grant date fair value is based on EUR market purchase price as of the grant date converted to USD using the EUR to USD exchange rate as published on the day prior to the grant, ignoring any risk of forfeiture. In 2017, Santander authorized the application of inflationary adjustments to be applied to deferred cash outstanding on and after December 31, 2017, to maintain our competitive positioning relative to non-regulated companies treatment of deferred compensation. The inflationary adjustments received by the NEOs in each of the reported years are not reflected here. For SC shares and RSUs, see Note 1 and ("Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices-Stock Based Compensation") and Note 16 ("Employee Benefit Plans") of the SC consolidated financial statements filed with the SEC on Form 10-K for the fiscal year ended December 31, 2019. The related expense is charged to earnings over the requisite service period.

SEC rules require the Summary Compensation Table to include in each year’s amount the aggregate grant date fair value of stock awards granted during the year. Typically, we grant equity awards early in the year as part of the Executive Incentive Plan award for prior year performance. As a result, the amounts for equity awards generally appear in the Summary Compensation Table for the year after the performance year upon which they were based and, therefore, the Summary Compensation Table does not fully reflect the BCTMC’s view of its pay-for-performance executive compensation program for a particular performance year. See the discussion under "Bonus Delivery" in the Compensation Discussion and Analysis regarding the 2019 awards of immediate and deferred cash and equity awards for 2019 performance under the 2019 Executive Incentive Plan.

(6)(9)Includes the following amounts that we paid to or on behalf of the named executive officers in the 2019 fiscal year with respect to service for us:


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    Year Powell Dayal Griffiths Gunn Aditya    Year Wennes Powell Alvarez Dayal Griffiths Lipsitz Wolf Aditya
        
Contribution to Defined Contribution Plan 2017 $10,800
 $10,800
 $0
 $10,800
 $10,800
 2019 $
 $14,000
 $16,500
 $14,000
 $
 $14,000
 $14,000
 $14,000
2016 $10,600
 $10,600
 $0
 $10,600
 $
2015 $10,600
 $
 $
 $0
 $
                       
Relocation Expenses, Temporary Housing, and Spousal Allowance 2017 $10,137
 $50,395
 $99,638
 $6,000
 $291,598
2016 $56,000
 $133,261
 $8,538
 $0
 $
2015 $36,300
 $
 $
 $0
 $
 2019 $74,425
 $
 $48,482
 $
 $
 $
 $
 $
                       
Housing Allowance, Utility Payments, and Per Diem 2017 $0
 $0
 $48,000
 $0
 $0
 2019 $
 $62,938
 $
 $
 $
 $
 $
 $
2016 $0
 $0
 $33,549
 $51,250
 $
2015 $0
 $
 $
 $34,850
 $
                  
Legal, Tax, and Financial Consulting Expenses 2017 $0
 $0
 $30,038
 $0
 $0
2016 $0
 $0
 $0
 $2,045
 $
2015 $0
 $
 $
 $0
 $
 2019 $
 $2,030
 $
 $
 $
 $
 $
 $
                  
Tax Reimbursements (*) 2017 $11,094
 $44,779
 $248,585
 $5,139
 $102,320
 2019 $39,340
 $53,860
 $23,879
 $
 $
 $
 $
 $
2016 $41,929
 $69,250
 $32,450
 $51,082
 $
2015 $26,436
 $
 $
 $2,510
 $
                  
School Tuition and Language Classes 2017 $0
 $0
 $0
 $0
 $0
2016 $0
 $0
 $0
 $0
 $
2015 $0
 $
 $
 $4,800
 $
    
Paid Parking 2017 $0
 $0
 $0
 $6,300
 $0
2016 $0
 $0
 $0
 $6,240
 $
2015 $0
 $
 $
 $2,560
 $
 2019 $
 $
 $
 $
 $
 $
 $
 $
                        
Taxable Fringe Benefits 2017 $246
 $0
 $158,481
 $0
 $0
 2019 $
 $
 $
 $
 $
 $
 $
 $
2016 $0
 $0
 $13,875
 $0
 $
2015 $0
 $
 $
 $0
 $
                    
Home Travel 2017 $0
 $0
 $12,711
 $0
 $0
2016 $0
 $0
 $0
 $0
 $
2015 $0
 $
 $
 $0
 $
Self-Managed PTO Payout 2019 $
 $57,693
 $
 $23,077
 $21,154
 $18,269
 $15,385
 $
            
Total 2017 $32,277
 $105,974
 $597,453
 $28,239
 $404,718
 2019 $113,765
 $190,521
 $88,861
 $37,077
 $21,154
 $32,269
 $29,385
 $14,000
2016 $108,529
 $213,111
 $88,412
 $121,217
 $
2015 $73,336
 $
 $
 $44,720
 $
(*)Includes amounts paid to gross up for tax purposes certain perquisites and tax payments in accordance with an applicable employment or letter agreement or other arrangement.


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Grants of Plan-Based Awards-2017Awards-2019
 Estimated
Possible
Payouts Under
Equity
Incentive Plan
Awards
 All Other Stock Awards: Number of Shares of Stock or Units (#) Grant
Date Fair
Value of
Stock and
Option
Awards
($)
 Awards: Number of Shares of Stock or Units (#) Grant Date Fair Value of Stock and Option Awards ($)
Name Grant
Date
 Target
(#)
 Grant
Date
  
        
Scott Powell 9/26/2017 4,368
(1) 
$29,332
 3/1/2019 $30,014
(1) 
$623,691
 2/21/2017 115,839
(2) 
$633,435
 3/1/2019 $45,022
(2) 
$935,557
 2/21/2017 115,839
(3) 
$633,435
 2/21/2019 $74,632
(3) 
$352,235
     2/21/2019 $111,948
(4) 
$528,352
    
Juan Carlos Alvarez 3/1/2019 $11,739
(1) 
$243,936
 3/1/2019 $7,826
(5) 
$162,624
    
Madhukar Dayal 9/26/2017 993
(1) 
$6,669
 2/21/2019 $127,341
(3) 
$601,001
 2/21/2017 100,085
(3) 
$547,289
 2/21/2017 66,724
(4) 
$364,863
 2/21/2019 $127,341
(6) 
$601,001
        
Daniel Griffiths 9/26/2017 894
(1) 
$6,004
 2/21/2019 $130,805
(3) 
$617,350
 2/21/2017 90,077
(3) 
$492,562
 2/21/2019 $87,203
(7) 
$411,565
 2/21/2017 60,051
(4) 
$328,373
    
Michael Lipsitz 2/21/2019 $119,191
(3) 
$562,537
     2/21/2019 $79,461
(7) 
$375,026
Brian Gunn 9/26/2017 2,440
(1) 
$16,386
 2/21/2017 100,196
(3) 
$547,896
    
William Wolf 2/21/2019 $99,326
(3) 
$468,781
 2/21/2017 66,798
(4) 
$365,267
 2/21/2019 $66,217
(7) 
$312,519
        
Mahesh Aditya 2/21/2017 
 $
 2/21/2019 $87,162
(3) 
$411,372
 2/21/2017 
 $
 2/21/2019 $58,108
(7) 
$274,248
    

Footnotes:
(1)Reflects the number of immediately vested SC shares granted in 2019 to the applicable named executive officer under the 2018 Executive Incentive Plan, subject to one-year retention.
(2) Reflects the number of SC RSUs awarded on March 1, 2019 under the 2018 Executive Incentive Plan. These were scheduled to vest on March 1 of each year over a five-year period, in equal installments, with first vesting occurring in 2020 and the final vesting occurring in 2024. The shares vesting in the last three years were subject to performance conditions. Mr. Powell forfeited these RSUs as a result of his departure from SC during 2019.
(3) Reflects the number of immediately vested Santander ADRs granted in 2019 to the applicable named executive officer under the 2018 Executive Incentive Plan subject to one-year retention.
(4)Reflects the number of Santander ADRs awarded on February 21, 2019 under the 2018 Executive Incentive Plan. These were scheduled to vest on February 21 of each year over a five-year period in equal installments, with first vesting occurring in 2020 and the final vesting occurring in 2024. The shares vesting in the last three years were subject to performance conditions. Mr. Powell forfeited these Santander ADRs as a result of his departure from SHUSA during 2019.
(5)Reflects the number of SC RSUs awarded on March 1, 2019 under the 2018 Executive Incentive Plan. These vest on March 1 of each year over a three-year period, in equal installments, with first vesting occurring in 2020 and the final vesting occurring in 2022. The shares vesting in the last year are subject to performance conditions.
(6)Reflects the number of Santander deferred ADRs awarded on February 21, 2019 under the 2018 Executive Incentive Plan. These vest within 30 days of the initial grant date of each year over a five-year period in equal installments, with first vesting occurring in 2020 and the final vesting occurring in 2024. The shares vesting in the last three years are subject to performance conditions.
(7)Reflects the number of Santander deferred ADRs awarded on February 21, 2019 under the 2018 Executive Incentive Plan. These vest within 30 days of the initial grant date of each year over a three-year period in equal installments, with the first vesting occurring in 2020 and the final vesting occurring in 2022. The shares vesting in the last year are subject to performance conditions.

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Outstanding Equity Awards at Fiscal 2019 Year End

  Time Vesting Stock Awards Equity Incentive Plan Awards
Name Number of Shares or Units of Stock that have not Vested (#) Market Value of Shares or Units of Stock that have not Vested ($) Number of Unearned Shares, Units or Other Rights that have not Vested
(#)
 Market or Payout Value of Unearned Shares, Units or Other Rights that have not Vested
($)
Timothy Wennes 

$
 

$
         
Scott Powell 
(1) 
$
 
(1) 
$
         
Juan Carlos Alvarez 

$
 7,826
(2) 
$182,894
 2,121
(3) 
$49,568
 

$
 

$
 13,382
(4) 
$55,401
 137
(5) 
$566
 

$
 9,236
(6) 
$38,237
 

$
         
Madhukar Dayal 

$

127,341
(7) 
$527,191
 

$

63,330
(8) 
$262,186
 252
(5) 
$1,042



$0
 16,971
(6) 
$70,258



$0
         
Daniel Griffiths 

$

87,203
(4) 
$361,020
 

$

56,170
(8) 
$232,544
 227
(5) 
$941



$
 15,273
(6) 
$63,230



$
         
Michael Lipsitz 

$

79,461
(4) 
$328,969
 

$

33,501
(9) 
$138,694
 197
(5) 
$814



$
 13,198
(6) 
$54,641



$
         
William Wolf 

$

66,217
(4) 
$274,138
 

$

28,911
(9) 
$119,692
 169
(5) 
$698



$
 11,313
(6) 
$46,836



$
         
Mahesh Aditya 

$

58,108
(4) 
$240,567
 

$

24,781
(9) 
$102,593

Footnotes:
(1)Mr. Powell resigned on December 2, 2019 and as a result forfeited all unvested equity outstanding as of that date.
(2)SC awarded these RSUs on March 1, 2019 under the 2018 Executive Incentive Plan. They vest on March 1 of each year over a three-year period, in equal installments, with the first vesting in 2020 and the last vesting in 2022. The shares vesting in the last year are subject to performance conditions.
(3)SC awarded these RSUs on March 1, 2018 under the 2017 Executive Incentive Plan and SRIP. One-third of these shares vested on March 1, 2019, and the remainder will vest within 30 days of the initial grant date, in equal installments, in each year from 2020 through 2021.
(4)Santander awarded these deferred Santander ADRs on February 21, 2019 under the 2018 Executive Incentive Plan. These vest within 30 days of the initial grant date of each year over a three-year period in equal installments, with the first vesting occurring in 2020 and the final vesting occurring in 2022. The shares vesting in the last year are subject to performance conditions.
(5)Santander awarded these deferred Santander ADRs on September 26, 2017 as additional shares for all outstanding deferred awards granted prior to December 31, 2017 that vest in 2018 and beyond to account for share dilution resulting from Santander's purchase of Banco Popular in June 2017. The share numbers reflect the 1.49% upward adjustment of all the outstanding deferred shares as ofgranted prior to December 31, 2017 that vest in 2018 and beyond, as shown in this table, and follow the vesting schedule applicable to each grant. (For allOne-third of these shares vested on February 21, 2018, one-third vested on February 21, 2019 and the outstandingremainder will vest within 30 days of the initial grant date in 2020. The shares asvesting in the last year are subject to performance conditions, except for the shares listed for Mr. Alvarez, and the number of December 31,shares delivered in 2020 depend on the achievement of performance criteria. The performance period for this plan has been completed and the awards were adjusted to 76.3% of initial targeted value, vesting in March 2020.

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(6)Santander awarded these deferred Santander ADRs on February 21, 2017 under the 2016 Executive Incentive Plan. One-third of these shares vested on February 21, 2018, one-third vested on February 21, 2019 and correspondingthe remainder will vest within 30 days of the initial grant date in 2020. The shares vesting schedules, seein the "Outstanding Equity Awards at Fiscal 2017 Year End" table.)last year are subject to performance conditions, except for the shares listed for Mr. Alvarez, and the number of shares delivered in 2020 depend on the achievement of performance criteria. The performance period for this plan has been completed and the awards were adjusted to 76.3% of initial targeted value, vesting in March 2020.
(2)Reflects the number of shares of immediately vested Santander ADRs granted in 2017 to the applicable named executive officer under the 2016 Executive Bonus Program subject to one-year retention.
(3)(7)Santander awarded these sharesdeferred Santander ADRs on February 21, 2017 as deferred shares granted2019 under the 20162018 Executive Bonus Program. TheyIncentive Plan. These vest on February 22within 30 days of the initial grant date of each year over a five-year period in equal installments, with the first vesting occurring in 20182020 and the final vesting occurring in 2022.2024. The shares vesting in the last three years are subject to performance conditions.
(4)(8)Santander awarded these sharesdeferred Santander ADRs on February 21, 2017 as deferred shares granted2018 under the 20162017 Executive Bonus Program. They vestIncentive Plan and SRIP. One-fifth of these shares vested on February 2221, 2019, and the remainder will vest within 30 days of each year over a three-year period,the initial grant date, in equal installments, with the first vesting occurring in 2018 and the final vesting occurring in 2020. The shares vesting in the last year are subject to performance conditions.



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Outstanding Equity Awards at Fiscal 2017 Year End

  Stock Awards
Name Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested
(#)
 Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that have not Vested
($)
Scott Powell 4,368
(1) 
$28,565
 115,839
(2) 
$757,590
 92,774
(3) 
$606,742
 84,888
(6) 
$555,168
     
Madhukar Dayal 993
(1) 
$6,494
 66,724
(4) 
$436,375
     
Daniel Griffiths 894
(1) 
$5,847
 60,051
(4) 
$392,734
     
Brian Gunn 2,440
(1) 
$15,958
 66,798
(4) 
$436,859
 49,479
(5) 
$323,593
 47,750
(6) 
$312,285
     
Mahesh Aditya 
 $
   
  
 

Footnotes:
(1)Santander awarded these shares on September 26, 2017 as additional shares for all outstanding deferred awards granted prior to December 31, 2017, that vest in 2018 and beyond to account for share dilution resulting from Santander's purchase of Banco Popular in June 2017. The share numbers reflect the 1.49% upward adjustment of all the outstanding deferred shares, as shown in this table, and follow the vesting schedule applicable to each grant.
(2)Santander awarded these shares on February 21, 2017 as deferred shares granted under the 2016 Executive Bonus Program. They vest on February 22 of each year over a five-year period, in equal installments, with the first vesting in 2018 and the last vesting in 2022.from 2020 through 2023. The shares vesting in the last three years are subject to performance conditions.
(3)(9)Reflects unvested shares that Santander awarded these deferred Santander ADRs on February 22, 201621, 2018 under the 20152017 Executive Bonus Program. They vest in equal installments over a five-year period. One-fifthIncentive Plan and SRIP. One-third of these shares vested on February 22, 2017,21, 2019, and the remainder will vest on February 22,within 30 days of the initial grant date, in equal installments, in each year from 20182020 through 2021. The shares vesting in the last three years are subject to performance conditions.
(4)Reflects unvested shares that Santander awarded on February 21, 2017 as deferred shares granted under the 2016 Executive Bonus Program. They vest on February 22 of each year over a three-year period, in equal installments, in each year from 2018 through 2020. The shares vesting in the last year are subject to performance conditions.
(5)Reflects unvested shares that Santander awarded on February 22, 2016 as deferred shares granted under 2015 Executive Bonus Program. They vest in equal installments over a three-year period. One-third of these shares vested on February 22, 2017, one third will vest on February 22, 2018 and one-third will vest on February 22, 2019. The shares vesting in the last year are subject to performance conditions.
(6)Reflects unvested shares that Santander awarded on July 5, 2016 under the second cycle of the 2015 Performance Shares Plan. All shares cliff vest on the third anniversary of the award date and the number of shares delivered depend on achievement of performance criteria set forth in the second cycle plan, which we describe in the Compensation Discussion and Analysis section above under the heading entitled “Additional Long-Term Incentive Compensation.” The number of Mr. Powell’s unearned shares was inadvertently understated by 37,138 shares in our 2016 Annual Report on Form 10-K.


Option Exercises and Stock Vested - 20172019
 Option Awards Stock Awards ADR Awards SC RSU Awards
Name Number of Shares Acquired on Exercise (#) Value Realized on Exercise ($) Number of Shares
Acquired on
Vesting (#)
 Value Realized
on Vesting ($)
 Number of ADR Shares
Acquired on
Vesting (#)
 Value Realized
on Vesting ($)
 Number of Santander Consumer Shares Acquired on Vesting (#) Value Realized
on Vesting ($)
Timothy Wennes 
 $
 
 $
Scott Powell 
 $
 139,032
 $759,141
 188,222
 $896,140
 34,503
 $716,972
Juan Carlos Alvarez 37,771
 $180,177
 12,799
 $265,963
Madhukar Dayal 
 $
 100,085
 $547,289
 165,745
 $782,254
 
 $
Daniel Griffiths 
 $
 90,077
 $492,562
 165,163
 $779,507
 
 $
Brian Gunn 
 $
 124,936
 $681,986
Michael Lipsitz 188,631
 $893,057
 
 $
William Wolf 128,830
 $608,029
 
 $
Mahesh Aditya 
 $
 
 $
 99,553
 $469,853
 
 $
        


Description of Employment Letters

We have entered into employment letters with our named executive officers that were in effect in 2019. We describe below each of the letters providing for termination or change in control benefits and/or one-time bonus payments that were due in the last fiscal year.

Timothy Wennes

We entered into an employment letter agreement with Mr. Wennes dated July 10, 2019 relating to his employment responsibilities as CEO of SBNA.

Mr. Wennes received a sign on bonus of $1,000,000 that was paid on January 17, 2020. Mr. Wennes must repay this amount if he voluntarily terminates employment without good reason or we terminate him for cause (as defined in the employment letter) within 24 months of the payment.

The employment letter provides that Mr. Wennes will receive compensation for his forfeited equity through payments in 2020, 2021 and 2022, in accordance with the original vesting schedule implemented by his prior employer. The total payments as of the date of his employment letter have a value of $3,154,383; each payment will be made in Santander ADRs only. Mr. Wennes must repay a payment if he voluntarily terminates employment or we terminate him for cause (as defined in the employment letter) within 12 months of such payment.

Mr. Wennes was also eligible to receive a 24-month relocation benefit (ending in September 2021) in accordance with our policies.

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Equity Compensation Plans

As we describeUnder his employment letter, if Mr. Wennes is terminated by us without cause (as defined in the Compensation Discussion and Analysis section, the named executive officers receive a portion of their compensation in Santander ADRs under the Executive Bonus Program. (We describe the Executive Bonus Programletter) or if he terminates employment with us for good reason (as defined in the Compensation Discussion and Analysis section above.) In addition, Mr. Powell receives shares of Santander Consumer common stock under its shareholder approved equity compensation plansletter, including if he terminates employment for good reason within six months before or after a change in connection with his service as Santander Consumer's CEO. Certain of our named executive officers also have outstanding equity awards under our now-discontinued long-term incentive compensation plan, which we refer to as the “Performance Shares Plan.”

We set forth below information about the potential shares that our named executive officers may receive under the Executive Bonus Program.


Our named executive officers deferred the following amounts into the Executive Bonus Program (including payments under the SRIP) for 2017 andcontrol), he will be entitled to the following number of shares if the Program’s conditions are satisfied:
Named Executive OfficerTotal Amount DeferredCash DeferredShares Deferred (ADRs)*Santander Consumer RSUs**
Scott Powell$1,447,500$723,50049,82122,448
Madhukar Dayal$1,150,000$575,00079,162
Daniel Griffiths$1,020,000$510,00070,213
Brian Gunn$540,000$270,00037,172
Mahesh Aditya$540,000$270,00037,172
* Number of shares based on an exchange rate of €0.821 to $1 and a $7.26 per share price.
**Number of shares based on $16.12 per share price.following:

Description52 weeks of Letter Agreementsbase salary, paid in a lump sum;
Continued vesting of deferred bonus awards;
Continued payment of any remaining equity buy out payments; and
No repayment of his sign on bonus or relocation benefits.

We and/or Santander have entered intoMr. Wennes’s employment letter agreementswas revised, effective as of December 2, 2019, to reflect the base salary and target bonus award changes set forth above in connection with our named executive officers thathis new role. There were no changes to the termination provisions described in effect in 2017. We describe each of the agreements below.this section.

Scott Powell

We entered into aan employment letter agreement with Mr. Powell dated September 14, 2018 relating to his employment responsibilities for us, Santander, and SC during the period from January 1, 2018 - December 31, 2019. As set forth above, Mr. Powell resigned as of February 27, 2015.December 2, 2019.

Mr. Powell’s letter agreement provides that he will serve as our President and CEO and as a member of our Board of Directors. The agreement does not have a term.

The letter agreement provides for a base salary of $2,000,000. In addition, Mr. Powell received a sign-on restricted share grant under which, on the effective date of the agreement, he was paid $2,750,000, of which he was required to use the net after-tax proceeds to purchase shares, which he may not transfer for three years.

Mr. Powell is eligible to participate in our annual bonus plan contingent upon the achievement of annual performance objectives. Mr. Powell's annual bonus target for 2015 was $1,500,000 and the letter agreement provides that the bonus for 2015 would not be lower than the target bonus (provided Mr. Powell was employed with us on December 31, 2015). The bonus was paid partially in cash and partially in shares, in accordance with the terms of the Executive Bonus Program.

The letter agreement also provided, among other things, that Mr. Powell would participate in the Performance Shares Plan, which provided for an award for 2015 equal to 20% of his base salary paid in shares, subject to attainment of performance goals and the other provisions of the Performance Shares Plan.

The letter agreement provides that Santander will reimburse Mr. Powell for relocation expenses (including any taxes on that reimbursement), provided Mr. Powell relocates to Boston within two years of the effective date of the agreement.



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Madhukar Dayal

Juan Carlos Alvarez de Soto
We entered into aan employment letter agreement with Mr. DayalAlvarez dated December 9, 2015.August 12, 2019 and further revised as of February 4, 2020. Our employment letter with Mr. Alvarez does not provide for severance benefits in the context of termination or a change in control or any specific commitments regarding 2019 compensation.
Mr. Dayal’s letter agreement provides for him to serve as Chief Financial Officer. The agreement does not have a term.
The letter agreement provides for an initial base salary of $1,000,000. In addition, Mr. DayalAlvarez is eligible to receive an annual bonus contingent upon the achievement of annual performance objectives.a 12-month relocation benefit (ending in September 2020) in accordance with our policies and received a one-time net $46,000 lump sum relocation allowance. Mr. Dayal’s annual bonus target was set at $1,500,000, and the letter agreement provided that the bonus for 2016 would not be lower than the target bonus.
The letter agreement also provides, among other things, that Mr. Dayal would participate in the Corporate Long-Term Incentive Plan, subject to its terms, except that for 2016, Mr. Dayal’s award was equal to 15% of his target bonus.
Mr. Dayal’s letter agreement provides that:
30% of his variable compensation will be paid in cash;
30% of his variable compensation will be paid in shares, subject to a one-year holding requirement; and
The remaining 40% of his variable compensation will be deferred and payable in equal parts over three years (with each year's payment paid 50% in cash and 50% in shares subject to a one-year holding requirement).

Payment of deferred shares is subject to Mr. Dayal not having voluntarily terminated or been terminated for cause through the date of payment, as well as none of the following circumstances occurring during the deferral period:
Deficient performance by Santander;
Failure by Mr. Dayal to comply with internal rules, specifically including those relating to risk;
Material reformulation of Santander’s financial statements (other than due to change in accounting rules); or
Significant negative variations in Santander’s economic capital or risk profile.

The letter agreement also provided that Mr. Dayal would receive a sign-on bonus of $300,000, which we paid following his first 30 days of employment. If Mr. Dayal voluntarily terminates employment or we terminate him for cause within 24 months of employment, Mr. DayalAlvarez must repay such sign-on bonus to us.
Mr. Dayal’s letter agreement also provides forthe full payment of an additional amount totaling $1,902,000 to compensate him for losses he incurred as a result of changing employment. His agreement provides that this amount is paid in three installments with one installment of $951,000 paid following 30 days of employment, one installment of $475,500 paid following one year of employment and one installment of $475,500 payable following two years of employment. No payment will be made if Mr. Dayal voluntarily terminates employment or we terminate him for cause through the date of payment, and Mr. Dayal must repay such amounts if he voluntarily terminates employment or we terminate him for cause (as defined in the employment letter) within 1224 months of such payment.

Madhukar Dayal
We providedentered into an employment letter with Mr. Dayal dated December 9, 2015 that was revised on May 2, 2017. Our employment letter with U.S. domestic relocationMr. Dayal does not provide for severance benefits in accordance with our policies, whichthe context of termination or a change in control or any specific commitments regarding 2019 compensation. As set forth above, Mr. Dayal must repay to us in the event he voluntarily terminates employment or we terminate him for cause within 12 months of receipt from the last benefit paid.
Mr. Dayal’s letter agreement containsis no longer a nondisclosure obligation and a one-year non-solicitation agreement.

SHUSA executive officer.
Daniel Griffiths
We entered into aan employment letter agreement with Mr. Griffiths dated April 18, 2016.
2016 that was further revised on April 10, 2018 and February 4, 2020. Our employment letter with Mr. Griffiths’ letter agreement provides for him to serve as Head of Information Technology. The agreementGriffiths does not haveprovide for severance benefits in the context of termination or a term.change in control.
The employment letter agreement provides for an initial base salary of $1,000,000. In addition, Mr. Griffiths is eligible to receive an annual bonus contingent upon the achievement of annual performance objectives. Mr. Griffiths’ annual bonus target was set at $1,350,000, and the letter agreement provided that the bonus for 2016 would not be lower than the target bonus.
The letter agreement also provides, among other things, that Mr. Griffiths would participate in the Corporate Long-Term Incentive Plan, subject to its terms, except that for 2016, Mr. Griffiths’ award was equal to 15% of his target bonus.

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Mr. Griffiths’ letter agreement also provides that:
30% of his variable compensation will be paid in cash;
30% of his variable compensation will be paid in shares, subject to a one-year holding requirement; and
The remaining 40% of his variable compensation will be deferred and payable in equal parts over three years (with each year's payment paid 50% in cash and 50% in shares subject to a one-year holding requirement).

Payment of deferred shares is subject to Mr. Griffiths not having voluntarily terminated or been terminated for cause through the date of payment, as well as none of the following circumstances occurring during the deferral period:
Deficient performance by Santander;
Failure by Mr. Griffiths to comply with internal rules, specifically including those relating to risk;
Material reformulation of Santander’s financial statements (other than due to change in accounting standards); or
Significant negative variations in Santander’s economic capital or risk profile.

The letter agreement also provides that Mr. Griffiths will receive a sign-on bonus to compensate himcompensation for his forfeited equity from his prior position, to be paid in four installments totaling $2,500,000, with oneof which the final installment of $500,000$666,000 was paid following six months of employment, one installment of $667,000 paid following one year of employment, and two installments of $667,000 payable following two and three years of employment, respectively. No payment will be made if Mr. Griffiths voluntarily terminates employment or we terminate him for cause through the date of payment,in 2019. Mr. Griffiths must repay such amountsthis payment if he voluntarily terminates employment or we terminate him for cause (as defined in the employment letter) within 12 months of such payment.
Michael Lipsitz

We providedentered into an employment letter with Mr. Lipsitz dated as of July 22, 2015, which was further modified by a letter agreement dated December 21, 2016. Our employment letter with Mr. Lipsitz does not provide for travel arrangements and reasonable air travel expensesseverance benefits in the context of termination or a change in control.

William Wolf

We entered into an employment letter with Mr. Wolf dated as of January 7, 2016. Our employment letter with Mr. Wolf does not provide for severance benefits in the context of termination or a change in control.

The employment letter also provides that Mr. Griffiths between Ontario, Canada and Boston, Massachusetts. WeWolf will provide lodgingreceive compensation for his forfeited equity, of which the final installment of $420,000 was paid in Boston or will reimburse him, on an after-tax basis, for lodging in Boston, which will not exceed $4,000 net on a monthly basis.April 2019. Mr. Griffiths is also eligible to receive a 24-month relocation benefit in accordance with our policies, which Mr. GriffithsWolf must repay to us in the event he voluntarily terminates employment or$420,000 if we terminate him for cause within 24 months of employment with us.
Mr. Griffiths’ letter agreement contains a nondisclosure obligation and a one-year non-solicitation agreement.


Brian Gunn

We entered into a letter agreement with Mr. Gunn dated as of May 15, 2015, and amended as of June 29, 2015.

Mr. Gunn’s letter agreement provides for him to serve as our Chief Risk Officer. The agreement does not have a term.

The letter agreement provides for an initial base salary of $1,000,000. In addition, Mr. Gunn is eligible to receive an annual bonus contingent upon the achievement of annual performance objectives. Mr. Gunn’s annual bonus target for 2015 was $1,500,000, and the letter agreement provides that the bonus for 2015 would not be lower than the target bonus.

The letter agreement also provides, among other things, that Mr. Gunn will participate(as defined in the Performance Shares Plan subject to its terms, except that for 2015, Mr. Gunn’s reference value was equal to 15% of his target bonus.

Mr. Gunn’s letter agreement provides that:

30% of his variable compensation will be paid in cash;
30% of his variable compensation will be paid in shares, subject to a one-year holding requirement; and
The remaining 40% of his variable compensation will be deferred and payable in equal parts over three years (with each year's payment paid 50% in cash and 50% in shares subject to a one-year holding requirement).

Payment of deferred shares is subject to Mr. Gunn not having voluntarily terminatedemployment letter) on or been terminated for cause through the date of payment, as well as none of the following circumstances occurring during the deferral period:

Material deficient performance by Santander as a result, at least in part, due to Mr. Gunn’s conduct;
Failure by Mr. Gunn to comply with internal rules, specifically including those relating to risk;
Material reformulation of Santander’s financial statements (other than due to change in regulations); or
Significant negative variations in Santander’s economic capital or risk profile.

before April 2020.

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The letter agreement also provides that Mr. Gunn will receive a sign-on bonus paid in three installments with each installment paid on the first regularly scheduled payroll following the first, second, and third year of employment, respectively. The amount of the sign-on bonus was equal to the total value of equity awards that Mr. Gunn forfeited as a result of leaving his prior employment and accepting employment with SHUSA. We have paid Mr. Gunn $1,061,739 as compensation for two of his three equal installments for his forfeited equity, with one remaining payment of $530,870 due to be paid in April 2018. Mr. Gunn or his beneficiaries, as applicable, will receive payment of unpaid portions of his sign-on bonus if he dies, becomes disabled, or we terminate his employment without cause but no payment will be made if Mr. Gunn voluntarily terminates or we terminate him for cause through the date of payment.
In the event that Mr. Gunn provides sufficient documentation that his former employer is no longer obligated to make certain payments to Mr. Gunn under a deferred compensation arrangement maintained by that employer, we will pay Mr. Gunn those amounts in the same calendar year as the amounts were otherwise payable by his former employer.
Under the letter agreement, we provided Mr. Gunn housing accommodations in Boston for 12 months. If Mr. Gunn had voluntarily terminated employment or we terminated him for cause prior to competing 24 months of service, Mr. Gunn would have been obligated to reimburse Santander for this cost.
In 2016, Mr. Gunn agreed to a nondisclosure obligation and a one-year non-solicitation agreement.

Mahesh Aditya

We entered into aan employment letter agreement with Mr. Aditya dated as of February 2, 2017 that was revised on April 28, 2017.

Our employment letter with Mr. Aditya's letter agreement provides for him to serve as our Chief Operating Officer. The agreementAditya does not haveprovide for severance benefits in the context of termination or a term.change in control.

The employment letter agreement provides for an initial base salary of $1,000,000. In addition, Mr. Aditya is eligible to receive an annual bonus contingent upon the achievement of annual performance objectives. Mr. Aditya’s annual bonus target for 2017 was $1,000,000, and the letter agreement provides that the bonus for 2017 would not be lower than the target bonus.

Mr. Aditya's letter agreement provides that:

30% of his variable compensation will be paid in cash;
30% of his variable compensation will be paid in shares, subject to a one-year holding requirement; and
The remaining 40% of his variable compensation will be deferred and payable in equal parts over three years (with each year's payment paid 50% in cash and 50% in shares subject to a one-year holding requirement).

Payment of deferred shares is subject to Mr. Aditya not having voluntarily terminated or been terminated for cause through the date of payment, as well as none of the following circumstances occurring during the deferral period:

Material deficient performance by Santander as a result, at least in part, due to Mr. Aditya's conduct;
Failure by Mr. Aditya to comply with internal rules, specifically including those relating to risk;
Material reformulation of Santander's financial statements (other than due to change in regulations); or
Significant negative variations in Santander's economic capital or risk profile.

The letter agreement also provides that Mr. Aditya will receive $2,175,000 as compensation for his forfeited equity in four installments. His agreement provides for the first installmentinstallments, of $900,000 payable in July 2017, the second installment of $550,000 payable in November 2017, and the third installment of $400,000 payable in November 2018, andwhich the final installment of $325,000 to bewas paid in November 2019. No payments will be made if Mr. Aditya voluntarily terminates employment or if we terminate him for cause through the dates of payment and Mr. Aditya must repay such amountsthis final installment if he voluntarily terminates employment or we terminate him for cause (as defined in the employment letter) within 12 months of payment. This repayment obligation remains in place for the final installment until November 2020 notwithstanding Mr. Aditya's new role at SC.
Potential Payments upon Termination or Change in Control

Executive Incentive Plan, SRIP, and Performance Share Plan
Deferred cash and Santander ADRs granted under the Executive Incentive Plan, SRIP, and Performance Share Plan as described in the footnotes under the section captioned "Outstanding Equity Awards at Fiscal 2019 Year End" generally require the participating named executive officer to remain employed until each such payment.
Underscheduled vesting date to earn payment for the letter agreement, we will provide Mr. Adityaaward. The arrangements, however, permit the award to continue to become earned and payable over the vesting schedule as if the named executive officer had remained employed in the event that the named executive officer terminates employment due to (i) the executive’s death or disability; (ii) an involuntary termination due to reduction in force, divestiture, or acquisition; or (iii) the executive’s retirement. "Retirement" for this purpose means the executive’s termination of employment after attaining a combined age and years of service of at least 60, with relocation benefitsat least five years of service and at least age 55. In the case of retirement, the named executive officer must also certify the intent to retire from the for-profit financial services industry for a minimum of 12 months. IfAs of the end of the last fiscal year, none of the named executive officers was eligible for Retirement. The vesting of the awards remains subject to any performance goals, as well as the Santander US Malus and Clawback Requirements Policy, as described under "Long-Term/Deferred" in the Compensation Discussion and Analysis above.

Severance Plan and Agreements
See above regarding the description of severance benefits payable to Mr. Aditya voluntarily terminatesWennes in case of his termination by us without "cause" or by Mr. Wennes for "good reason."
The other named executive officers are covered by our Enterprise Severance Policy. Under this policy, if a named executive officer’s employment is involuntarily terminated by us, other than for unsatisfactory performance or misconduct, the executive is terminatedeligible to receive a lump sum severance ranging from 26 to 52 weeks of base salary based on a formula in the policy that depends on the executive’s length of service. As of December 31, 2019, each of the other named executive officers would be eligible for cause prior to competing 24a minimum of 26 weeks of salary under this formula. The named executive officer would also receive three months of service, Mr. Aditya will reimburse Santander for this cost.
Mr. Aditya’s letter agreement containspremiums under COBRA and six months of outplacement services. The named executive officer must provide us with a nondisclosure obligationrelease of claims and a one-year non-solicitation agreement.


comply with certain post-employment covenants to be eligible to receive the severance benefits.

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Deferred Compensation Plan
We maintain the Sovereign Bancorp, Inc. 2007 Nonqualified Deferred Compensation Plan, which we refer to as the “Deferred Compensation Plan.” The Deferred Compensation Plan has the following features:
Participants may defer up to 100% of their cash bonus and choose among various investment options upon which we will base the rate of return on amounts deferred. We adjust participants’ accounts periodically to reflect the deemed gains and losses attributable to the deferred amounts. The specific investment options mirror the investment options in our qualified retirement plan, with some additional investment alternatives available.
We distribute all account balances in cash.
Participants are always 100% vested in all amounts deferred.
Our and SBNA’s directors may defer receipt of cash fees for service as a director into the Deferred Compensation Plan.
Distribution events will be only as permitted under Section 409A of the Internal Revenue Code.

No named executive officer deferred any salary or bonus earned in 2017 into the Deferred Compensation Plan.

Potential Payments uponUpon Termination or Change in Control

The table below sets forth the value of the benefits (other than payments that were generally available to salaried employees) that would have been due to the named executive officers if they had terminated employment with us on December 31, 2017. We describe these agreements, including2019 based on the material conditions or obligations applicable to the receipt of these benefits, under the caption “Description of Letter Agreements,”arrangements described above.
 Termination
for Death
 Termination for Disability Involuntary
Termination Other than for Cause
 Voluntary Termination or Termination for Cause Termination
for Death
 Termination for Disability Involuntary
Termination Other than for Cause
 Voluntary Termination or Termination for Cause Change in Control
                  
Scott Powell 
Executive Bonus Program (1)
 $2,409,636
 $2,409,636
 $2,409,636
 $0
 
Executive Bonus Program (1)
 $
 $
 $
 $
 $
Performance Share Plan (2)
 $563,428
 $563,428
 $563,428
 $0
Total $2,973,064
 $2,973,064
 $2,973,064
 $0
 
Santander Consumer RSUs (2)
 $
 $
 $
 $
 $
 
Severance Benefits (3)
 $
 $
 $
 $
 $
 Total $
 $
 $
 $
 $
Timothy Wennes 
Executive Bonus Program (1)
 $
 $
 $
 $
 $
 
Severance Benefits (3)
 $
 $
 $5,511,700
 $
 $
 Total $
 $
 $5,511,700
 $
 $
Juan Carlos Alvarez 
Executive Bonus Program (1)
 $438,061
 $438,061
 $438,061
 $
 $
 
Santander Consumer RSUs (2)
 $232,461
 $232,461
 $232,461
 $
 $
 
Severance Benefits (3)
 $
 $
 $561,700
 $
 $
 Total $670,522
 $670,522
 $1,232,222
 $
 $
Madhukar Dayal
 
Executive Bonus Program (1)
 $802,863
 $802,863
 $802,863
 $0
 
Executive Incentive Plan (1)
 $2,037,239
 $2,037,239
 $2,037,239
 $
 $
Performance Share Plan (2)
 $
 $
 $
 $
Total $802,863
 $802,863
 $802,863
 $0
 
Severance Benefits (3)
 $
 $
 $611,700
 $
 $
 Total $2,037,239
 $2,037,239
 $2,648,939
 $
 $
Daniel Griffiths 
Executive Bonus Program (1)
 $722,580
 $722,580
 $722,580
 $0
 
Executive Incentive Plan (1)
 $1,576,144
 $1,576,144
 $1,576,144
 $
 $
Performance Share Plan (2)
 $
 $
 $
 $
Total $722,580
 $722,580
 $722,580
 $0
Brian Gunn 
Executive Bonus Program (1)
 $1,345,499
 $1,345,499
 $1,345,499
 $0
Performance Share Plan (2)
 $316,935
 $316,935
 $316,935
 $0
Sign-On Bonus $530,870
 $530,870
 $530,870
 $0
Total $2,193,304
 $2,193,304
 $2,193,304
 $0
 
Severance Benefits (3)
 $
 $
 $561,700
 $
 $
 Total $1,576,144
 $1,576,144
 $2,137,844
 $
 $
Michael Lipsitz 
Executive Incentive Plan (1)
 $1,227,664
 $1,227,664
 $1,227,664
 $
 $
 
Severance Benefits (3)
 $
 $
 $486,700
 $
 $
 Total $1,227,664
 $1,227,664
 $1,714,364
 $
 $
William Wolf 
Executive Incentive Plan (1)
 $1,037,404
 $1,037,404
 $1,037,404
 $
 $
 
Severance Benefits (3)
 $
 $
 $411,700
 $
 $
 Total $1,037,404
 $1,037,404
 $1,449,104
 $
 $
Mahesh Aditya 
Executive Bonus Program (1)
 $
 $
 $
 $
 
Executive Incentive Plan (1)
 $808,361
 $808,361
 $808,361
 $
 $
Performance Share Plan (2)
 $
 $
 $
 $
Total $
 $
 $
 $
 
Severance Benefits (3)
 $
 $
 $749,200
 $
 $
 Total $808,361
 $808,361
 $1,557,561
 $
 $

Footnotes:
 
(1)Amounts shown for the Executive Bonus ProgramIncentive Plan are the value of deferred cash and Santander ADRs under the Executive Incentive Plan and/or SRIP as of December 31, 2019 (based on the NYSE closing price of SAN ADRs on that date). As noted above, payment of deferred amounts that were deferredis made in 2017 that are payable in three annual installments. Payment isaccordance with the original vesting schedule and subject to all performance conditions, as if employment had not accelerated due to termination of employment.been terminated.
(2)Amounts shown for the Performance Share PlanSC RSUs are the maximum amountvalue of unvested SC RSUs as of December 31, 2019 (based on the closing price of the SC common stock on that could bedate).  As noted above, payment of the RSUs is made in accordance with the original vesting schedule and subject to all performance conditions, as if employment had not been terminated.  The "Change in Control" column shows amounts payable assumingin the highest targetsevent of a change in control of SC (if the RSUs are achieved for future years. Payment is not accelerated due toassumed, converted or replaced in the transaction) or upon a termination of employment.employment without cause or with good reason within two years after a change in control of SC (if the RSUs are assumed, converted or replaced in the transaction). 
(3)Amounts shown are as follows: (i) for Mr. Wennes, in accordance with his employment letter described above, 52 months of base salary, plus payment of his 2019 guaranteed bonus in the amount of $3.4 million (in cash and equity paid in accordance with the applicable deferral vesting schedule and subject to all performance conditions, as if employment had not been terminated), plus the estimated value of three months of COBRA premiums and six months of outplacement services; and (ii) for each of the other named executive officers, in accordance with the Enterprise Severance Policy as described above, 26 weeks of salary plus the estimated value of three months of COBRA premiums and six months of outplacement services.

Director Compensation in Fiscal Year 20172019
We believe that the amount, form, and methods used to determine compensation of our non-executive directors wereare important factors in:
attracting and retaining directors who were independent, interested, diligent, and actively involved in overseeing our affairs and who satisfy the standards of Santander, the sole shareholder of our common stock; and
providing a reasonable, competitive, and effective approach that compensates our directors for the responsibilities and demands of the role of director.

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Director Compensation Program
Our 2019 Director Compensation Program for service on our Board and the SBNA Board included payment of the following amounts, quarterly in arrears, to our non-executive directors:
a $150,000 cash retainer annually; plus
a $20,000 supplement as an additional cash retainer annually, if the director also serves as a director of SBNA or of SC; plus
$70,000 in cash annually, if the director serves as chair of our Risk Committee, Audit Committee or BCTMC; plus
$35,000 in cash annually if the director serves as chair of SBNA’s or SC’s Risk Committee, Audit Committee or BCTMC; plus
$20,000 in cash annually if the director serves as a non-chair member of our Nominations Committee, Risk Committee, Audit Committee, or BCTMC; plus
$5,000 in cash annually if the director also serves as a non-chair member of SBNA’s or SC’s Risk Committee, Audit Committee or BCTMC or SBNA’s Nominations and Executive Committee or SC’s Executive Committee.

The BCTMC is scheduled to next review our Director Compensation Program during the first half of 2020. At the present time, we do not expect that the compensation program for non-executive directors will materially change.

The following table sets forth a summary of the compensation that we paid to each director for service as a director of SHUSA and its subsidiaries for 2017:2019:
Name 
Fees Earned or
Paid in Cash
(1)
 
Stock Awards(2)
 Other
Compensation
 
Total(1)
Stephen Ferriss (3)
 $342,800
 $50,000
 $0
 $392,800
Alan Fishman(4)
 $396,250
 $
 $0
 $396,250
Thomas S. Johnson(5)
 $296,250
 $
 $0
 $296,250
Catherine Keating(6)
 $337,917
 $
 $0
 $337,917
Henri-Paul Rousseau(7)
 $299,166
 $
 $0
 $299,166
T. Timothy Ryan, Jr.(8)
 $1,450,000
 $
 $0
 $1,450,000
Wolfgang Schoellkopf(9)
 $127,981
 $
 $0
 $127,981
Richard Spillenkothen(10)
 $314,167
 $
 $0
 $314,167
Name 
Fees Earned or
Paid in Cash
(1)
 
Stock Awards(2)
 
Total (1)
Stephen Ferriss (3)
 $415,000
 $50,000
 $465,000
Alan Fishman(4)
 $390,000
 $
 $390,000
Thomas S. Johnson(5)
 $290,000
 $
 $290,000
Henri-Paul Rousseau(6)
 $327,500
 $
 $327,500
T. Timothy Ryan, Jr.(7)
 $1,450,000
 $
 $1,450,000
Richard Spillenkothen(8)
 $127,083
 $
 $127,083
Edith Holiday(9)
 $193,751
 $50,000
 $243,751

Footnotes:
(1)Reflects amounts paidearned in 2017 for the fourth quarter of 2016 and the first three quarters of 2017.2019.
(2)Reflects awards of RSUs payable in shares of Santander Consumer common stock.SC Common Stock granted for service on the Board of SC. The RSUs will vest on the earlier of (i) the first anniversary of the grant date, and (ii) Santander Consumer’sSC’s first annual shareholders' meeting following the grant date. Reflects the aggregate grant date fair value computed in accordance with ASC Topic 718, based on the closing price of Santander Consumer’s common stockSC Common Stock on the applicable grant date.Referdate. Refer to Note 1618 of the Consolidated Financial Statements contained in this Annual Report on Form 10-K for a discussion of the relevant assumptions used to account for these awards.
(3)Mr. Ferriss servesreceived $100,000 for service as the Chair of Santander BanCorp, and received cash compensation of $100,000 for such service in 2017, as approved by Santander Bancorp’s Board of Directors, which areamount is included in the above table. The table also includes cash compensation of $211,549$230,000 and $55,000 that Mr. Ferriss earned for service on Santander Consumer’s Board.the Boards of SC and BSI, respectively. As of December 31, 2017,2019, Mr. Ferriss held 4,3702,129 of outstanding, unvested Santander ConsumerSC RSUs and 5,207 of outstanding, vested options to purchase shares of Santander Consumer common stock.SC Common Stock.
(4)Includes cash compensation of $184,250$180,000 and $100,000 that Mr. Fishman earned for service on the BoardsBoard of SBNA and Santander Investment Securities, Inc.,as the Chair of SIS, respectively.
(5)Includes cash compensation of $99,250$95,000 that Mr. Johnson earned for service on the Board of SBNA.SBNA Board.
(6)Includes cash compensation of $147,167 that Ms. Keating earned for service on the Board of SBNA.
(7)Mr. Rousseau joined our Board on March 15, 2017. Includes cash compensation of $242,083$179,583 that Mr. Rousseau earned for service on the Board of SBNA.SBNA Board.
(8)(7)Includes cash compensation of $450,000 and $100,000 that Mr. Ryan earned for service onas Chair of the Boards of SBNA and Banco Santander International,BSI, respectively.
(9)(8)Mr. SchoellkopfSpillenkothen retired from our Board and the SBNA Board on June 14, 2017.May 10, 2019. Includes cash compensation of $32,250 and $49,231 that Mr. Schoellkopf earned for service on SBNA’s and Santander Consumer’s Board, respectively.
(10)Includes cash compensation of $134,250$45,833 that Mr. Spillenkothen earned for service on SBNA’s Board.
Director Compensation Program
Our Board adopted the following compensation program for non-executive directors for service on our Board and on the SBNA Board for 2017:
a $150,000 cash retainer annually; plus
a $20,000 supplement as an additional cash retainer annually, if the director also serves as a director of SBNA or of Santander Consumer; plus
$70,000 in cash annually, if the director serves as chair of the our Risk Committee, Audit Committee or Compensation Committee; plus
$35,000 in cash annually if the director serves as chair of SBNA’s or Santander Consumer’s Risk Committee, Audit Committee or Compensation Committee; plus
$20,000 in cash annually if the director serves as a non-chair member of our Executive Committee, Risk Committee, Audit Committee, or Compensation Committee; plus
$5,000 in cash annually if the director also serves as a non-chair member of SBNA’s or SC’s Executive Committee, Risk Committee, Audit Committee, or Compensation Committee.
We pay these amounts quarterly in arrears.
For 2018, we expect that the compensation program for non-executive directors will remain substantially the same.


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(9)Ms. Holiday was appointed to our Board on December 11, 2019. Includes cash compensation of $190,000 that Ms. Holiday earned for service on the Board of SC. As of December 31, 2019, Ms. Holiday held 2,129 of outstanding, unvested SC RSUs.

Agreement with Mr. Ryan

Mr. Ryan serves as our non-executive chair. We and SBNA entered into an agreement with Mr. Ryan as of December 1, 2014 to serve as our and SBNA’s chair. The initial term of the agreement was for three years through November 30, 2017 and was extended by us, SBNA, and Mr. Ryan for additional terms through 2019. Under this agreement, for years prior to 2020, we paypaid Mr. Ryan an annual cash retainer of $900,000 for serving as our chair and aSBNA paid him an annual $450,000 cash retainer for serving as SBNA’s chair. The initial term of the agreement was for three years through November 30, 2017. Under the agreement, if Mr. Ryan forfeits any equity or equity-based awards in connection with his prior employment with JPMorgan Chase & Co., we will pay him an amount equal to the present value of such equity awards. Mr. Ryan is also eligible to receive equity compensation on the same basis as other non-executive members of our or SBNA’s Board.

On AugustDecember 30, 2017,2019, we and SBNA entered into an amendment to the originalamended and restated agreement to providewith Mr. Ryan. The amended and restated agreement provides for an additional one-year term through November 30, 2018.2020. The amendmentamended and restated agreement also providedprovides for a reduced annual cash retainer of $750,000 for serving as our chair and a reduced retainer of $250,000 for serving as SBNA’s chair. The amended and restated agreement provides that we and SBNA could, at our option, propose to extend the term of Mr. Ryan’s service for additional terms.

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Under the amendment,amended and restated agreement, Mr. Ryan is subject to a non-solicitation obligation while serving on our and SBNA’s Boards.boards. In addition, the amended and restated agreement includes a restriction on Mr. Ryan’s ability to compete with us, the Bank and Santander for 3 years following termination of his role as chair.

The other terms of Mr. Ryan’s original agreement with respect toRyan also serves as a director on the BSI board, and receives compensation that we pay him for hissuch services as Board chair continue to apply without change.

Directors Participation in Deferred Compensation Plan
The Deferred Compensation Plan provides for the participation of our and SBNA's non-executive directors. The relevant terms of the Deferred Compensation Plan, as we describenoted in the section entitled “DeferredDirectors Compensation Arrangements” above, apply in the same manner to participants who are directors as they do to participants who are executive officers.
No director deferred fees earned for 2017 into the Deferred Compensation Plan.Table footnotes above.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS

As noted elsewhere in this Form 10-K, on January 30, 2009, SHUSA became a wholly-owned subsidiary of Santander (the "Santander Transaction"). As a result, following January 30, 2009, all of SHUSA’s voting securities are owned by Santander.

As a result of the Santander Transaction, there are no longer any outstanding equity awards under SHUSA’s equity incentive compensation plans. Pursuant to the Santander Transaction, (i) all stock options outstanding immediately prior to the Santander Transaction were canceled and any positive difference between the exercise price of any given stock option and the closing price of SHUSA’s common stock on January 29, 2009 was paid in cash to the option holder, and (ii) all shares of restricted stock outstanding immediately prior to the Santander Transaction vested and were treated the same way as all other shares of SHUSA common stock in the transaction.


ITEM 13 - RELATED PARTY TRANSACTIONS

Certain Relationships and Related Transactions

During each of 2017, 20162019, 2018 and 2015,2017, SHUSA and/or the Bank were participants in the transactions described below in which a “related person” (as defined in Item 404(a) of Regulation S-K, which includes directors and executive officers who served during the applicable fiscal year) had a direct or indirect material interest and the amount involved in such transaction exceeded $120,000. Item 13 should be read in conjunction with Note 21 of the Company's Consolidated Financial Statements.

Santander Relationship: Santander owns 100% of SHUSA's common stock. As a result, Santander has the right to elect the members of SHUSA's Board of Directors. In addition, certain individuals who serve as officers of SHUSA are also employees or officers of, or may be deemed to be officers of, Santander and/or its affiliates. The following transactions occurred during the 2017, 20162019, 2018 and 20152017 fiscal years between SHUSA or the Bank and their respective affiliates, on the one hand, and Santander or its affiliates, on the other hand.

Please refer to Note 21 of the Company's Consolidated Financial Statements for contributions from Santander during the year.

Loan Sales

During 2017, SBNA sold $372.1 million of commercial loans to Santander. The sale resulted in $2.4 million of net gain for the year ended December 31, 2017, which is included in Miscellaneous income, net in the Consolidated Statements of Operations.

Letters of credit

In the normal course of business, SBNA provides letters of credit and standby letters of credit to affiliates. During the years ended December 31, 2019 and 2018, the average unfunded balance outstanding under these commitments was $92.5 million and $82.7 million, respectively.

Debt and Other Securities

As of December 31, 2019, 2018 and 2017, SHUSA had $10.1 billion, $8.5 billion and $8.7 billion, respectively, of public securities consisting of various senior note obligations, trust preferred securities obligations and preferred stock. As of such dates, Santander owned approximately 0.2%, 0.4% and 1.6% of these securities, respectively.


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Derivatives

The BankCompany has established a derivatives trading program with Santander pursuant to which Santander and its subsidiaries and affiliates provide advice with respect to derivative trades, coordinate trades with counterparties, and act as counterparty in certain transactions. The agreement and the trades are on market rate terms and conditions. In 2017, 20162019, 2018 and 2015,2017, the aggregate notional amounts of $2.1 billion, $4.6 billion, $2.7 billion and $6.0$2.1 billion, respectively, were completed in which Santander and its subsidiaries and affiliates participated.

As of December 31, 2017, 2016 and 2015, SHUSA had $8.7 billion, $6.1 billion and $5.0 billion, respectively, of public securities consisting of various senior note obligations, trust preferred securities obligations and preferred stock issuances. As of such dates, Santander owned approximately 1.6%, 2.0% and 3.0% of these securities, respectively.Service Agreements

In 2017, 2016 and 2015, the Company and its subsidiaries borrowed money and obtained credit from Santander and its affiliates. Each of the transactions was done in the ordinary course of business and on market terms prevailing at the time for comparable transactions with persons not related to Santander and its affiliates, including interest rates and collateral, and did not involve more than the normal risk of collectability or present other unfavorable features. The transactions are as follows:

In the normal course of business, SBNA provides letters of credit and standby letters of credit to affiliates. During the year ended December 31, 2017, the average unfunded balance outstanding under these commitments was $82.9 million.

In 2017, 2016 and 2015, the Company and its affiliates entered into, or were subject to, various service agreements with Santander and its affiliates. Each of the agreements was made in the ordinary course of business and on market terms. The agreements are as follows:

NW Services Co., a Santander affiliate doing business as Aquanima, is under contract with the BankCompany to provide procurement services, with total fees paid in 2017, 2016 and 20152019 in the amount of $10.2 million, $5.4 million in 2018 and $3.7 million $3.6 million and $3.8 million, respectively.
Duringin 2017. There were no payables in connection with this agreement for the yearyears ended December 31, 2017,2019 or 2018. The fees related to this agreement are recorded in Technology, outside service, and marketing expense in the Company paid $11.2 million in rental payments to Santander compared to $6.1 million in 2016 and $8.1 million in 2015.Consolidated Statements of Operations.
Geoban, S.A., a Santander affiliate, is under contract with the BankCompany to provide administrative services, consulting and professional services, application support and back-office services, including debit card disputes and claims support, and consumer and mortgage loan set-up and review;review, with total fees paid in 2017, 2016 and 2015 in the amounts of $3.3 million, $15.1 million and $9.8 million, respectively.
Ingenieria De Software Bancario S.L., a Santander affiliate, is under contract with the Bank to provide information technology development, support and administration, with total fees paid in 2017, 2016 and 20152019 in the amount of $77.9$1.7 million, $91.7$1.8 million in 2018 and $101.6$3.3 million respectively.
Produban Servicios Informaticos Generales S.L., a Santander affiliate, is under contractin 2017. The Company had no payables in connection with the Bankthis agreement in 2019 or 2018. The fees related to provide professional servicesthis agreement are recorded in Technology, outside service, and administration and support of IT production systems, telecommunications and internal/external applications, with total fees paid in 2017, 2016 and 2015marketing expense in the amountConsolidated Statements of $110.7 million, $123.4 million and $119.1 million, respectively.Operations.
Santander Back-Offices Globales Mayoristas S.A., a Santander affiliate, is under contract with the BankCompany to provide administrative services and back-office support for the Bank'sBank’s derivative, foreign exchange and hedging transactions and programs,programs. Fees in the amounts of $1.4 million were paid to Santander Back-Offices Globales Mayoristas S.A. with totalrespect to this agreement in 2019, and $1.9 million and $1.1 million in 2018 and 2017, respectively. There were no payables in connection with this agreement in 2019 or 2018. The fees related to this agreement are recorded in Technology, outside service, and marketing expense in the Consolidated Statements of Operations.
Santander Global Technology S.L. is under contract with the Company to provide information technology development, support and administration, with fees for these services paid in 2019 in the amount of $2.8 million, $38.7 million in 2018 and $77.9 million in 2017. In addition, as of December 31, 2019 and 2018, the Company had payables for these services in the amounts of $0.2 million and $0.8 million, respectively. The fees related to this agreement are capitalized in Premises and equipment, net on the Consolidated Balance Sheets.
Santander Global Technology is also under contract with the Company to provide professional services and administration and support of information technology production systems, telecommunications and internal/external applications, with fees for these services paid in 2019 in the amount of $20.9 million, $74.9 million in 2018 and $110.7 million in 2017. In addition, as of December 31, 2019 and 2018, the Company had payables for these services in the amounts of $15.6 million and $18.1 million, respectively. The fees related to this agreement are capitalized in Premises and equipment, net on the Consolidated Balance Sheets.
In addition, Santander Global Technology is under contract with the Company to provide information technology development, support and administration, with fees paid in eachthe amount of 2017, 2016$113.2 million in 2019 and 2015$5.5 million in 2018. As of $1.1 million, $1.8December 31, 2019 and 2018, the Company had payables with Santander Global Technology in the amounts of $5.6 million and $1.6$21.9 million respectively.for these services. The fees related to this agreement are capitalized in Premises and equipment, net on the Consolidated Balance Sheets.
During the year ended December 31, 2019 and 2018, the Company paid $15.4 million and $17.1 million to Santander through its New York branch, is under an agreement withfor the Bankdevelopment and implementation of global projects as part of group expense allocation.
During the year ended December 31, 2019, the Company paid $3.9 million in rental payments to provide support for derivatives transactionsSantander, compared to the Bank. The Bank is under$3.9 million in 2018 and $11.2 million in 2017.

SC has entered into or was subject to various agreements with Santander, through its New York branch, to provide credit risk analysisaffiliates or the Company. Each of the agreements was done in the ordinary course of business and investment advisory services to Santander.on market terms. Those agreements include the following:


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SC relationship: On January 28, 2014, the Company obtained a controlling financial interest in SC in connection with the Change in Control. The financial information set forth in Item 8 gives effect to the Company’s consolidation of SC as a result of the Change in Control. The following transactions occurred during the 2017, 2016 and 2015 fiscal years between SHUSA or the Bank and SC, on the one hand, and Santander or its affiliates, on the other hand. Those agreements include the following:Revolving Agreements

SC hashad a $3.0 billion committed revolving credit agreement with Santander that can be drawn on an unsecured basis. This facility was terminated during 2018. During the years ended December 31, 2017 , 20162019, December 31, 2018 and 2015,December 31, 2017, SC incurred interest expense, including unused fees of $0.0 million, $11.6 million and $51.7 million, $69.9 million and $96.8 million, respectively, which included $1.4 million and $6.3 million of accrued interest payable for the years ended December 31, 2017 and 2016, respectively.

In August 2015, under a new agreement with Santander, SC agreed to begin incurring a fee of 12.5 basis points (per annum)per annum on certain warehouse facilities as they renew, for which Santander provides a guarantee of SC's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee will be paid against each months ending balance. The guarantee fee will only be applicable for additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by a duly executed counter-guaranty agreement. SC recognized guarantee fee expense of $6.0$0.4 million, $6.4$5.0 million and $2.3$6.0 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. As of December 31, 20172019 and 2016,2018, SC had $7.6$0.0 million and $1.6$1.9 million of fees payable to Santander under this arrangement.
Through SHUSA, Santander provides SC with $3.3 billion of committed revolving credit, $300.0 million of which is collateralized by residuals retained on its own securitizations, and $3.0 billion of committed revolving credit that can be drawn on an unsecured basis. These transactions eliminate in the consolidation of the Company.
SC has entered into derivative agreements with Santander and its affiliates, which consist primarily of swap agreements to hedge interest rate risk. These contracts had notional values of $3.7 billion and $7.3 billion at December 31, 2017 and 2016, respectively, which are included in Note 14 of these financial statements.Securitizations
During 2014 and until May 9, 2015,
SC entered into a flow agreementMSPA with SBNASantander, under which SBNAit had the first rightoption to review and approve Chrysler Capital consumer vehicle lease applications. SC could review any applications declined by SBNAsell a contractually determined amount of eligible prime loans to Santander under the SPAIN securitization platform, for SC’s own portfolio.a term that ended in December 2018. SC provides servicing and received an origination fee on all leasesloans originated under this agreement. Pursuantarrangement. SC provides servicing on all loans originated under this arrangement.

Other information relating to SPAIN securitization platform for the Chrysler Agreement, SC pays FCA on behalf of SBNA for residual gains and losses on the flowed leases. Fees related to this agreement eliminate in consolidation.
During the yearyears ended December 31, 2017, SBNA purchased an RV/marine loan portfolio from SC. Servicing of these receivables will be performed by SC. All fees2019 and expenses associated with this agreement between SBNA and SC eliminate in consolidation.2018 is as follows:
(in thousands) December 31, 2019 December 31, 2018
Servicing fee income $29,831
 $35,058
Loss (Gain) on sale, excluding lower of cost of market adjustments (if any) 
 20,736
Servicing fees receivable 1,869
 2,983
Collections due to Santander 8,180
 15,968

Origination Support Services

Beginning in 2018, SC has agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail loans, primarily from ChryslerFCA dealers. In addition, SC has agreed to perform the servicing offor any loans originated on SBNA’s behalf. For the years ended December 31, 2019 and 2018, SC facilitated the purchase of $7.0 billion and $1.9 billion of RICs, respectively. Under this agreement, SC recognized referral and servicing fees of $58.1 million and $15.5 million for the year ended December 31, 2019 and 2018, of which $2.1 million was receivable and $4.9 million was payable to SC as of December 31, 2019 and 2018, respectively.

Other related-party transactions

As of December 31, 2019, Jason A. Kulas and Thomas Dundon, both former members of SC's Board of Directors and CEOs of SC, each had a minority equity investment in a property in which SC leases approximately 373,000 square feet as its corporate headquarters. During the years ended December 31, 2019, 2018 and 2017 SC recorded $5.3 million, $4.8 million and $5.0 million, respectively, in lease expenses on this property. Future minimum lease payments over the seven-year term of the lease, which extends through 2026, total $48.5 million.
SC's wholly-owned subsidiary Santander Consumer International Puerto Rico, LLC ("SCI"),SCI, opened deposit accounts with Banco Santander Puerto Rico,BSPR, an affiliated entity. As of December 31, 20172019 and 2016,2018, SCI had cash (including restricted cash) of $106.6$8.1 million and $98.8$8.9 million, respectively, on deposit with Banco Santander Puerto Rico.BSPR. This transaction eliminates in the consolidation of SHUSA.
On March 29, 2017, SC entered into a Master Securities Purchase Agreement with Santander, under which it has the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform, for a term ending in December 2018. SC will provide servicing on all loans originated under this arrangement. For the year ended December 31, 2017, SC sold $1.2 billion of loans under this arrangement. Under a separate securities purchase agreement, SC sold $1.3 billion of prime loans to Santander during the year ended December 31, 2017. A total loss of $13.0 million was recognized for the year ended December 31, 2017, which is included in Miscellaneous (loss)/income, net(1) in the Consolidated Statement of Operations. SC had $13.0 million of collections due to Santander as of December 31, 2017.
SC is partyhas certain deposit and checking accounts with SBNA. As of December 31, 2019 and 2018, SC had a balance of $33.7 million and $92.8 million, respectively, in these accounts. This transaction eliminates in the consolidation of SHUSA.

Entities that transferred to a master service agreement ("MSA")the IHC have entered into or were subject to various agreements with a company in which it has a cost method investment and holds a warrant to increaseSantander or its ownership if certain vesting conditions are satisfied. The MSA enables SC to review point-of-sale credit applications of retail store customers. Under termsaffiliates. Each of the MSA, SC originated personal revolving loansagreements was made in the ordinary course of zero, zerobusiness and $23.5 million duringon market terms. Those agreements include the years endedfollowing:

BSI enters into transactions with affiliated entities in the ordinary course of business. As of December 31, 2017, 2016 and 2015, respectively. During the year ended2019, BSI had short-term borrowings from unconsolidated affiliates of $1.8 million, compared to $59.9 million as of December 31, 2015, SC fully impaired its cost method investment in this entity2018. BSI had cash and recorded a losscash equivalents deposited with affiliates of $6.0 million. Effective August 17, 2016, SC ceased funding new originations from all of the retailers for which it reviews credit applications under this MSA.
On July 2, 2015, the Company announced the departure of Mr. Dundon from his roles as Chairman of SC’s Board$6.8 million and its CEO, effective$46.2 million as of the closeDecember 31, 2019 and December 31, 2018, respectively. BSI had foreign exchange rate forward contracts with affiliates as counterparties with notional amounts of business on July 2, 2015. On the dateapproximately $1.9 billion and $1.5 billion as of Mr. Dundon's departure, among other things, he entered into the Separation Agreement.

December 31, 2019 and December 31, 2018, respectively. BSI held deposits from unconsolidated affiliates of $118.4 million and $55.7 million as of December 31, 2019 and December 31, 2018, respectively. At December 31, 2019 and 2018, loan participations of $714.2 million and $195.8 million, respectively, were sold to BSSA without recourse.

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SIS enters into transactions with affiliated entities in the ordinary course of business. SIS executes, clears and custodies certain of its securities transactions through various affiliates in Latin America and Europe. The Separation Agreement as amended provided for certain payments and benefitsbalance of payables to Mr. Dundon, as well as the delivery by the Company of an irrevocable noticecustomers due to exercise the call option with respectSantander at December 31, 2019 was $1.9 billion, compared to the shares of SC Common Stock owned by DDFS and consummate the transactions contemplated by that call option notice, subject to required bank regulatory approvals and any other approvals required by law being obtained. On August$1.0 billion at December 31, 2016, Santander exercised its option to assume the Company’s obligation to purchase the shares of SC Common Stock in respect of that call transaction.2018.

On November 15, 2017, the parties to the Separation Agreement entered into a settlement and release that, among other things, altered certain of the economic arrangements in the Separation Agreement. Pursuant to the settlement agreement, (i) the amounts payable by SC to Mr. Dundon were reduced by $50.0 million to $66.1 million and (ii) Santander affirmed its prior commitment to complete the call transaction. The call transaction was consummated at the aggregate price of $941.9 million, representing the aggregate of the previously agreed price per share of SC Common Stock of $26.17, plus accrued interest. The settlement agreement included mutual releases. All transactions contemplated by the settlement agreement, including the call transaction, were completed on November 15, 2017.

Pursuant to the Separation Agreement, concurrently with the completion of the call transaction, $294.5 million of the net proceeds payable to DDFS in that transaction were used to pay off all outstanding principal, interest and fees under a loan agreement between Santander and DDFS.

On November 15, 2017, Santander contributed the 34,598,506 shares of SC Common Stock purchased from DDFS in the call transaction to the Company. The Company recorded the capital contribution at the contribution date fair value of $566 million. As a result, the Company currently owns a total of 245,593,555 shares of SC Common Stock, representing approximately 68.1% of SC’s outstanding shares.

Loans to Directors and Executive Officers

SHUSA, through the Bank, is in the business of gathering deposits and making loans. Like many financial institutions, SHUSA actively encourages its directors and the companies which they control and/or are otherwise affiliated with to maintain their banking business with the Bank, rather than with a competitor.

In addition, the Bank provides certain other banking services to its directors and entities with which they are affiliated. In each case, these services are provided in the ordinary course of the Bank's business and on substantially the same terms as those prevailing at the time for comparable transactions with others.

As part of its banking business, the Bank also extends loans to directors, executive officers and employees of SHUSA and the Bank and their respective subsidiaries. Such loans are provided in the ordinary course of the Bank’s business, are on substantially the same general terms (including interest rates, collateral and repayment terms) as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with others not affiliated with the Bank and do not involve more than the normal risk of collectability. As permitted by Regulation O, certain loans to directors and employees of SHUSA and the Bank, including SHUSA’s executive officers, are priced at up to a 0.25% discount to market and require no application fee, but contain no other terms different than terms available in comparable transactions with non-employees. The 0.25% discount is discontinued when an employee terminates his or her employment with SHUSA or the Bank. No such loans have been non-accrual, past due, restructured, or potential problem loans. Loans to directors and executive officers required to be disclosed under Item 404(b) of Regulation S-K were as follows:

An adjustable rate first mortgage loan to Federico Papa, a former executive officer of the Bank, in the original principal amount $995,000. The current interest rate on this loan was 2.00%. For 2019, the highest outstanding balance was $472,284, and the balance outstanding at December 31, 2019 was zero. Mr. Papa paid $472,284 in principal and $13,284 in interest on this loan in 2019. For 2018, the highest outstanding balance was $488,014, and the balance outstanding at December 31, 2018 was $472,284. Mr. Papa paid $15,730 in principal and $9,617 in interest on this loan in 2018. For 2017, the highest outstanding balance was $503,432, and the balance outstanding at December 31, 20172018 was $488,014. Mr. Papa paid $15,418 in principal and $9,928 in interest on this loan in 2017. For 2016, the highest outstanding balance was $902,888, and the balance outstanding at December 31, 2016 was $503,432. Mr. Papa paid $399,456 in principal and $12,153 in interest on this loan in 2016. For 2015, the highest outstanding balance was $928,682, and the balance outstanding at December 31, 2015 was $902,888. Mr. Papa paid $25,794 in principal and $18,338 in interest on this loan in 2015.
A fixed-rate first mortgage loan to Kenneth Goldman, a former executive officer, in the original principal amount of $824,000. The interest rate on this loan was 2.875%. For 2019, the highest outstanding balance was $703,742, and the balance outstanding at December 31, 2019 was zero. Mr. Goldman paid $703,742 in principal and $11,933 in interest on this loan in 2019. For 2018, the highest outstanding balance was $725,893, and the balance outstanding at December 31, 2018 was $703,742. Mr. Goldman paid $22,151 in principal and $22,292 in interest on this loan in 2018. For 2017, the highest outstanding balance was $745,738, and the balance outstanding at December 31, 2017 was $725,893. Mr. Goldman paid $19,845 in principal and $21,180 in interest on this loan in 2017. For 2016, the highest outstanding balance was $765,021, and the balance outstanding at December 31, 2016 was $745,738. Mr. Goldman paid $19,283 in principal and $21,742 in interest on this loan in 2016. For 2015, the highest outstanding balance was $783,758, and the balance outstanding at December 31, 2015 was $765,021. Mr. Goldman paid $18,737 in principal and $22,287 in interest on this loan in 2015.

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An adjustable rate first mortgage loan to Cameron Letters, a former executive officer of the Bank, in the original principal amount of $950,000. The interest rate on this loan was 3.00%. For 2018, the highest outstanding balance was $814,262, and the balance outstanding at December 31, 2018 was zero. Mr. Letters paid $814,262 in principal and $18,256 in interest on this loan in 2018. For 2017, the highest outstanding balance was $839,768, and the balance outstanding at December 31, 2017 was $814,262. Mr. Letters paid $25,507 in principal and $16,189 in interest on this loan in 2017. For 2016, the highest outstanding balance was $865,553, and the balance outstanding at December 31, 2016 was $839,768. Mr. Letters paid $25,785 in principal and $14,941 in interest on this loan in 2016. For 2015, the highest outstanding balance was $890,891, and the balance outstanding at December 31, 2015 was $865,553. Mr. Letters paid $25,338 in principal and $15,388 in interest on this loan in 2015.
A fixed-rate first mortgage loan to Marcelo Brutti, a former executive officer of the Bank, in the original principal amount of $631,200. The most recent interest rate on this loan was 3.875%. For 2016, the highest outstanding balance was $617,745, and this loan was paid in full as of December 31, 2016. Mr Brutti paid $617,745 in principal and $12,423 in interest on this loan in 2016. For 2015, the highest outstanding balance was $631,200, and the balance outstanding at December 31, 2015 was $617,745. Mr Brutti paid $13,455 in principal and $17,971 in interest on this loan in 2015.
A fixed-rate first mortgage loan to David Chaos, a former executive officer of the Bank , in the original principal amount of $700,000. The most recent interest rate on this loan was 2.375%. As of December 31, 2015 this loan was paid-off in full. For 2015, the highest outstanding balance was $484,587. Mr. Chaos paid $484,587 in principal and $10,998 in interest on this loan in 2015.
An adjustable rate first mortgage loan to Melissa Ballenger, a former executive officer of the Bank, in the original principal amount of $700,000. The interest rate on this loan was 1.625%. For 2017, the highest outstanding balance was $674,048, and the balance outstanding at December 31, 2017 was $655,366. Ms. Ballenger paid $18,682 in principal and $10,815 in interest on this loan in 2017. For 2016, the highest outstanding balance was $692,429, and the balance outstanding at December 31, 2016 was $674,048. Ms. Ballenger paid $18,381 in principal and $11,115 in interest on this loan in 2016. For 2015, the highest outstanding balance was $700,000, and the balance outstanding at December 31, 2015 was $692,429. Ms. Ballenger paid $7,571 in principal and $5,572 in interest on this loan in 2015.
A line of credit to Mr. Chaos in the original principal amount of $532,000. The interest rate on this line was 2.24%. In 2015 the original principal amount was reduced to $91,800, with an interest rate of 3.74%. This line was closed in the third quarter of 2015.
An adjustable rate first mortgage loan to Alfonso de Castro, a former executive officer, in the original principal amount of $950,000. The most recent interest rate on this loan was 3.375%. For 2016, the highest outstanding balance was $853,075, and this loan was paid in full a s of December 31, 2016. Mr. de Castro paid $853,075 in principal and $3,499 in interest on this loan in 2016. For 2015, the highest outstanding balance was $899,762, and the balance outstanding at December 31, 2015 was $853,075. Mr. de Castro paid $46,687 in principal and $23,732 in interest on this loan in 2015.


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A fixed-rate first mortgage loan to Gonzalo de Las Heras, a former director, in the original principal amount of $400,000. The interest rate on this loan was 3.99%. For 2017, the highest outstanding balance was $334,458, and the balance outstanding at December 31, 2017 was $322,862. Mr. de Las Heras paid $11,596 in principal and $13,134 in interest on this loan in 2017. For 2016, the highest outstanding balance was $345,601, and the balance outstanding at December 31, 2016 was $334,458. Mr. de Las Heras paid $11,143 in principal and $13,587 in interest on this loan in 2016. For 2015, the highest outstanding balance was $356,309, and the balance outstanding at December 31, 2015 was $345,601. Mr. de Las Heras paid $10,708 in principal and $14,022 in interest on this loan in 2015.
A fixed-rate first mortgage loan to Mr. de Las Heras, in the original principal amount of $255,000. The interest rate on this loan was 2.375%. For 2017, the highest outstanding balance was $223,573, and the balance outstanding at December 31, 2017 was $216,918. Mr. de Las Heras paid $6,655 in principal and $5,238 in interest on this loan in 2017. For 2016, the highest outstanding balance was $230,072, and the balance outstanding at December 31, 2016 was $223,573. Mr. de Las Heras paid $6,499 in principal and $5,394 in interest on this loan in 2016. For 2015, the highest outstanding balance was $236,419, and the balance outstanding at December 31, 2015 was $230,072. Mr. de Las Heras paid $6,347 in principal and $5,546 in interest on this loan in 2015.
An adjustable rate first mortgage loan to Carol Hunley, a former executive officer of the Bank, in the original principal amount of $926,400. The most recent interest rate on this loan was 2.625%. For 2016, the highest outstanding balance was $833,733, and the loan was paid in full as of December 31, 2016. Ms. Hunley paid $833,733 in principal and $8,873 in interest on this loan in 2016. For 2015, the highest outstanding balance was $858,999, and the balance outstanding at December 31, 2015 was $833,733. Ms. Hunley paid $25,265 in principal and $13,771 in interest on this loan in 2015.
An adjustable rate first mortgage loan to John Murphy, a former executive officer of the Bank, in the original principal amount of $535,000. The interest rate on this loan is 3.0%. For 2017, the highest outstanding balance was $470,288, and the balance outstanding at December 31, 2017 was $457,150. Mr. Murphy paid $13,138 in principal and $13,929 in interest on this loan in 2017. For 2016, the highest outstanding balance was $483,648, and the balance outstanding at December 31, 2016 was $470,288. Mr. Murphy paid $13,361 in principal and $12,316 in interest on this loan in 2016. For 2015, the highest outstanding balance was $497,554, and the balance outstanding at December 31, 2015 was $483,648. Mr. Murphy paid $13,905 in principal and $9,824 in interest on this loan in 2015.
A fixed-rate first mortgage loan to Mr. Christopher Pfirrman, a former executive officer, in the original principal amount of $245,000. The most recent interest rate on this loan was 2.29%. For 2017, the highest outstanding balance was $188,969, and the loan was paid in full as of December 31, 2017. Mr. de Las Heras paid $188.969 in principal and $714 in interest on this loan in 2017. For 2016, the highest outstanding balance was $203,771, and the balance outstanding at December 31, 2016 was $188,969. Mr. Pfirrman paid $14,803 in principal and $4,512 in interest on this loan in 2016. For 2015, the highest outstanding balance was $218,239, and the balance outstanding at December 31, 2015 was $203,771. Mr. Pfirrman paid $14,468 in principal and $4,846 in interest on this loan in 2015.
An adjustable rate first mortgage loan to Guillermo Sabater, a former executive officer, in the original principal amount of $545,000. The most recent interest rate on this loan is 2.875%. As of December 31, 2015 this loan was paid in full. For 2015, the highest outstanding balance was $398,207. Mr. Sabater paid $398,207 in principal and $5,437 in interest on this loan in 2015.
A fixed-rate first mortgage loan to Alberto Sanchez, one of our former directors, in the original principal amount of $341,000. The interest rate on this loan was 3.875%. For 2017, the highest outstanding balance was $185,832, and the balance outstanding at December 31, 2017 was $157,799. Mr Sanchez paid $28,033 in principal and $6,495 in interest on this loan in 2017. For 2016, the highest outstanding balance was $221,591, and the balance outstanding at December 31, 2016 was $185,832. Mr. Sanchez paid $35,759 in principal and $7,044 in interest on this loan in 2016. For 2015, the highest outstanding balance was $247,334, and the balance outstanding at December 31, 2015 was $221,591. Mr. Sanchez paid $25,744 in principal and $9,179 in interest on this loan in 2015.
A fixed-rate first mortgage loan to Lisa VanRoekel, a former executive officer of the Bank, in the original principal amount of $400,000. The most recent interest rate on this loan was 3.50%. For 2016, the highest outstanding balance was $338,730, and this loan was paid in full as of December 31, 2016. Ms. VanRoekel paid $338,730 in principal and $3,409 in interest on this loan in 2016. For 2015, the highest outstanding balance was $358,009, and the balance outstanding at December 31, 2015 was $338,730. Ms. VanRoekel paid $19,279 in principal and $8,722 in interest on this loan in 2015.

Related Party Transactions

SHUSA's policies require that all related person transactions be reviewed for compliance and applicable banking and securities laws. Moreover, SHUSA's policies require that all material transactions be approved by SHUSA's Board or the Bank's Board.

Director Independence


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As noted elsewhere in this Form 10-K, SHUSA is a wholly-owned subsidiary of Santander. As a result, all of SHUSA's voting common equity securities are owned by Santander. However, the depository shares of SHUSA's Series C non-cumulative preferred stock continue to be listed on the NYSE. In accordance with the NYSE rules, because SHUSA does not have common equity securities but rather only preferred and debt securities listed on the NYSE, the SHUSA Board is not required to have a majority of “independent” directors.

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ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees of the Independent Auditor

The following table set forth the aggregate fees for services rendered, to the Company, for the fiscal year ended December 31, 20172019 by our principal accounting firm, PricewaterhouseCoopers LLP. 
Fiscal Year Ended December 31, 2017(1)
Parent Company and SBNA SC All Other Entities Total
Fiscal Year Ended December 31, 2019(1)
Parent Company and SBNA SC All Other Entities Total
(in thousands)(in thousands)
Audit Fees (2)
$9,331
 $8,407
 $3,125
 $20,863
$10,245
 $8,150
 $3,983
 $22,378
Audit-Related Fees (3)
540
 898
 95
 1,533
455
 900
 128
 1,483
Tax Fees (4)
220
 485
 
 705
425
 150
 
 575
All Other Fees (5)

 
 
 
13
 7
 
 20
Total Fees$10,091
 $9,790
 $3,220
 $23,101
$11,138
 $9,207
 $4,111
 $24,456
(1) Represents proposed fees approved by the Audit Committee.
(2) Audit fees include fees associated with the annual audit of the Company's financial statements and the audit of internal control over financial reporting, of the Company, reviews of the interim financial statements included in the Company's quarterly reports and statutory/subsidiary audits.
(3) Audit-related fees principally include attestation and agreed-upon procedures which address accounting, reporting and control matters, consent to use the Company's report in connection with various documents filed with the SEC, and comfort letters issued to underwriters for securities offerings.
(4) Tax fees include tax compliance, tax advice and tax planning.
(5) All other fees are fees for any services not included in the first three categories.

The following table set forth the aggregate fees for services rendered to the Company for the fiscal year ended December 31, 2016 .2018.
Fiscal Year Ended December 31, 2016(1)
Parent Company and SBNA SC All Other Entities Total
Fiscal Year Ended December 31, 2018(1)
Parent Company and SBNA SC All Other Entities Total
(in thousands)(in thousands)
Audit Fees (2)
$9,560
 $11,073
 $3,312
 $23,945
$9,441
 $7,450
 $3,216
 $20,107
Audit-Related Fees (3)
1,319
 1,342
 20
 2,681
392
 975
 142
 1,509
Tax Fees (4)
2,550
 210
 360
 3,120
269
 332
 
 601
All Other Fees(5)
1,905
 
 
 1,905
438
 7
 
 445
Total Fees$15,334
 $12,625
 $3,692
 $31,651
$10,437
 $8,764
 $3,358
 $22,662
(1) Audit fees for 20162018 have been adjusted to conform with the 2017 presentation and reflect amounts billed in 20172019 related to 20162018 audits.
(2) Audit fees include fees associated with the annual audit of the Company's financial statements and the audit of internal control over financial reporting, of the Company, reviews of the interim financial statements included in the Company's quarterly reports and statutory/subsidiary audits.
(3) Audit-related fees principally include attestation and agreed-upon procedures which address accounting, reporting and control matters, consent to use the Company's report in connection with various documents filed with the SEC, and comfort letters issued to underwriters for securities offerings.
(4) Tax fees include tax compliance, tax advice and tax planning.
(5) All other fees are fees for any services not included in the first three categories.


Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by Independent Auditor

During 20172019, SHUSA’s Audit Committee pre-approved 100% of audit and non-prohibited, non-audit services provided by the independent auditor. These services may have included audit services, audit-related services, tax services and other services. Pre-approval was generally provided by the Audit Committee for up to one year and any pre-approval was detailed as to the particular service or category of services and was subject to a specific budget. In addition, the Audit Committee may also have pre-approved particular services on a case-by-case basis. For each proposed service, the Audit Committee received detailed information sufficient to enable it to pre-approve and evaluate such service. The Audit Committee may have delegated pre-approval authority to one or more of its members. Any pre-approval decision made under delegated authority was communicated to the Audit Committee at or before its next scheduled meeting. There were no waivers by the Audit Committee of the pre-approval requirement for permissible non-audit services in 2017.2019.

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PART IV


ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a) 

1. Financial Statements.

The following financial statements are filed as part of this report:
   Consolidated Balance Sheets
   Consolidated Statements of Operations
   Consolidated Statements of Comprehensive Income
   Consolidated Statements of Stockholder's Equity
   Consolidated Statements of Cash Flows
   Notes to Consolidated Financial Statements

2. Financial Statement Schedules.

Financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.

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(b)
(3.1)
  
(3.2)
  
(3.3)
  
(3.4)
  
(3.5)
  
(3.6)
(3.7)
(3.8)
  
(4.1)Santander Holdings USA, Inc. has certain debt obligations outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of Santander Holdings USA, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Annual Report on Form 10-K. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request.
  

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(10.1)
  
(10.2)
(10.3)
  
(21.1)
  
(23.1)
(23.2)
  
(31.1)
  
(31.2)
  
(32.1)
  
(32.2)
  
(101.INS)
Inline XBRL Instance Document (Filed herewith)
  
(101.SCH)
Inline XBRL Taxonomy Extension Schema (Filed herewith)
  
(101.CAL)
Inline XBRL Taxonomy Extension Calculation Linkbase (Filed herewith)
  
(101.DEF)
Inline XBRL Taxonomy Extension Definition Linkbase (Filed herewith)
  
(101.LAB)
Inline XBRL Taxonomy Extension Label Linkbase (Filed herewith)
  
(101.PRE)
Inline XBRL Taxonomy Extension Presentation Linkbase (Filed herewith)


ITEM 16 - FORM 10-K SUMMARY

None applicable


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

   
SANTANDER HOLDINGS USA, INC.
(Registrant)
    
Date:March 19, 201811, 2020 /s/ Madhukar DayalJuan Carlos Alvarez de Soto
   Madhukar DayalJuan Carlos Alvarez de Soto
   Chief Financial Officer and Senior Executive Vice President
    
    
Date:March 19, 201811, 2020 /s/ David L. Cornish
   David L. Cornish
   Chief Accounting Officer, Corporate Controller and Executive Vice President



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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SignatureTitleDate
/s/ Scott E. PowellTimothy Wennes    
Scott E. PowellTimothy Wennes
 
Director, President
Chief Executive Officer
(Principal Executive Officer)
March 19, 201811, 2020
   
/s/ Madhukar DayalJuan Carlos Alvarez de Soto
Madhukar DayalJuan Carlos Alvarez de Soto
Senior Executive Vice President
Chief Financial Officer (Principal Financial Officer)
March 19, 201811, 2020
   
/s/ David LL. Cornish
David L. Cornish
Executive Vice President
Chief Accounting Officer and Corporate Controller (Principal Accounting Officer)
March 19, 201811, 2020
   
/s/ T. Timothy Ryan, Jr.
T. Timothy Ryan Jr.
Director
Chairman of the Board
March 19, 201811, 2020
   
/s/ Javier Maldonado
Javier Maldonado    
DirectorMarch 19, 201811, 2020
   
/s/ Thomas S. Johnson
Thomas S. Johnson
DirectorMarch 19, 201811, 2020
/s/ Ana Botin Ana BotinDirectorMarch 11, 2020
   
/s/ Stephen A. Ferriss
Stephen A. Ferriss
DirectorMarch 19, 201811, 2020
   
/s/ Alan Fishman
Alan Fishman
DirectorMarch 19, 201811, 2020
   
/s/ Juan Guitard
Juan Guitard
DirectorMarch 19, 201811, 2020
   
/s/ Catherine KeatingHector Grisi
Catherine KeatingHector Grisi
DirectorMarch 19, 201811, 2020
   
/s/ Jose DoncelEdith Holiday
Jose DoncelEdith Holiday
DirectorMarch 19, 201811, 2020
   
/s/ Victor MatarranzGuy Moszkowski
Victor MatarranzGuy Moszkowski
DirectorMarch 19, 2018
/s/ Juan Olaizola
Juan Olaizola
DirectorMarch 19, 201811, 2020
   
/s/ Henri-Paul Rousseau
Henri-Paul Rousseau
DirectorMarch 19, 201811, 2020
   
/s/ Richard Spillenkothen
Richard Spillenkothen
DirectorMarch 19, 2018



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